[1978] 48 COMP. CAS. 262 (
HIGH COURT OF
v.
SABYASACHI MUKHARJI AND SUDHINDRA MOHAN GUHA
JJ.
INCOME-TAX
REFERENCE NO. 385 OF 1970.
JANUARY 18. 1978
A. Sengupta for the Applicant.
S.L. Sharaf for the Respondent.
Sabyasachi Mukharj J.—In this reference under
section 256(2) of the Income-tax Act, 1961, the Tribunal has referred the
following question as directed by this court :
"Whether, on the facts and in the circumstances
of the case, the Tribunal was right in holding that the assessee could elect to
be assessed on the basis of the cash system of accounting and in directing the
Income-tax Officer to make assessment on the basis."
We are concerned in this reference with the
assessment year 1966-67. The assessee is a company. Its income was mainly
derived from interest. It had some dividend income also. The accounting year
under consideration ended on the 30th June, 1965. The directors passed a
resolution on the 28th March, 1965, stating that with effect from the year
starting with 1st of July, 1964, the company would change the method of
accounting from mercantile basis to cash basis and that this new method should
be regularly folio wed in maintaining the company's books of accounts year
after year. The resolution was confirmed by the general body of the
shareholders. As a result of this change there was a loss of Rs. 942, but if
the method previously followed had been followed then there would have bean a
profit of Rs. 14,151. The question involved in this reference is whether the
assessee was entitled to change the method and insist on being assessed on the
cash basis. Under section 291 of the Companies Act, the directors have power to
change the method of accounting by themselves. The Tribunal has discussed the
evidence and found that there was no mala fide motive in changing the method.
Furthermore, the new method has been regularly followed and in the subsequent
years the department has accepted the said method. Having regard to the facts
and circumstances of the case, the Tribunal held that the assessee could elect
to be assessed on the basis of cash system of accounting and directed the
Income-tax Officer to make the assessment on that basis. There was evidence
upon which the Tribunal could come to this conclusion. The findings of the
Tribunal have not been challenged as perverse or as bared on no evidence In the
aforesaid view of the matter we are of opinion that the question referred to us
must be answered in the affirmative and in favour of the assessee. Each party
to pay and bear its own costs.
Sudhindra Mohan Guha J.—I agree.
[1981] 51 COMP. CAS. 733 (P
& H)
HIGH COURT OF PUNJAB AND HARYANA
v.
Oswal Woollen Mills Ltd
B.S. DHILLON AND J.V. GUPTA, JJ.
JULY 24, 1979
D.N. Awasthy and B.K. Jhingan for the Appellant.
B.S. Gupta and Jagdev Sharma for the Respondent.
J.V. Gupta, J.—This judgment will dispose of
Income-tax References Nos. 2 and 5 of 1974, as both of them—one by the assessee
and the other by the revenue—arise out of the same facts and the order of the
Income-tax Appellate Tribunal, Chandigarh Bench, dated May 26, 1975. The
questions of law referred by the Income-tax Appellate Tribunal in these
references are as under :
Questions arising out of the assessee's reference
application :
"(1) Whether,
on the facts and in the circumstances of the case, the Tribunal was justified
in law in holding that Rs. 8 lakhs is not a part of reserve within the meaning
of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ?
(2) Whether,
on the facts and in the circumstances of the case, the Tribunal was justified
in law in holding that Rs. 3 lakhs is not a part of reserve within the meaning
of rule 1 of the Second Schedule to the Super Profits Tax Act, 1963 ? "
Questions arising out of the revenue's reference
application :
"(1) Whether, on the facts and in the circumstances of the case, the
Tribunal was right in law in allowing the additional. ground to be raised for
the first time before it ?
(2) Whether, on the facts and in the circumstances of the case, the
Tribunal was right in law in holding that the amounts of Rs. 2,40,966 and Rs.
2,09,999 respectively for provision for taxation and provision for dividends
could be treated as ' reserve ' to be included in the computation of the
assessee's capital under rule 1 of the Second Schedule to the Super Profits Tax
Act, 1963 ?"
The facts giving rise to these two reference
applications are that the assessee known as M/s. Oswal Woollen Mills Ltd.,
On appeal by the assessee before the AAC, he found
that as on January 1, 1962, the amount of Rs. 11,09,293 was only a mass of
undistributed profits and it was only later on that Rs. 8,00,000 was
transferred to the reserve account. However, he did not deal with the amount of
Rs. 3 lakhs specifically.
Being aggrieved, the assessee filed a second appeal
before the Income-tax Appellate Tribunal and there, apart from claiming these
two amounts of Rs. 8,00,000 and Rs. 3,00,000 as "reserve", the
assessee sought permission to raise the following additional ground of appeal :
"That the 'provision for taxation' of Rs. 2,40,966 and 'provision
for dividends' Rs. 2,09,999 may also be considered as a part of the capital
employed in the business for the purpose of computation of capital and standard
deductions".
Though the departmental representative objected to
this ground being allowed to be raised at that stage because no such ground was
taken before the authorities below, yet the learned Tribunal relying upon a
judgment of this court in CIT v. Ram Sanehi Gian Chand [1972] 86 ITR 724
allowed this additional ground to be taken and ultimately accepted the
contention of the assessee relying upon a judgment of the Allahabad High Court
in CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210. The view
taken by the Allahabad High Court was that the "provision for taxation and
provision for dividends" should be considered as "reserves" for
the purpose of r. 1 of the Second Schedule to the S.P.T. Act, 1963.
Respectfully following that judgment, the Tribunal directed that the amount of
Rs. 2,40,966, being "provision for taxation", and Rs. 2,09,999, being
"provision for dividends", should be treated as a part of the
"reserves" for the purpose of r. 1 of the Second Schedule to the said
Act. As regards the other contention, claiming the transfer of Rs. 8,00,000 and
Rs. 3,00,000 from the profit and loss account to the reserve fund account, the
same was not accepted. Thus, the appeal was partly allowed.
Feeling aggrieved against this order of the Tribunal,
dated 26th May, 1973, both the parties, i.e., the assessee as well as the
revenue, made two separate applications for reference, on which the
abovementioned questions have been framed and referred to this court.
Question No. 1 arising out of the assessee's
reference application is :
"Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that Rs. 8 lakhs is not a part of the
reserve within the meaning of r. 1 of the Second Schedule to the S.P.T. Act,
1963?"
Before dealing with this question, it may be stated
that the S.P.T. Act, 1963, enacted by Parliament, imposes a special tax on
certain companies. Section 4 charges the tax on every company for every
assessment year from April 1, 1963, in respect of so much of the chargeable
profits of the previous year as exceeded the standard deduction at the rates
specified in the Third Schedule. The expression "standard deduction"
is defined in s. 2(9) as "an amount equal to six per cent. of the capital
of the company as computed in accordance with the provisions of the Second
Schedule, or an amount of fifty thousand rupees, whichever is greater".
The Second Schedule contains rules for computing the capital of a company for
the purpose of super profits tax, and r. 1 declares :
"Subject to the other provisions contained in this Schedule, the
capital of a company shall be the sum of the amounts, as on the first day of
the previous year relevant to the assessment year, of its paid up share capital
and of its reserve, if any, created under the proviso (b) to clause (vib) of
sub-section (2) of section 10 of the Indian Income-tax Act, 1922(11 of 1922),
or under sub-section (3) of section 34 of the Income-tax Act, 1961 (43 of
1961), and of its other reserves in so far as the amounts credited to such
other reserves have not been allowed in computing its profits for the purposes
of the Indian Income-tax Act, 1922 (11 of 1922), or the Income-tax Act, 1961
(43 of 1961), diminished by the amount by which the cost to it of the assets
the income from which in accordance with clause (iii) or clause (vi) or clause
(viii) of rule 1 of the First Schedule is not includible in its chargeable
profits, exceeds the aggregate of—
(i) any money borrowed by it which remains outstanding; and
(ii) the amount of any fund, any surplus and any such
reserve as is not to be taken into account in computing the capital under this
rule....".
For the purpose of r. 1, the reserves of the company
must be added to its paid up capital.
While disallowing the amount of Rs. 8,00,000, the
learned Tribunal observed :
"The learned counsel for the assessee had pleaded that under section
86 of the Indian Companies Act (erroneously mentioned for regulation 87) the
directors were authorised to create reserves. We do not doubt the authority of
the directors to create reserve, before recommending any dividends, but the
sanction of the directors must have the sanction of the shareholders. In this
case we are not satisfied that the shareholders, while adopting the
balance-sheet for the year 1961, approved the transfer of Rs. 8,00,000 from the
profit & loss account to the reserve fund account".
From these observations it is quite clear that the
learned Tribunal rejected the claim of the assessee on the ground that though
the board of directors had the authority to create "reserve", yet it
must have the sanction of the shareholders in its general meeting. In the order
the Tribunal has also reproduced the resolution of the board of directors,
passed on 1st March, 1962, which reads :
"Further it is unanimously resolved that a sum of Rs. 8,00,000 (Rs.
eight lakhs) of the accumulated profits be credited to the reserve fund
account".
Now, the question for our determination in this case
is, whether this resolution of the board of directors was sufficient to create
a reserve without the sanction of the shareholders. For that purpose a
reference to reglns. 85 and 87 of Sch. 1, Table A, of the Companies Act, 1956,
is necessary, which are as under :
"85. The company in general meeting may
declare dividends, but no dividend shall exceed the amount recommended by the
board.
87. (1) The
Board may, before recommending any dividend, set aside out of the profits of
the company such sums as it thinks proper as a reserve or reserves which shall,
at the discretion of the Board, be applicable for any purpose to which the
profits of the company may be properly applied, including provision for meeting
contingencies or for equalising dividends; and pending such application, may,
at the like discretion, either be employed in the business of the company or be
invested in such investments (other than shares of the company) as the Board
may, from time to time, think fit.
(2) The
Board may also carry forward any profits which it may think prudent not to
divide, without setting them aside as a reserve".
A reading of both the regulations together makes it
quite clear that the declaration of dividend is to be made by the shareholders
of the company in its general meeting whereas to set aside out of the profits
of the company, such sums as it. thinks proper as a reseve shall be at the
discretion of the board. The reason seems to be obvious. Once any amount is
declared as dividend, it is to be paid to the shareholders and is thus no more
available to the company for its business and, therefore, this declaration is
required to be made by the shareholders of the company in its general meeting
whereas setting aside any sum as a reserve remains with the company for its
use.
We have heard the learned counsel for the parties.
The learned counsel for the revenue, in support of his contention that the
sanction of the shareholders of the company is necessary, referred to s. 284
and s. 217 of the Companies Act, as well as to Sch. VI and Parts 1 and 3 thereof.
He also cited the Supreme Court authority, reported as Kesoram Industries and
Cotton Mills Ltd. v. CWT [1966] 59 ITR 767. We do not find that this helps the
revenue in any way. No judgment dealing with the matter directly has been
cited. Section 215 of the Companies Act provides the authentication of the
balance-sheet and profit and loss account by the board of directors. The
business of the company is controlled by the board of directors and they are in
the best position to know the affairs of the company and to act in the
interests of the company. Thus, in our opinion, the learned Tribunal was wrong
in holding that the sanction of the board of directors creating the reserve
must have the sanction of the shareholders. There is no such requirement of any
law under the Companies Act; rather s. 291 thereof read with regln. 87
prescribes the board's powers and restrictions thereon. The learned counsel for
the revenue then argued that in any case the entry of Rs. 8,00,000 in
accordance with the resolution of the board dated 1st March, 1962, was passed
on 30th April, 1962, transferring Rs. 8,00,000 from the profit and loss account
to the reserve fund account and was not shown in the balance-sheet for the year
ending 31st December, 1961. According to him, it could not be held that this
amount was a "reserve" on the crucial date. On the other hand, Mr.
Gupta, learned counsel for the assessee, has referred to CIT v. Mysore
Electrical Industries Ltd. [1971] 80 ITR 566 (SC), also a judgment of the
Supreme Court. It has been observed therein thus (p. 569):
"It is well known that the accounts of the company have to be made
up for a year up to a particular day. In this case that day was the 31st March,
1963. If it was reasonably practicable to make up the accounts up to the 31st
March, 1963, and present the same to the directors of the respondent on April
1, 1963, they could have made up their minds on that day and declared their
intention of appropriating the said and other sums to reserves of different
kinds. But the fact that they could not 'do so for the simple reason that the
calculation and collection of figures of all the items of income and
expenditure of the company for the year ending March 31, 1963, was bound to
take some time, cannot make any difference to the nature or quality of the
appropriation of the profits to reserves as determined by the directors after
the 1st of April, 1963. Their determination to appropriate the sums mentioned
to the three separate classes of reserves on the 8th August, 1963, must be related
to the 1st of April, 1963, i. e., the beginning of the accounts for the new
year and must be treated as effective from that day".
Applying these observations to the facts of the
present case, it is quite clear that the entry made on 30th April, 1962, in
pursuance of the resolution of the board of directors, passed on 1st March,
1962, transferring Rs. 8,00,000 from the profit and loss account to the reserve
fund account, relates back to 1st January, 1962, i.e., the beginning of the
accounts for the new year and must be treated as effective from that date. In
this view of the matter, we hold that the learned Tribunal was not justified in
law in holding that Rs. 8,00,000 is not a part of reserve within the meaning of
r. 1 of the Second Schedule to the S.P.T. Act, 1963. Thus, the answer to this
question is against the revenue and in favour of the assessee.
Question No. 2 arising out of the assessee's
application :
"Whether, on the facts and in the circumstances of the case, the
Tribunal was justified in law in holding that Rs. 3,00,000 is not a part of
reserve within the meaning of rule 1 of the Second Schedule to the Super
Profits Tax Act, 1963?"
As regards the answer to this question, it is quite
clear that with respect to this amount of Rs. 3,00,000 the board of directors
passed a resolution on 29th June, 1963, for the first time, whereas the
accounts for the year 1961 were passed in the year 1962, when a sum of Rs.
8,00,000 was credited to the reserve fund account. Therefore, the Tribunal
rightly decided that this amount of Rs. 3,00,000 could not be considered as a
part of the "reserve" as on 1st January, 1962. Thus, the answer to
this question is in favour of the revenue and against the assessee.
Question No. 1 arising out of the revenue's reference application :
"Whether, on the facts and in the circumstances of the case, the
Tribunal was right in law in allowing the additional ground to be raised for
the first time before it ?"
In view of the decision of this court in CIT v. Ram
Sanehi Gian Chand [1972] 86 ITR 724, the learned Tribunal rightly allowed the
additional ground of appeal to be taken. The judgment of the Gujarat High Court
in CIT v. Karamchand Premchand P. Ltd. [1969] 74 ITR 254, relied upon by the
learned counsel for the revenue, was also noted by the Tribunal. As regards the
view of this court referred to above, it has again been reiterated in Oswal
Cotton Spinning and Weaving Mills v. CIT [1981] 129 ITR 761 (P&H). In view
of these earlier authorities of this court, we hold that the Tribunal was right
in law in allowing the additional ground to be taken for the first time before
it. Thus, the answer to this question is in favour of the assessee and against
the revenue.
Question No. 2 arising out of the revenue's reference application :
"Whether, on the facts and in the circumstances of the case, the
Tribunal was right in law in holding that the amounts of Rs. 2,40,966 and Rs.
2,09,999, respectively, for provision for taxation and provision for dividends
could be treated as 'reserves' to be included in the computation of the
assessee's capital under rule 1 of the Second Schedule to the Super Profits Tax
Act, 1963?"
The Tribunal allowed these two amounts to be treated
as "reserve", relying upon the judgment of the Allahabad High Court
in CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210. It was held
therein that the "provision for taxation" and "provision for
dividends" should be considered as reserves for the purpose of r. 1 of the
Second Schedule to the S.P.T. Act, 1963. The learned counsel for the revenue
argued that in view of the recent authority of this court in Oswal Cotton
Spinning and Weaving Mills [1981] 129 ITR 761, the "provision for
taxation" and "provision for dividends" cannot be treated as
"reserve" within the meaning of r. 1 of the Second Schedule to the
Super Profits Tax Act, 1963. He also cited another authority of this court in
CIT v. Hindustan Milk Food Mfg. Ltd. [1975] 98 ITR 517 in this respect. Some
other High Courts have also taken the same view as in the judgments in CIT v.
Mafatlal Chandulal & Co. Ltd.
[1977] 107 ITR 489 (Guj), Shree Ram Mills Ltd. v. CIT [1977] 108 ITR 27 (Bom)
and Hyderabad Asbestos Cement Products Ltd. y. CIT [1976] 105 ITR 822
(AP) [FB]. On the other hand, the learned counsel for the assessee has relied
upon a judgment of the Calcutta High Court in CIT v. Burn and Co. Ltd. [1978]
114 ITR 565. The hon'ble judges in that case have differed from the view taken
by the Bombay High Court in Shree Ram Mills Ltd. [1977] 108 ITR 27 and have
taken the view that the expression "reserve" in r. 1 of Sch. II meant
reserve in the ordinary sense and need not be considered in contradistinction
to "provision". However, we are not inclined to agree with the view
taken by the Calcutta High Court in CIT v. Burn and Co Ltd. [1978] 114 ITR 565
and we concur with the view taken by this court in Oswal Cotton Spinning and
Weaving Mills [1981] 129 ITR 761.
The learned counsel for the assessee also tried to
argue that there is no finding that these two amounts, i.e., the "provision
for taxation" and "provision for dividends" were made for
discharging an existing liability. Under the circumstances, it was not
warranted, since the Tribunal relied upon the Allahabad High Court judgment in
CIT v. Security Printers of India (P.) Ltd. [1972] 86 ITR 210, in which it was
held that the "provision for taxation" and "provision for
proposed dividends" by a company are entitled to be treated as
"reserve" for the purpose of r. 1 of the Second Schedule to the
S.P.T. Act, 1963, and included these amounts in the computation. We are not
inclined to agree with the views taken by the Allahabad and Calcutta High
Courts and, relying upon the judgments of this court and other High Courts, we
hold that the Tribunal was wrong in holding that the amounts of Rs. 2,40,966
and Rs. 2,09,999, respectively, for "provision for taxation" and
"provision for dividends" sh6uld be treated as a part of the
"reserve" for the purposes of r. 1 of the Second Schedule to the
S.P.T. Act, 1963. Accordingly, this question is answered in the negative, i.e.,
in favour of the revenue and against the assessee. The references are disposed
of accordingly.
B.S. Dhillon, J.—I agree.
[2002] 37 scl 339 (Guj.)
Smt.
Shantadevi Pratapsinh Gaekwad
v.
Sangramsinh P. Gaekwad
R.K. Abchandani and A.R. Dave, JJ.
O.J. Appeal Nos. 6 to 8 of 1995
Company Petition No. 51 of 1991
August 9, 2000
Section 397, read with section
398, of the Companies Act, 1956 - Oppression and Mismanagement - Whether
directors of a company, cannot use their fiduciary powers over the shares of a
company for the purpose of destroying an existing majority - Held, yes -
Petitioner, who was mother and legal heir of a Chairman of a company who was
holding 75 per cent of shares, came to know that after death of Chairman,
respondent No. 1 had fraudulently allotted 9481 additional shares to himself
and his HUF and thereafter allotted 9415 shares, out of his shares, to one ‘I
Ltd.’ - Petitioner also came to know that in a general body meeting respondent
No. 1 made himself a permanent Chairman of company and passed a resolution to
shift office of company to some other place and also gave notice to remove some
of directors who had been in company for several years - It was alleged by
petitioner that all acts of respondent No. 1 were against articles of
association - A petition under section 397 was filed by petitioner - Single
judge rejected petitioners’ contentions - Whether it was clear from course of
conduct of respondent Nos. 1 to 5 that they had acted in a high-handed manner
and in gross breach of fiduciary duty as directors of company, treating company
as their private affair and trying to gain a total control over it by improper
means to detriment of interests of other shareholders including petitioner - Held,
yes - Whether, therefore, appeal against order of single judge was to be
admitted and his findings set aside - Held, yes
Section 291 of the Companies
Act, 1956 - Directors - General powers of - Whether Power of the directors to
issue shares to the members of the company is a fiduciary power to be exercised
by them bona fide for the general advantage of the company and the directors
are not entitled to use their power of issuing shares merely for the purpose of
maintaining their control over the affairs of the company or merely for the
purpose of altering a majority shareholding - Held, yes
Respondent No. 6 company GIC (P.) Ltd., which
was initially incorporated as a public limited, was converted into a private
limited around the year 1971. According to the petitioners, the said company
was closely-held by family members and family friends who were its
shareholders. Since its incorporation Srimant ‘F’ had been holding 75 per cent
of equity shares and rest were held by different family members including
respondent Nos. 1 and 2. On or about 23-3-1988, in a family meeting, it was
decided to broaden the capital base of the company by a further issue of 15,000
equity shares of Rs. 100 each and it was agreed at that meeting and also in a
subsequent meeting of the board of directors that out of 15,000 equity shares
8,000 would be allotted to Shrimant ‘F’, 500 equity shares to Smt. ‘M’ who was
also his sister and 6,475 shares to respondent No. 1, ‘S’. No date was fixed
for payment to be made in respect of those shares and the share certificates
were to be issued as and when the payments were made. On 1-9-1998, Shrimant ‘F’
died, and on his death the right in respect of the 8,000 equity shares, which
were decided to be allotted as per the draft minutes to Shrimant ‘F’ vested in
his mother, the petitioner, who was his sole heir. The respondent No. 1 as a
member of family had been managing the affairs of the company for sometime and
after the death of Shrimant ‘F’, he continued to manage the same. According to
the petitioner she had reposed trust and faith in him believing that he would
be managing the affairs fairly and honestly and will discharge his obligations
to his mother, sisters and other members of the family and close friend. It was
alleged that in or about October/November 1990 the petitioner came to know that
the respondent No. 1 had transferred some of his shareholding and that of his
immediate family to a non-member with an ulterior motive. The petitioner,
therefore, took inspection of the register of members and the register of
transfers and learnt that apart from issuing 6,475 equity shares to himself and
the members of his family, the respondent No. 1 had fraudulently issued further
3,000 equity shares to his son and daughter, who were respondent Nos. 4 and 5
in the petition, increasing in the process his total shareholding in the
company together with the shareholding of his wife, son and daughter and his
HUF, to 9,481 equity shares. It was further alleged in the petition that the
petitioner also came to know that the respondent No. 1 and his wife, the
respondent No. 2, purportedly transferred 9,415 equity shares out of 9,481 to a
company named ‘I’ Ltd.
On the above allegations, the petitioners
initially sought a relief of declaring that the petitioner and/or her nominees
were the allottees of 8,000 equity shares of respondent No. 6 company besides
the shares previously held by late Shrimant ‘F’, a direction on the company to
issue share certificates on that basis by adjusting the amount of Rs. 8 lakhs as
share money from out of the deposits standing to the credit of the petitioner
No. 1 with respondent No. 6 company, a declaration that the issue of allotment
of 3000 shares in excess of 6475 equity shares to respondent No. 1 and/or his
nominees respondent Nos. 2 to 5 was null and void and seeking rectification of
the register of members, a declaration that the petitioner as mother and sole
heir of Shrimant ‘F’ was entitled to be in the majority and/or control of
respondent No. 6 company, a declaration that respondent Nos. 1, 2, 9, 10 and 11
had ceased to be the directors of respondent No. 6 company and by an amendment,
an alternative declaration that all the allotments of shares in the respondent
No. 6 company made beyond the original paid up capital consisting of 425 equity
shares as existing on 23-3-1988 were null and void, illegal and of no legal
effect and seeking to set aside the same, alternatively, a declaration that the
allotment of 6475 equity shares to respondent Nos. 1 to 5 and/or their nominees,
was subject to the simultaneous allotment of 8,000 equity shares to petitioner
No. 1, 500 equity shares to Smt. ‘M’, 25 equity shares to Smt. ‘S’ and that the
allotment of any further shares including the said 3,000 shares to respondent
Nos. 4 and 5 was null and void. It was also prayed that in the event of the
Court holding that allotments of 6475 shares to respondent Nos. 1 to 5 and
3,000 shares to respondent Nos. 4 and 5 were valid, it should be directed that
the said 9475 shares which were transferred to ‘I’ shall be offered and
transferred by the respondent No. 6 to the shareholders, on pro rata basis of
their original shareholding of 425 equity shares. After hearing both side,
Single Judge dismissed the petition and gave order in favour of respondent
On appeal to High Court:
There was no dispute about the fact that late
Shrimant F’s only class one heir was his mother, the petitioner S, because he
died intestate on 1-9-1998. When the member of the respondent-company
bequeathed his shares under a will, the succession had to be given effect to as
per article 14 of the articles of association without the restriction in
article 16 of the directors’ right to refuse to register any transfer or
transmission being attracted. Regulations 25 to 28 of Table A of Schedule I to
the Companies Act, which applied to the company under article 1, read with
article 2 of the articles of association, relate to transmission of shares.
Accordingly, on the death of a member, who was a sole holder, his legal
representatives shall be the only persons recognised by the company as having
any title to his interest in the shares. Any person becoming entitled to a
share in consequence of the death of a member may elect either to be registered
himself as holder of the share or to make such transfer of the share as the
deceased could have made as provided in regulation 26, read with regulation 27
of Table “A” of Schedule I to the Act. A person becoming entitled to a share on
death of a member is, as recognised by regulation 28, entitled to the same
dividends and other advantages to which he would be entitled if he were the
registered holder of the share except any membership right in relation to the
meetings of the company which he can get only on getting himself registered.
Thus, the fact that the property in share passes by inheritance to the heir of
the deceased member like his any other property is duly recognized. The words
‘other advantages’ in regulation 28 suggest that all the entitlements of a
deceased member will pass on to his heir who becomes entitled to a share of
such deceased member. The transmission of share related rights will take place
irrespective of the factum of registration of the successor. The only thing
that a board can do is to give a notice requiring any such person to elect to
be registered himself or to transfer the share, and if the notice is not
complied with within ninety days, the board may thereafter withhold payment of
all dividends, bonuses or other moneys payable in respect of the share, until
the requirements of the notice have been complied with as laid down in
regulation 28.
In the present case, therefore when Shrimant
‘F’ died intestate on 1-9-1988, his mother i.e., petitioner No. 1, who was the
only class one heir succeeded to the shares which were already held by him, and
became entitled under regulation 28 to the same dividends and other advantages
to which she would be entitled if she were the registered holder of the shares
of Shrimant ‘F’. This statutory entitlement does not depend upon the mercy of
the board of directors which could have, at best, given a notice as required by
the proviso to regulation 28. There is no time limit provided in regulation 28
for exercising the option given to such successor to get registered as holder
of the share or to make transfer of the share as the deceased could have made.
In other words, there is no contingency provided by which the rights which
devolved on the heir would lapse, and the attribute of a vested right in the
share of the deceased member devolving on the successor is duly recognised.
Therefore, if there was a valid decision taken to allot new shares and such
shares are earmarked for such allotment to a member who became entitled to
subscribe therefor and receive them, such entitlement of the deceased member
would also devolve on his heir who would step into his shoes and can claim that
advantage to which the deceased member was entitled as if the successor were
the registered holder of shares. The petitioner, therefore, as a sole heir of
the deceased member Shrimant ‘F’ became entitled to his entire shareholding out
of 425 shares at the time of his demise on 1-9-1988 with all its advantages
under the said regulation.
The question whether the entitlement of
Shrimant ‘F’ to 8,000 shares stood transmitted to her on his demise had never
been put upon the agenda though the fact that she being the sole heir of
Shrimant ‘F’ was known to all. It appeared that no reply was sent to the letter
dated 29-11-1990 addressed by the petitioner to the respondent No. 1 in his
capacity as Chairman of the company.
The stand taken up by the contesting
respondents was that Shrimant ‘F’ had before his demise renounced his
entitlement to 8,000 shares which were decided to be allotted to him, in favour
of the respondent No. 1 and his children. Shrimant ‘F’ had passed away on
1-9-1988 and a meeting of board of directors was held on 26-10-1988 where the
respondent No. 1 and Mr. ‘C’ were present for a condolence resolution.
Important decisions were also taken in the
said meeting, but there was no mention made at all to the letter dated
11-6-1988 by which Shrimant ‘F’ was said to have renounced through his
Secretary his entitlement to 8,000 shares in favour of the respondent No. 1 and
his children which was to tilt the balance of power in his favour.
Renouncing 8,000 shares would have been a
major event in which all shareholders would be interested and were entitled to
be informed. No such renouncement was addressed to the company by Shrimant ‘F’.
Admittedly, Shrimant ‘F’ did not himself send any letter to the company or for
the information of the shareholders who were close relatives and friends. The
letter of so-called renouncement, therefore, did not inspire any confidence.
The petitioner’s case was that there was a
family meeting on 23-3-1988, wherein it was decided to broaden the capital base
of the company by issuing 15,000 shares of Rs. 100 each. It was decided therein
and also subsequently at a meeting of the company’s board of directors that out
of the 15,000 equity shares, 8,000 equity shares would be allotted to Shrimant
‘F’, 500 equity shares to Smt. ‘M’, 25 equity shares to Smt. ‘S’ and 6475
equity shares to respondent No. 1 Shri ‘S’.
In the background of the discrepancies in the
version of the respondent No. 1 about his having been allotted 6,475 shares for
himself and his family, one might refer to the minutes of the meeting of the
Managing Committee said to have convened on 10-12-1988. When as per these
minutes of the Managing Committee meeting said to have been on 10-12-1988 the
Committee took the decision to allot the shares for the first time at that
meeting, the theory of the respondent No. 1 that 6,475 shares were already
allotted by the committee to the respondent Nos. 1 to 5 earlier stood badly
exploded.
The minutes book of the committee meeting was
amongst other minute books and registers at the company’s office on 10-12-1990
and the certified copies thereof which had been produced on the record were
obtained by the petitioner on that day.
The allotment of 51 per cent of the new shares
to Shrimant ‘F’ was firmly reflected from the minutes of 21-3-1988 and there
was no reference therein or even in the minutes of 10-12-1988 about any
decision to issue any shares to the respondent No. 1. That decision had emerged
in the requisition note on which the Secretary of respondent No. 1 made
endorsement for preparing minutes on 23-3-1988, at the instance of the Chairman
who had okayed it. That Chairman was none other than the respondent No. 1 who
had signed the minutes of 21-3-1988. On the basis of that requisition note the
draft minutes were made to show as if it was decided to give 6475 shares to the
respondent No. 1 and others while in fact no such decision was recorded in the
minutes of the meeting of the Managing Committee of 21-3-1988 or of 10-12-1988
in which that decision of 21-3-1988 was referred and which were signed by the
respondent No. 1.
Since admittedly the Managing Committee
consisted of three Directors, i.e., Shrimant F, the respondent No. 1, one ‘C’
the endorsement in the requisition note was capable of being construed to mean
that Shrimant F had okayed the allotment as Chairman. Only the respondent No. 1
was interested in bringing about such a situation on record because Shrimant F
allotment of 51 per cent share was firmly mentioned as reflected in the minutes
of 21-3-1988 was that would have gone to his heir on his demise. Thus, though
there was no decision for allotment of 6475 shares to respondent No. 1 as per
the minutes of the meeting of the Managing Committee dated 21-3-1988 signed as
chairman by him the respondent No. 1 who was the director of the company
brought about the allotment of such shares to himself and his family members,
which were later transferred by the respondent Nos. 1 to 5 to ‘I’. Such issuance
of shares coupled with blocking of 51 per cent equity shares from devolving on
the sole heir of Shrimant ‘F’ was obviously intended by the respondent No. 1 to
enhance his power and position by allotting shares to himself and his family
members. The exercise was obviously intended for destroying the existing
majority and creating a new majority of his group. The transfer of the new
shares in the Register and issuance of share certificates in favour of the
respondent Nos. 1 to 5 was clearly not warranted by any valid decision of the
Managing Committee or the board of directors.
Self-interest is the commonest instance of
improper motive leading to abuse of power. Where the question is one of abuse
of powers the state of mind of those who exercised power as reflected from the
surrounding circumstances and the materials which throw light upon that aspect
so as to show whether they were honestly acting in discharge of the powers in
the interest of the company or were acting for their own advantage of improperly
favouring themselves or one section of the shareholders against another is to
be examined. Where directors have acted in what they believe to be an interest
which they were entitled to serve their exercise of power can only be set
aside, if it be found that the interest they were serving was an inadmissible
or corrupting interest, such as self-interest. The power to issue shares being
of fiduciary nature its exercise can be set aside when it is exceeded or
abused. There can be no dispute over the proposition that a majority
shareholders cannot control the directors as to the exercise of their fiduciary
powers. The directors of a company, however, cannot use their fiduciary powers
over the shares of a company for the purpose of destroying an existing majority.
The purpose of altering the balance of voting power is never permissible. If
the purpose of issuing shares is solely to alter the voting power, the issue
would be invalid. The directors cannot manipulate the issue of shares for
private purposes, or merely to secure voting power. A power of the directors to
issue shares must be exercised for the benefit of the company because primarily
it is given to them for the purpose of enabling them to raise capital when
required for the purpose of the company. There may be occasions when the
directors may fairly and properly issue shares in case of a company. However,
when shares are issued to persons who are obviously meant and intended to
secure necessary statutory majority that will not be a fair and bona fide exercise
of power. If the shares are issued under the general and fiduciary powers of
the directors for the express purpose of acquiring an unfair majority for the
purpose of altering the rights of parties under the articles, the Court ought
to interfere because it would be unconstitutional for the 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. If there is added
to this immediate purpose an ulterior motive 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 will be considered to be
greater. This precisely was done by the respondent Nos. 1 and 2 who were the
directors of the company for their self-aggrandisement and in breach of their
fiduciary duty to the company and the shareholders.
Before the shares were transferred to ‘I’ it
was incumbent upon the transferor to give a transfer notice to the company as
required by clause 8 of the articles of association. Admittedly, no such
transfer notice was given in respect of 9415 shares to the company by the
respondent Nos. 1 to 5. Therefore, the transfer in favour of ‘I’ by them which
was effected at the behest of the respondent Nos. 1 and 2 and their group at
the meeting of 30-3-1990 was in breach of the articles of association and
ignoring the rights of other members to be offered by the company shares
specified in a transfer notice as nearly as may be in proposition to their
existing shares, as envisaged by clause 13 of the articles of association.
It was abundantly clear that the title in 9415
shares that had passed on to ‘I’ was not conveyed back in this manner. Such
retransfer would again have required transfer notice as per clause 8 of the
articles of association, because ‘I’ name had already been entered in the
register of members and the other members again had pre-emption right if ‘I’
were to transfer the shares back. All these hurdles were conveniently crossed
by resorting to the device of so-called rescission retrospectively recorded in
the minutes of 9-8-1990 which was not borne out from the entries in the
register of members even up to 10-12-1990 as was clear from the certified
copies taken out on that day of the register of members. Even if ‘I’ was a
company controlled by the respondent No. 1 and his family, in the eye of law it
was a separate legal entity and not an existing member of the respondent No. 6
company to whom the shares could have been transferred or by whom they could
have retransferred back without a transfer notice. Therefore, transfer of
shares to ‘I’ by the respondent Nos. 1 to 5 was not a transfer to a member.
Such a transfer was therefore, clearly impermissible and in violation of the
transfer rules contained in the articles of association. This aspect had
significance in the present case not from the view point or to who was the
owner of these 9415 shares, i.e., respondent Nos. 1 to 5 ‘I’, but it had a
great bearing on the conduct of the respondent Nos. 1 to 5 and showed that the
provisions of articles of association were being violated by them with
impugnity and that the directors respondent Nos. 1 and 2 committed breach of
their fiduciary duty towards the company by keeping their self-interest
paramount.
‘I’ was admittedly restrained by an injunction
order dated 12-12-1990 of the Civil Judge made in Civil Suit No. 867 of 1990
filed by Smt. ‘S’ from attending meeting of GIC or exercising any rights in
respect of 9415 equity shares. Similar injunction orders dated 28-11-1990 was
served in respect of these shares on the defendants of Suit No. 305/1990 filed
by the share-holder Smt. ‘P’. Thus, the net position which obtained just prior
to the AGM of 20-12-1990 was that 9415 shares continued to be held by ‘I’ in
the Register of the company and that there were Court injunctions preventing
exercise of voting rights in respect of 9415 shares transferred to that company
by the respondent Nos. 1 to 5. It was obvious from the facts on the record that
the story of rescission on 9-8-1990 was thought out with a view to meet with
this situation which had reduced the voting power of the respondent Nos. 1 to 5
to only 66 shares at the AGM scheduled to be held on 20-12-1990.
Despite the Court’s injunctions preventing
participation in respect of 9,415 shares which stood in the name of ‘I’ there
was a purported exercise of votes in respect of that shareholding also. The
entire exercise reflected from these minutes smacked of a desperate attempt on
the part of the respondent Nos. 1 to 5 to tilt the power in their favour in
total disregard of the fiduciary nature of the directors’ powers and to serve
their self interest.
It would thus be seen from the above
discussion that the respondent No. 1 and his group adopted the following
calculated course of conduct to achieve their personal interest:—
(i) The respondent No. 1 abusing his position as a director
converted his group into a majority by allowing 9475 shares (6475 + 3000) to
himself and his family members respondent Nos. 2 to 5 without there being any
valid decision to that effect by the Managing Committee or the board of
directors;
(ii) Though the allotments of new shares were not made to the
respondent Nos. 1 to 5, their names were entered in the Register of members
prior to 10-12-1988 in respect of 9475 shares;
(iii) Allotment of shares were made in favour of non-members,
i.e., the HUF of the respondent No. 1 - 1475 shares, his minor son (2750
shares), his minor daughter ‘P’ (1750 shares), which was not permissible under
the articles of association of the company or any Resolutions of the AGM of
17-12-1987 or the board of directors on 8-1-1988;
(iv) Allotments were made beyond 10-3-1988 which was the last
date for receiving requisitions as per the letter of 12-2-1988 endorsed at the
Board meeting of 13-2-1988 though there was no extension given by the Board or
even by the Managing Committee;
(v) Even though no renunciation or decline letter was
addressed by Shrimant ‘F’ in favour of respondent Nos. 1, 4 and 5, 3000 shares
were appropriated on that footing by the respondent No. 1 by allotting them to
his minor children the respondent Nos. 4 and 5;
(vi) The Managing Committee was removed with immediate effect
from 30-3-1990 and the respondent No. 2, Smt. ‘A’, wife of the respondent No.
1, was made executive director to exercise all the powers of the Managing
Committee;
(vii) Transfer of 9414 shares by the respondent Nos. 1 to 5 was
sanctioned at the behest of the respondent Nos. 1 and 2 in favour of a non-member
company, ‘I’, without issuing transfer notice and its name was entered in the
Register as member contrary to the articles of association;
(viii) Though the name of ‘I’ continued in the Register of members
even on 10-12-1990, as per the notarised copies of the Register folios, and
shares were not retransferred to the respondent Nos. 1 to 5, minutes of a
meeting alleged to have taken place on 9-8-1990 were manipulated by the
respondent Nos. 1 and 2 and their group to show as if those shares were
transferred back to respondent Nos. 1 to 5 though no such transfer notice had
been given as per the articles of association nor was it recorded in the
Register;
(ix) The right of pre-emption guaranteed by the articles of
association to the shareholders was thrown to winds by the group of respondent
Nos. 1 to 5 and they effected transfer to ‘I’ without offering the shares to
the members first or even without giving a transfer notice to the company which
was a must;
(x) The respondent No. 1 tried to adopt and ingenious device
for nullifying the effect of the decision to issue 51 per cent of the new
shares to Shrimant ‘F’, taken at the Managing Committee meeting of 21-3-1988
which decision was also referred in the minutes of the meeting held on
10-12-1988, were chaired by the respondent No. 1, by creating a story that
Shrimant ‘F’ had renounced his allotment in favour of the respondent No. 1 and
his children and on that footing managed to allot 3,000 shares to his minor
children on 10-12-1988;
(xi) The minutes of the meeting of AGM held on 20-12-1990
prepared under the signature of respondent No. 1 as Chairman, did not disclose
the correct state of affairs about the outcome of voting by the shareholders
and proxies present and voting (even in the pursis filed by the respondents in
the Suit at 3 p.m. on 20-12-1990, it was not disclosed by them that the
resolution were passed but it was only generally stated that the voting was
done);
(xii) The respondent No. 1 was made a permanent director and
Chairman though there was no such provision for a permanent director under the
articles of association;
(xiii) Mr. ‘R’ and Mr. ‘H’ were removed as directors and Mr. ‘M’
as the Company Secretary because they did not toe the line of the respondent
Nos. 1 to 5;
(xiv) The Registered office of the respondent No. 6 company was
resolved to be removed from Vadodara to
(xv) The Registers and other records of the company were
authorised to be removed from the Registered office by the respondent No. 2.
It was at once clear from the above course of
conduct of the respondent Nos. 1 to 5 that they had acted in a high-handed
manner and in gross breach of the fiduciary duty of the respondent Nos. 1 and 2
as the directors of the company, treating the company as their private affair
and trying to gain a total control over it by improver means to the detriment
of the interests of other shareholders including the petitioners and the
respondent Nos. 12 and 13. Such engineered take over of the respondent No. 6
company by the respondent Nos. 1 to 5 and their group could not be recognised.
A director of a company is precluded from
dealing on behalf of the company, with himself, and from entering into
engagements or arrangements in which he has a personal interest conflicting, or
which possibly may conflict, with the interests of those whom he is bound by
fiduciary duty to protect, and this rule is as applicable to the case of one of
the several directors as to a managing or sole director and any affirmance or
adoption, by the company of any such dealing, engagement or arrangement,
brought about by unfair or improper means which is illegal, fraudulent or
oppressive toward the shareholders who oppose it, cannot be recognised. Power
of the directors to issue shares to the members of the company is a fiduciary
power to be exercised by them bona fide for the general advantage of the
company and the directors are not entitled to use their power of issuing shares
merely for the purpose of maintaining their control over the affairs of the
company or merely for the purpose of altering a majority shareholding. Breaches
of fiduciary duty by the controlling directors would entitle a minority
shareholder to bring an action against them and the Court would be justified in
redressing the wrong. If the persons in control of the company have acted in
their own interest by allotting shares to themselves or to their associates so
as to enable themselves to control the voting at the General Meetings or to
enhance their power or position, the members who were unfairly prejudiced by
such conduct would become entitled to have the affairs of the company properly
conducted according to law. The Court’s reluctance to examine business
decisions would disappear if it were shown that the directors or controlling
shareholders concerned did not make the decision in good faith in the interest
of the members of the company as a whole. The Court has ample powers to make
such order as it thinks fit to give relief in respect of the matters complained
of, and can fashion the remedy to suit the circumstances of a particular case.
The Court’s jurisdiction in such matters is equitable in character although
originating in a statutory provision. In a matter of this type, the Civil
Courts would be wholly ill-equipped in power to deal with this gross case of
oppression and mismanagement by the contesting respondents.
In view of the above the findings of the
single Judge or the contentions which had been raised on behalf of the
contesting respondents in these appeals in support of that decision, could not
be accepted.
As a result, the appeals were allowed and the
impugned order passed by the single Judge on 17-4-1995 in company petition was
set aside and the company petition was allowed with appropriate reliefs.
Needle Industries (India) Ltd. v. Needle
Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298, World Wide Agencies
(P.) Ltd. v. Mrs. Margarat T. Desor AIR 1990 SC 737, Nanalal Zaver v. The
Bombay Life Assurance Co. Ltd. AIR 1950 SC 172, Ramashankar Prosad v. Sindri
Iron Foundry (P.) Ltd. AIR 1966 Cal. 512, Jadabpore Tea Co. Ltd. v. Bengal
Dooars National Tea Co. Ltd. [1984] 55 Comp. Cas. 160, John Tinson & Co.
(P.) Ltd. v. Mrs. Surjeet Malhan AIR 1997 SC 1411, Life Insurance Corpn. of
India v. Escorts Ltd. AIR 1986 SC 1370, Hungerford Investment Trust Ltd. v.
Turner Morrison & Co. Ltd. ILR 1972 (1) Cal. 286, Bengal Luxmi Cotton Mills
Ltd., In re [1965] 35 Comp. Cas. 187 (
V.M. Trivedi, P.V. Kapoor and
Abichandani, J. - These three appeals are directed against the
judgment and order passed by the learned single Judge on 17-4-1995, in the
Company Petition No. 51 of 1991, dismissing the petition which was filed under
the provisions of sections 397 and 398 of the Companies Act, 1956 (‘the Act’).
O.J. Appeal No. 6 of 1995 has been preferred by the petitioners of the Company
Petition No. 51 of 1991 and the other two O.J. Appeal Nos. 7 and 8 of 1995 have
been preferred by the supporting original respon-dent Nos. 11 and 12. Since
common points were involved, all these three appeals have been argued together
by referring to the record of the O.J. Appeal No. 6 of 1995, by both the sides.
2. The
case of the appellants in O.J. Appeal No. 6 of 1995 (hereinafter referred to as
the petitioners) was that the respondent No. 6 company Gaekwad Investments
Corpn. (P.) Ltd. (“the company”) which was initially incorporated as a Public
Ltd. company in the year 1958 was converted into a Private Limited Company
around the year 1971 and its registered office is situate at “‘Indumati Mahal’,
Jawaharal Nahru Marg, Baroda 390 001”. The company was established with the
objective of carrying on business of an investment trust company and to
transact the activities which are referred to in the memorandum of association
of the company and its articles of association at Annexure “A” to the petition.
2.1 According
to the petitioners, the said company was closely held by family members and
family friends who were its shareholders. Since its incorporation and until his
demise on 1-9-1988, Shrimant Fatehsinh Gaekwad was the Chairman of the company
and in his absence, his mother the petitioner No. 1 Smt. Shantadevi Pratapsinh
Gaekwad used to function as the Chairman. Shrimant Fateshinhrao Gaekwad was
holding about 75 per cent of the equity shares of the company. According to the
petitioners, the equity share capital in the company consisted of 425 shares of
Rs. 100 each, out of which Shrimant Fateshinhrao Gaekwad owned 301 shares, the
petitioner No. 1 owned 7 shares, the supporting respondent Smt. Shubanginidevi
owned 5 shares, the supporting respondent Smt. Mrunalinidevi Puar owned 10
shares, the respondent No. 1 Shri Sangramsinh P. Gaekwad, brother of Shrimant
Fatehsinhrao Gaekwad owned one share and his wife Smt. Asharaje Gaekwad,
respondent No. 2 herein owned 5 shares. The remaining shares were held by the
members of the family of Shrimant Fatehsinhrao Gaekwad and his friends. The
statement showing shareholding pattern of the 425 shares is at Annexure “A-1”
to the petition. According to the petitioners, on the demise of Shrimant
Fatehsinhrao Gaekwad on 1-9-1988, his mother, the petitioner No. 1 was his sole
heir.
2.2 On
or about 23-3-1988, according to the petitioners, in a family meeting it was
decided to broaden the capital base of the company by further issue of 15,000
equity shares of Rs. 100 each and it was agreed at that meeting and also in a
subsequent meeting of the board of directors that out of 15,000 equity shares,
8,000 would be allotted to Shrimant Fatehsinhrao Gaekwad, 500 equity shares to
Smt. Mrunalinidevi Puar who was also his sister and 6475 shares to respondent
No. 1 Shri Sangramsinh P. Gaekwad. No date was fixed for payment to be made in
respect of those shares and the share certificates were to be issued as and
when the payments were made. These averments seem to have been made in the
petition on the basis of copies of a requisition note containing endorsements
in the hand-writing of Shri N.K.K. Mohammed, who was the Personal Secretary of
the respondent No. 1 and the draft minutes prepared on that basis. At Annexure
“B” to the petition is annexed the said note which is described as a note dated
23-3-1988 in the petition, but on perusal it appears that the said date is
written below the endorsement made by Shri N.K.K. Mohammed, which reads
‘Minutes of Committing meeting on this basis’. This note is a typewritten note,
containing particulars of ‘requisitions so far’ and in the margin it bears an
endorsement ‘Chairman has okayed this’. Annexure ‘C’ to the petition is a note
dated 29-3-1988 signed by the Company Secretary Mr. M.N. Khade forwarding draft
minutes of the Committee meeting held on 21-3-1988 to Mr. N.K.K. Mohammed with
a request to approve the same, both the said note bearing endorsement of Mr.
N.K.K. Mohammed and the draft minute forwarded under the note dated 29-3-1988
of the Company Secretary Mr. M.N. Khade, reflected the agreed basis for
allotment of 15,000 shares as stated in the petition. According to the
petitioners, on the death of Shrimant Fatehsinhrao Gaekwad the right in respect
of the 8,000 equity shares which were decided to be allotted as per the draft
minutes to Shrimant Fatehsinhrao Gaekwad vested in his mother the petitioner
No., who was his sole heir. The respondent No. 1 as a member of Shrimant
Fatehsinhrao Gaekwad family had been managing the affairs of the company for
sometime and after the death of Shrimant Fatehsinhrao Gaekwad, he continued to
manage the same. According to them, they had reposed trust and faith in him
believing that he would be managing the affairs fairly and honestly and will
discharge his obligations to his mother, sisters and other members of the
family and close friends. Therefore, no accounts were checked nor any questions
asked by the petitioners to the respondent No. 1.
2.3 It
is alleged that in or about October/November 1990, the petitioners came to know
that the respondent No. 1 had transferred some of his shareholding and that of
his immediate family to a non-member with an ulterior motive. The petitioner
No. 1, therefore, took inspection of the register of members and the register
of transfers and learnt that apart from issuing 6475 equity shares to himself
and the members of his family, (as per the requisition note and the draft
minutes at Annexures ‘B’ and ‘C’ to the petition), the respondent No. 1 had
fraudulently issued further 3,000 equity shares to his son and daughter, who
are respondent Nos. 4 and 5 in the petition, increasing in the process his
total shareholding in the company together with the shareholding of his wife,
son and daughter and his HUF, i.e., the respondent Nos. 2, 3, 4 and 5 to 9481
equity shares. The respondent No. 1 had thus, changed behind the back of the
petitioners, the basic idea of the company being the company of Shrimant
Fatehsinhrao Gaekwad and after his death, his mother as the sole heir of
Shrimant Fatehsinhrao Gaekwad. It is further alleged in the petition that the
petitioners also came to know that the respondent No. 1 and his wife, the
respondent No. 2, purportedly transferred 9415 equity shares out of the 9481 to
a company named Indreni Holdings (P.) Ltd. (hereinafter referred to as
“Indreni”) on or about 30-3-1990. According to the petitioners, the said
conduct of the respondent Nos. 1 and 2 was motivated to grab the control of the
company and the transfer of shares in favour of Indreni was illegal, null and
void. After the transfer of their shares to Indreni, the balance number of
shares that remained with the respondent No. 1 was 26 and that the respondent
Nos. 2, 3, 4 and 5, ten each, i.e., in all 66. Some of the shareholders filed
Suits at Baroda and Rajkot, being Suit Nos. 867 of 1990 and 305 of 1990
respectively, in which ad interim injunction was granted restraining Indreni
from exercising any voting rights in respect of the 9415 equity shares
transferred to it. The injunctions were served on Indreni on or about
15-12-1990. On 20-12-1990, the respondent No. 2, as the executive director of
the company, had called an Annual General Meeting (AGM) of the company, by a
notice dated 10-12-1990. It is alleged that the said notice, at Annexure ‘D’ to
the petition, was not valid since it was not a notice of fourteen clear days as
required. The Board meeting at which annual accounts were approved, was held at
Bombay on 10-12-1990 and therefore, according to the petitioners, it was
physically impossible for the annual accounts to be sent thereafter on that day
itself, i.e., 10-12-1990 to the auditors of the company at Baroda for their
examination and report and for the auditors to have examined and made the
report on that very day at Baroda, and to send it back to Bombay. The fact that
all this could not have been done in a single day shows the mala fide conduct
of the respondent Nos. 1, 2, 9, 10 and 11. It is further alleged that several
shareholders including the petitioners had objected to the validity of the AGM
as its very commencement on 20-12-1990. At that meeting which was held in the
registered office of the company at
2.4 It
is then stated that in the civil suits instituted against the respondent Nos.
1, 2 and 5 at
2.5 It
was further contended that since the respondent Nos. 1, 2, 7, 8 and 9 had
ceased to be directors of the company in any event with effect from 20-12-1990,
if not earlier, they had no right to represent themselves to be the directors
of the company. The petitioners however, received a notice dated 5-1-1991 as
per Annexure “I” to the petition, under the signature of the respondent No. 2,
claiming to be the executive director of the company, stating that an
Extraordinary General Meeting was called on 14-1-1991 at
2.6 It
is also contended that despite the petitioner No. 1 having called upon the respondent
No. 1 orally on several occasions and later by a letter dated 29-11-1990 to
give share certificates of the said 8,000 equity shares which were to be
allotted to Shrimant Fatehsinhrao Gaekwad, respondents had neglected to do so.
A copy of the letter dated 29-11-1990 is at Annexure “R” to the petition. The
petitioners alleged that the respondent Nos. 1 and 2 had further colluded and
purported to allot 3,000 equity shares to their children Pratapsinh S. Gaekwad
and Miss Priyadarshini S. Gaekwad, i.e., the respondent Nos. 4 and 5, who were
minors and thereby had acted contrary of the decision which was arrived at in
March 1988, by appropriating in the names of their children, additional 3,000
equity shares over and above 6475 equity shares, to which as per the decision
taken in March 1988, the respondent No. 1 was entitled for allotment. The
respondent Nos. 1 and 2 had illegally attempted to transfer 9415 shares out of
their holdings of 9481 equity shares to Indreni and had raised “palpably false
story” that the transfer in favour of Indreni was rescinded on 9-8-1990. It is
also alleged that respondent Nos. 1, 2, 9, 10 and 11 had purported to relieve
long standing employees of the company including its Company Secretary Shri
M.N. Khade. On these allegations it was contended that the affairs of the
company were being carried on in a manner prejudicial to the interest of the
company and to the public interest. It was also pointed out that the respondent
Nos. 1 and 6 have filed Civil Suit No. 63 of 1991 in the Court of learned Civil
Judge (Senior Division) at Surat against the petitioners and others claiming
themselves to be the directors of the company and seeking various reliefs it is
also alleged that in order to grab control and properties of Alaukik Trading
Investments (P.) Ltd. the respondent Nos. 1 and 2 acting as the board of
directors of the respondent-company filed Special Civil Suit No. 675 of 1990 in
the name of the company, in the civil Court (Senior Division) at
2.7 On
the above allegations, the petitioners initially sought a relief of declaring
that the petitioner No. 1 and/or her nominees were the allottees of 8,000
equity shares of respondent No. 6 company besides the shares previously held by
late Shrimant Fatehsinhrao P. Gaekwad, a direction on the company to issue
share certificates on that basis by adjusting the amount of Rs. 8 lakhs as
share money from out of the deposits standing to the credit of the petitioner No.
1 with respondent No. 6 company, a declaration that the issue of allotment of
3000 shares in excess of 6475 equity shares to respondent No. 1 and/or his
nominees, respondent Nos. 2 to 5 was null and void and seeking rectification of
the register of members, a declaration that the petitioner No. 1 as mother and
sole heir of Shrimant Fatehsinhrao P. Gaekwad was entitled to be in the
majority and/or control of respondent No. 6 company, a declaration that
respondent Nos. 1, 2, 9, 10 and 11 had ceased to be the directors of respondent
No. 6 company and by an amendment, an alternative declaration that all the
allotments of shares in the respondent No. 6 company made beyond the original
paid up capital consisting of 425 equity shares as existing on 23-3-1988 were null
and void, illegal and of no legal effect and seeking to set aside the same,
alternatively, a declaration that the allotment of 6475 equity shares of
respondent Nos. 1 to 5 and/or their nominees was subject to the simultaneous
allotment of 8,000 equity shares to petitioner No. 1, 500 equity shares to Smt.
Mrunalinidevi Puar, 25 equity shares to Smt. Shubhanginidevi and that the
allotment of any further shares including the said 3,000 shares to respondent
Nos. 4 and 5 was null and void. It was also prayed that in the event of the
Court holding that allotments of 6475 shares to respondent Nos. 1 to 5 and
3,000 shares to respondent Nos. 4 and 5 were valid, it should be directed that
the said 9475 shares which were transferred to Indreni shall be offered and
transferred by the respondent No. 6 to the shareholders, on pro rata basis of
their original shareholding of 425 equity shares. There are various other
prayers for interim relief, which need not be referred to here.
3. In
response to the petition, the respondent No. 1 filed his affidavit-in-reply
dated 21-3-1991, denying the allegations and raising a preliminary ground that
the petition ought not be entertained in view of the fact that the allegations
and grievance set out in the petition were urged in some form or the other in
the related proceedings pending before the civil Courts, namely - three Suits
at Baroda, one Suit at Rajkot and one Suit at Surat, as per the list Annexure-I
to the affidavit-in-reply. It was contended that the provisions of sections 397
and 398 were not attracted and that there was no oppression of minority as
contemplated by these provisions. According to the respondent No. 1, the
petition was calculated by the petitioners and their supporters to wrest
control and management of the well-known and prosperous Public company, namely
- Baroda Rayon Corpn. Ltd. It is alleged that the petitioners had made false
statements that the respondent No. 6 company and various other business
entities were meant to be the personal property of late Shrimant Fatehsinhrao
Gaekwad and that they passed by inheretence. Moreover they had made false
statements relating to the issue of 15,000 equity shares and related aspects
and concerning the AGM held on 20-12-1990. The case of the respondent No. 1 is
that he was appointed as an Additional Director of Baroda Rayon Corpn. from
1-7-1970, became its Joint Managing Director in 1975 and after the death of the
managing director on 3-9-1976, he assumed full responsibility of that company
under the supervision of the Board and subsequently was designated as managing
director for two periods of 5 years with effect from 19-2-1980 and 19-2-1985.
After the death of the Chairman Shrimant Fatehsinhrao P. Gaekwad on 1-9-1988,
the Board appointed him as Chairman and managing director on 23-9-1988 in the
said Baroda Rayon Corpn. According to him, he had devoted his full time and
attention and brought that company to its prosperous days.
3.1 It
is alleged that the Baroda Rayon Corporation and the respondent No. 6 company
were managed by the executives and outside professionals and that Shrimant
Fatehsinhrao Gaekwad was not actively involved in their day-to-day management.
In 1988, the respondent No. 2 was appointed as an executive director in the
respondent No. 6 company and managed it with the assistance of the Executives.
It is further alleged that Shrimant Fatehsinhrao Gaekwad was not interested in
business or actual participation in financial matters and a large chunk of his
shares, i.e., 300 out of 425 shares was held by one Jaysing Ghorpade Trust,
through Shrimant Fatehsinhrao Gaekwad as the trustee and, therefore, he was not
the owner of the shares because he had no beneficial interest therein.
Moreover, there were members from outside the family, namely Shri Jadeja, Shri V.L.
Raichand, Shri Dilip Thakker, Shri K.D. Merchand, Shri E.B. Desai and Shri K.K.
Shah, who had been in the board of directors. According to him, the respondent
No. 6 company was a small investment company and it made loss in the years
ending 31-3-1987 and 31-3-1988, as a result of which substantial part of the
equity and reserves were wiped out. When Baroda Rayon skipped the dividend in
year 1986-87, this company also came into financial trouble. In these
circumstances, at a Board meeting of the company held on 8-1-1988 when the
respondent No. 1 was in chair and Shrimant Fatehsinhrao Gaekwad was absent,
while Mr. P.U. Rana and Mr. P.H. Chinoy had attended the meeting, after taking
into account all the circumstances, the board of directors resolved that 15,000
equity shares of Rs. 100 each be issued at par to the members of the company.
The resolution which was passed at Board meeting, which has been reproduced in
the affidavit-in-reply, reads as under:—
“Resolved
that out of 25,000 equity shares of Rs. 100 each, 15,000 equity shares of Rs.
100 covering Rs. 15,00,000 be issued at par to the members of the company at
present and the balance as and when required.
Further Resolved that the management Committee of the company
be and is hereby authorised to issue equity shares to members in such
proportion as it deems fit.
Further Resolved that the Management Committee be and is hereby authorised to do all such
acts, deeds and things necessary for the purpose.”
Pursuant to the above resolution, the Company
Secretary Mr. M.N. Khade issued a circular letter dated 12-2-1988 to all the
existing share-holders requesting them to subscribe for the equity shares at
par. It was stated therein that if no reply was received by 10-3-1988, it would
be presumed that the shareholders concerned were not interested in the offer.
That letter is at Annexure “16” of the affidavit-in-reply of the respondent No.
1. The minutes of the earlier meeting held on 8-1-1988 were confirmed at the
Board’s meeting held on 13-2-1988. It is further stated in paragraph 6(g) of
his reply that since no offers were received from the existing shareholders,
the Managing Committee decided at its meeting held on 21-3-1988 to extend the
time for the said offer and it was further decided that out of 15,000 shares,
8,000 shares be kept apart for the time being for Shrimant Fatehsinhrao Gaekwad
“as he was desirous of subscribing to the same”. The balance 7,000 shares were
kept apart for the other existing members of the company including 6475 shares
for the respondent No. 1 and his children. It was further stated by the
respondent No. 1 in the said reply that between March 1988 and 9-6-1988, the
company subsequently reminded Shrimant Fatehsinhrao Gaekwad to subscribe to
8,000 shares which were offered to him, but he decided that he would not
subscribe to them and renounced the offer in favour of the respondent Nos. 1, 4
and 5. In the meanwhile during the period between 21-3-1988 and June 1988, the
said 7,000 shares were allotted on various dates during that period to the
shareholders who subscribed to the shares and paid application money to the
company. In addition to the 500 shares already allotted to Mrs. Puar, she was
further allotted 500 shares out of 8,000 shares kept apart for Shrimant
Fatehsinhrao Gaekwad. According to the respondent No. 1, at this stage itself
the sanctity of keeping aside 8,000 shares for Shrimant Fatehsinhrao Gaekwad
was broken. It is then stated that as far as balance 7,500 shares were
concerned, in view of the clear expression of disinterest by Shrimant
Fatehsinhrao P. Gaekwad and his renunciation thereof in favour of the
respondent No. 1 and his children in June 1988, the same remained unallotted.
It is also stated that all efforts were made to find subscribers from the
existing members to take up the remaining 7,500 shares. Ultimately, the
respondent No. 1, his children Pratapsinh Gaekwad and Priyadarshiraje S.
Gaekwad applied for further 3,000 shares through their guardian and in view of
the availability of shares, the Board of the company decided to issue and allot
the said 3,000 shares to them, thereby leaving only an unallotted quantity of
only 4,500 shares, which according to the respondent No. 1 were not available
for allotment. It was contended that the suggestion in the petition that the
petitioner No. 1 had as long back as in November 1988 deposited an amount of
Rs. 15 lakhs to subscribe for shares of the company and that by letter dated
29-11-1990 sought retrospective entitlement to 8,000 shares on the ground of
being the sole heir of the beneficial interest/right of Shrimant Fatehsinhrao
P. Gaekwad was false and incorrect. According to the respondent No. 1, an
amount of Rs. 15 lakhs was paid as a loan to the company and that she had no
right to apply for 8,000 shares. It was contended that in any event, the right
to the said issue was renounced by Shrimant Fatehsinhrao Gaekwad in favour of
the respondent No. 1 and his children.
3.2 It
was further stated in the said reply that the respondent Nos. 1 to 5 had
floated their own investment company, namely Indreni Holdings (P.) Ltd., in
which the respondent Nos. 1, 2, 3 and 4 had 50 equity shares each and the other
holder Prasang Holdings (P.) Ltd. had 800 equity shares in the company. It was
stated that in Prasang Holdings (P.) Ltd., the respondent Nos. 1, 2, 3 and 4
had 250 equity shares each and under the circumstances, Indreni was wholly
owned investment company held and controlled by the respondent No. 1 and his
family. For wealth-tax purposes, it was felt that barring a token shareholding
to be held by the respondent Nos. 1 to 5, the bulk of their shareholding in the
respondent No. 6 company would be transferred to Indreni and accordingly 9,415
shares were transferred to Indreni, as stated in paragraph 6(m) of the
affidavit-in-reply. It is stated that the respondent Nos. 1 to 5 had requested
the Company Secretary Mr. M.N. Khade to circulate a formal offer in accordance
with articles 5 to 9 of the articles of association of the company. On an
assurance from him that all procedures were complied with, the transfers were
effected to Indreni at the Board meeting held on 30-3-1990. It is further
stated that in the Board meeting held on 9-6-1990, on enquiries being made it
was ascertained that the share transfer register was not traceable either at
the registered office of the company or at the Bombay office of the company
and, therefore, the respondent No. 1, as a Chairman, directed that a fresh
transfer register should be maintained. According to the respondent No. 1, at
the Board meeting held on 13-7-1990, the Board was for the first time informed
that the transfer notices under article 9 of the articles of association of the
company were not given and it was suggested that the transfer of shares by the
respondent Nos. 1 to 5 to Indreni may be considered to be irregular. It was
therefore, decided to reconsider the issue and invite legal opinion on the
matter and to reconsider the matter after receiving views from the transferors
and transferees and in accordance with legal opinion. It was further stated
that after considering all aspects of the case including the legal opinion, on
9-8-1990, the Board decided to cancel and rescind the transfer of 9415 shares
which was made by the respondent Nos. 1 to 5 to Indreni, and, thereupon the
status-quo ante was restored. According to the respondent No. 1, the Company
Secretary Mr. M.N. Khade had acted against the interest of the company and at
the behest and as a puppet of the petitioner’s group. In paragraph 6(q) of the
affidavit-in-reply, it was stated that before it was decided by the respondent
Nos. 1 to 5 to transfer the shares to Indreni, Mr. M.H. Khade was told to
inform the existing shareholders as per the articles of the company. It was
stated that it was felt that keeping in mind the closely held nature of Indreni
which was merely respondent Nos. 1 to 5 in a corporate form, none of the other
members would get hyper-technical but would readily consent in the transfer to
Indreni, as any reasonable and fair-minded person would have done and hence,
there was no real danger of having to disinvest in favour of other members. It
is further stated that even though he had prepared a letter dated 15-11-1989 to
all the shareholders, he did not deliver them to any of them and falsely
informed the respondent Nos. 1 to 5 that there was no response to the proposed
transfer it is stated that this was recorded in the minutes of the Board
meeting held on 27-12-1989 “in usual course”. It was stated that in view of the
conduct of Mr. Khade, he was removed from service of the company from 5-1-1991.
3.3 In
paragraph 6(t)(2) of the affidavit in reply it is stated that in Suit No. 305
of 1990 filed on 28-11-1990 at Rajkot by Smt. Pramilaraje Kachar of Jasdan for
similar reliefs an interim order was obtained in respect of these shares on the
same day. The date of hearing was fixed on 11-12-1990, but on that day the
injunction order was extended till 10-1-1991. It is stated that a couple of
days before the date of the AGM i.e., on or around 16-12-1990, some of the
defendants of the suit were served the injunction order of the Court. It is
stated in paragraph 6(t)(3) of the reply that Suit No. 872 of 1990 was filed by
Shri Ajitsinh Gaekwad in the civil Court at Baroda on 19-12-1990, inter alia,
for freezing rights in respect of 9415 shares and that the application for
injunction was successfully resisted as caveates were filed. It was further
stated that at the meeting of the board of directors held on 10-12-1990 at
3.4 The
minutes of the AGM held on 20-12-1990 are annexed at Annexure “18” to the
affidavit-in-reply of the respondent No. 1, who has denied any statement or
allegation in the petition contrary or inconsistent with these minutes. As
regards the resolution for appointment of Dr. G.M. Oza at the said meeting, it
is stated by the respondent No. 1 that the said resolution had been included in
the notice convening the meeting on the basis of past practice and his oral
consent and in any event, implied consent was obtained prior to the meeting. It
is contended that the reference to the appointment of Dr. G.M. Oza was entirely
irrelevant to the present proceedings and cannot assist the petitioner in their
case of ‘oppression’ by the majority shareholders within the meaning of section
397 it is further stated that having regard to the conduct of Mr. P.U. Rana and
Mr. H.A. Shinde it was decided at the AGM of 20-12-1990 that it was in the
interest of the company that they should not continue on the board of directors
of the respondent No. 6 company. In the meanwhile, the respondent No. 4 Mr.
P.S. Gaekwad had issued notices under section 190 and section 284 of the Act,
proposing resolutions for their removal. These were placed before the board of
director on 5-1-1991, when it was decided to convene an Extraordinary General
Meeting of the company at a short notice on 14-1-1991. The Extraordinary
General Meeting had on its agenda, also a resolution for appointment of
respondent No. 1 Shri Sangramsinh Gaekwad as the permanent director and
Chairman of the company, a resolution for shifting the registered office of the
company to
4. In
the affidavit-in-rejoinder, the petitioner No. 1 reiterated that Shrimant
Fatehsinhrao Gaekwad was holding 300 equity shares out of 425 and stated that
the Trust was created for the purpose of tax planning. It is stated that after
the demise of Shrimant Fatehsinhrao Gaekwad, the petitioner No. 1 and her
daughter Smt. Mrunalinidevi were the trustees of the private trust and that the
petitioner No. 1 was the managing trustee. It is pointed out that Shri Jaysinh
Ghorpade was the brother of the petitioner No. 1 and living with them since
child-hood till his death.
4.1 It
is stated in paragraph 11 of the affidavit-in-rejoinder that the petitioner No.
1 with her daughter Smt. Mrunalinidevi had gone to the registered office of the
company on 10-12-1990 for inspection of the register of members, register of
transfer and other registers and papers and when she inspected the register of
members and register of transfers, she was shocked to note various entries made
therein. Thereupon, she asked the director of the company Mr. P.U. Rana who had
given her the inspection, also to give inspection of the minutes book of the
board of directors of the company as well as minutes book of the Committee
meetings. To this Shri P.U. Rana informed that the shareholders were not
entitled to see or inspect these Minutes books whereupon she tried to convince
him that it was at any rate not illegal to give such inspection, particularly
when it was a family company and serious illegalities and fabrication of
documents was suspected. On inspection of the minutes book of meetings of the
board of directors and the Minutes book of the Committee meetings, these
petitioners noted that in the minutes book of the board of directors the last
minutes that were recorded were of the meeting of 30-3-1990. They were signed
by the respondent No. 1, although there was no date. They also found that the
minutes of the Managing Committee meeting held on 21-3-1988 and 10-12-1988 were
totally fabricated and were under the signatures of the respondent No. 1. They,
therefore, requested Shri P.U. Rana to give xerox copies of the register of
members, register of transfers the last recorded minutes of the meeting of the
board of directors and minutes of the committee meetings of 21-3-1988 and
10-12-1988 duly certified by a Notary Public. It is further stated that Shri
Rana took the documents and got the same xeroxed and thereafter Shri M.C.
Vaidya, Notary was called to the office, who then verified the said copies and
after comparing the same with the originals, certified the same to be true
copies. These copies were handed over to the petitioner No. 1 and the certified
copies of the minutes of board of directors of 30-3-1990 and the minutes of the
Committee meetings held on 21-3-1988 and 10-12-1988 are produced at Annexures
A/1, A/2 and A/3 of the affidavit-in-rejoinder. It is indicated in the minutes
of the meeting of the Managing Committee held on 21-3-1988, which is at
Annexure A/2 to the rejoinder that only two persons, i.e., the respondent No. 1
and one Shri P.H. Chinoy were present at the meeting, while the respondent No.
1 in his affidavit-in-reply II(2)(vi) had stated that at a meeting of the
Managing Committee held on 21-3-1988, he requested Shrimant Fatehsinhrao
Gaekwad to reconsider his decision. As per the minutes of the meeting held on
21-3-1988, it was decided to issue 51 per cent additional equity share capital
to Shrimant Fatehsinhrao Gaekwad and not 8,000 shares. It is further stated on
the rejoinder that though the respondent No. 1 had stated in his
affidavit-in-reply that at the said meeting it was decided that 6475 shares
should be kept apart for respon-dent No. 1 and others, from the minutes of
21-3-1988 at Annexure A/2 it appeared that they did not at all provide that 6475
shares should be kept apart for the respondent No. 1 and others. In fact, the
said minutes recorded that the balance 49 per cent of the additional equity
share capital had to be issued to the existing members of the company and there
was no reference to 6475 shares being kept apart for respondent No. 1 and
others. There was no reference to the fact that the time was extended in the
said minutes of the meeting held on 21-3-1988 as was stated by the respondent
No. 1 in his affidavit-in-reply in paragraph 6(g). It was submitted in the
rejoinder that as per the minutes of the Managing Committee held on 21-3-1988,
neither the respondent No. 1, nor any of his family members were allotted any
shares on that date.
4.2 It
was further stated in paras 12 and 13 of the rejoinder that the story of letter
dated 11-6-1988 and of Shrimant Fatehsinhrao Gaekwad expressing his lack of
interest in subscribing to the additional share capital and renouncing the same
in favour of the respondent No. 1 and his children was totally fabricated and
false, and that nobody would have refused to subscribe to the shares of the
respondent No. 6 company at Rs. 100 per share when the real value of the share
(looking to the huge properties of the company worth several crores of rupees)
“was several hundred times more than only Rs. 100 per share”. It is denied that
the respondent Nos. 4 and 5 were allotted 3000 shares on 6-12-1988 as contended
by the respondent No. 1. It was further stated that in view of the minutes of
the Managing Committee meeting on 10-12-1988, 7500 could not have been allotted
prior to 11-6-1988 while the Register of Members indicated that the shares were
allotted prior to that date. The petitioner No. 1 has produced the affidavit of
Mr. Khade at Annexure “A/4” to the rejoinder in support of her version. She has
stated that she had advanced more than 15 lakhs free of interest to respondent
No. 6 and Smt. Mrunalinidevi Puar had also advanced Rs. 15 lakhs free of
interest, and that no interest has been paid to her.
4.3 As
regards the meeting of 20-12-1990, she has stated that the minutes produced by
the respondent No. 1 are fabricated and has annexed at Annexure “5”
collectively, affidavits of other persons who had attended the meeting to show
as to what transpired at that meeting. It is further pointed out in paragraph
22 of the rejoinder that the affidavit in the Baroda Court which is said to
have been filed on behalf of these respondents as well as the ‘purshis’ were
filed only after the general meeting of 20-12-1990. It is stated that they were
filed after the respondent No. 1 and his wife took physical control of the
register of members and other documents and papers and spirited them away. It
is also stated that after the respondent Nos. 1, 2, 9 and 11 ceased to be directors,
remaining board of directors filed their annual return and form 32 to the
Registrar of Companies and had also written letters to Baroda Rayon
Corporation, Banks and others intimating to them that the said respondents had
ceased to be the directors of the company on 20-12-1990.
4.4 It
is stated in the said rejoinder that the statement of the respondent No. 1 that
the information of the transfer register being misplaced furnished by Mr. P. U.
Rana was false as can be seen from the fact that Mr. P.U. Rana did not attend
the Board meeting of 29-6-1990. It is also stated that at the Board meeting of
13-7-1990, there was no talk whatsoever regarding the transfer of shares to
Indreni being irregular or the notice of transfer not having been sent to the
shareholders. The petitioner No. 1 has relied upon the affidavit of Mr. M.N.
Khade in this regard. It is further alleged that from the minutes of the
meeting dated 13-7-1990 produced by the respondent No. 1, it can be seen that
no resolution was passed at that meeting appointing Shri Rameshchandra Desai as
the power of attorney holder of the respondent No. 6 company. In the power of
attorney annexed at Annexure A/10 to the rejoinder it had been stated that it
was being executed pursuant to the authority in that behalf contained in the
meeting of the board of directors of the company held on 13-7-1990. From this
it is contended that the respondent No. 1 had fabricated the said minutes of
13-7-1990. It is also contended that the notice dated 10-12-1990 for calling
the AGM was not in accordance with clause 18 of the articles of association and
that there was nothing on record to show that any share-holders holding not
less than 50 per cent of the paid-up capital had agreed in writing to a shorter
notice. It is reiterated that there was no meeting of the board of directors on
9-8-1990 and the transfer in favour of Indreni was not at all rescinded. It is
further stated in paragraph 39 of the rejoinder that the petitioner No. 1 had
seen the register of members on 20-12-1990 during the AGM when votes were
required to be counted and she and others had seen therein that Indreni was
shown as holding 9415 equity shares in the respondent No. 6 company, and till
votes were ascertained from the Register of members there was no correction
made in it. It is, therefore, alleged that the Register of members appears to
have been altered only after the AGM of 20-12-1990.
5. The
supporting respondent No. 12 Smt. Mrunalinidevi Puar in her affidavit has
stated that she was allotted 1,000 shares in the company and was not aware from
whose alleged quota of shares she was being allotted the shares. According to
her, she was intimated by the respondent No. 1 that certain funds were required
for the respondent No. 6 company and she had sent him two separate cheques
dated 23-3-1988 and 19-5-1988 for Rs. 20,000 and Rs. 80,000 respectively under
the forwarding letter dated 19-5-1988 and the share certificates were issued to
her by the respondent No. 1 on or about 30-5-1988. She has denied that she was
given 500 equity shares from 8000 shares kept apart and allotted to her late
brother Shrimant Fatehsinhrao Gaekwad. She has stated that she had made no
application for any of these 1000 shares. As regards the AGM of 20-12-1990, she
has stated that at the said meeting all the resolutions except the resolution
for appointment of the auditors, were defeated by majority of 1122 to 66. She
has stated that she gone through the affidavits made by Shri P.U. Rana and
others in this regard and that what is stated therein as regards what
transpired at the said meeting was true and nothing said to the contrary by the
respondent No. 1 was true. The appellant No. 4 Shri Rajnitsinh Gaekwad has also
given similar version as regards the meeting of 20-12-1988, stating that after
counting of the votes it was made known to the meeting that the resolution for
the appointment of the auditors was passed unanimously while all other
resolutions including the resolutions for re-appointment of various directors
were lost by majority of 1122 votes against the resolutions and only 66 votes
in favour of them. He also has stated that when the members and proxy holders
including himself had seen the register of members to know the number of votes
to which they were entitled, Indreni was shown therein to be holding 9415
equity shares. Similar averments are made in the affidavit which has been filed
by the supporting respondent No. 13 Smt. Shubhanginidevi and Shri Ajitsinh
Gaekwad. Mr. P.U. Rana, Mr. H.S. Shinde and Mr. G.G. Sirvee who were the
directors of the respondent No. 1 company have all stated in their affidavits
filed in support of the petitioner’s version that they had not received any
notice of any meeting of the company’s Board stated to have been held on
9-8-1990 and that they had not sent any note for granting them leave of absence
from the said meeting. They have all stated that they used to send in writing a
letter for granting leave of absence.
6. In
this affidavit in-sur-rejoinder, the respondent No. 1 has denied the averments
made in the rejoinder of the petitioner as well as in the affidavits which were
produced in support of the version of the petitioners. He has stated that he
did not admit the minutes of the Managing Committee held on 21-3-1988 and
10-12-1988, which were produced by the petitioner No. 1 with her rejoinder. He
stated that the draft minutes of the meeting of the Managing Committee on
21-3-1988, which were relied upon by the petitioners and were at annexure ‘C’
to the petition indicated that Shrimant Fatehsinhrao Gaekwad was present at the
said meeting. He has then stated in paragraph 14 of the sur-rejoinder that “51
per cent of the shares has always been 8000 shares representing a convenient
approximation”. It was contended in the sur-rejoinder that the fact that 6475
shares were kept apart for him and others was confirmed even by the petitioners
themselves in the petition throughout as also in the proceedings before the
7. In
the background of the above broad contours of the controversy between the rival
groups, the learned single Judge by his judgment and order dated 17-4-1995,
came to a finding that there was a mandate of the Extraordinary General Meeting
which was held on 17-12-1987 for issuance of 25,000 equity shares of the
company. It was also found that the board of directors at its meeting held on
8-1-1988 decided to issue only 15,000 shares in the first instance, leaving its
managing committee to carry out the mandate. It was further held that so far as
the allotment of 6475 shares to the respondent group in concerned, the
petitioners had not earlier objected though they had objected to the issue of
additional 3,000 shares in favour of the respondent Nos. 4 and 5. It was
however, noted that the reliefs as they now stand after the amendment in the
petition went to the extent of challenging the entire fresh allotment that was
made above 425 shares which were held prior to the increase in the share
capital as decided by the Extraordinary General Meeting. It was observed that
if that and other analogous reliefs in that regard were granted, the situation
will be that respondent No. 6 company will be in the same position as it was at
the time when the Extraordinary General Meeting was convened in the month of
December 1987, in so far as its equity capital was concerned. The learned
single Judge held that the body of the petition did not bring about any change
so far as the allotment of 6475 shares to the respondent No. 1 were concerned.
It was observed by the learned Judge that the situation namely that the entire
issue over and above the original issue of 425 shares was challenged in the
relief clause while maintaining the earlier reliefs to the claim of 8,000
shares may initially appear to be contradictory and confusing. It was further
observed that if the prayer for striking down allotment of 3,000 shares to the
respondent Nos. 4 and 5 was granted, even then the petitioners’ group would not
be in majority, because, even then the respondent group will have 6475 shares,
subject of course to the disputes raised as to the transfer of shares to
Indreni. Unless, therefore, 8000 shares are issued to the petitioner No. 1, the
petitioners’ group cannot be in majority in the company. It was also observed
that if the transfer to Indreni were set aside the shares will not be available
to the respondent group automatically, but the board of directors will have to
offer the shares to the remaining members of the company, who will have a right
to buy them if they so desired and, therefore, if this prayer of setting aside
the transfer of shares to Indreni were allowed in proportion to the respective
holdings, the petitioners’ group will be in a position to acquire majority. It
was observed that the amended prayers leading to the setting aside of the
entire issue above the original issue of 425 shares if granted, would bring
about a situation that the petitioner’s group will be in majority. The learned
Judge held that while dealing with a matter under sections 397 and 398, the
question of oppression with or without mis-management, if any, is required to
be considered and in his opinion, such oppression should be subjectively felt
and objectively established and according to the learned Judge the oppression,
if any, related to the control that had slipped into the hands of respondent
No. 1 and nothing else. His Lordship took note of the fact that there were
prayers found in the present petition as well as other two proceedings before
the CLB that the shares transferred to Indreni be offered to other shareholders
except the respondents’ group and that the transfer to Indreni were invalid. It
was held that the additional issue of 15,000 shares was to be dealt with after
keeping apart 8,000 shares for Shrimant Fateshsinhrao P. Gaekwad and the rest
were to be issued in different names. It was observed that 51 per cent of
shares referred to in the minutes of the meeting dated 21-3-1988 will work out
to 7650, but the difference of about 350 shares on the basis of 51 per cent on
one side and the round figure of 8,000 on the other was in the opinion of His
Lordships, of no consequence. The learned Judge opined that the resolution of
the Board dated 8-1-1988 continued to hold the field and the business of
allotment as continued all throughout was done in keeping with it. It was held
in para 88 of the judgment that “this will automatically cover the allotment of
6475 shares as it does, allotment of 25 shares to respondent No. 13 and 500
shares to respondent No. 12”. It was further held that advancing of loans by
the petitioner No. 1 and the respondent No. 12 of Rs. 15 lakhs each to the
company in November 1988 was not for buying shares. It was further held that
the decision to issue 3,000 shares to the respondent Nos. 4 and 5 in December
1988 irrespective of the letter of 11-6-1988 was in the exercise of the power
of the Managing Committee. It was also held that upto 31st March, 1989 i.e.,
the closure of the accounting year, none of the directors of the company who
were with the petitioners’ group had questioned this action. As regards the
time limit of 10-3-1988, it was held that unless it was shown that while
delegating its power the Board had also imposed time limit upon the Committee,
the petitioners had no case in that regard. As regards the transfer of shares
by the respondent Nos. 1 to 5 to Indreni, the learned Judge rejected the
contention that the minutes of the Board meeting dated 13-7-1990 with regard to
transfer to Indreni were not correct and the contention that there was in fact
no meeting held on 9-8-1990. It was further held that at the AGM held on
20-12-1990, the result had gone in favour of the respondents’ group. The
learned single Judge held that at the meeting of 14-1-1991 of the Extraordinary
General Meeting, the director Shri P.U. Rana, Shri A.K. Shinde and others who
were supporting the petitioners and lost their Directorship, and the registered
office of the company had been shifted from
8. The
learned senior Counsel appearing for the appellant, i.e., the original
petitioners, contended before us that the Managing Committee could not have
exercised its powers to make allotment of shares as it pleased, in view of the
embargo laid down in the articles of association that transfer of shares to
non-members was not permissible and in view of the Board’s decision that the
additional shares were to be issued only in favour of the members of the
company. It was submitted that there was nothing to show in the circular dated
12-2-1988 that it was sent to all the members of the company. It was also
argued that in view of the deadline of 10-3-1988 indicated in the said circular
letter which was approved by the Board’s meeting of 13-2-1988 and in view of
the admitted fact that no response was received to that letter, the Managing
Committee could not have made any allotment of shares on the basis of that
letter. It was contended that as regards the decision said to have taken on
21-3-1988 by the Managing Committee, there were conflicting versions. From the
requisition note and the draft of the minutes which were found by the
petitioners and annexed to the petition at annexures “B” and “C” it appeared
that a decision was taken to allot 8,000 shares to Shrimant Fatehsinhrao
Gaekwad, 6475 shares to the respondent No. 1, 1,000 shares to the respondent
No. 12 and 25 shares to the respondent No. 13. It was submitted that though in
the requisition note at Annexure “B” to the petition, the words ‘and others’
were not there alongside the name of the respondent No. 1, they appeared to
have been added by hand in the draft of the minutes which were forwarded under
letter dated 29-3-1988 by the Company Secretary to the Secretary to the
respondent No. 1 as per Annexure “C” to the petitioner. It was pointed out that
in the third version, which emanated from the minutes for the Committee meeting
said to have been held on 21-3-1988, a true copy of which was obtained by the
petitioner No. 1 on 10-12-1990 and which was produced along with the
affidavit-in-reply of the petitioner No. 1 at Annexure “A/2” to that reply,
there was no mention at all, of allotment of 6475 shares to respondent No. 1.
It was also pointed out that the said minutes were signed by the respondent No.
1 as the Chairman and only two directors were present at that meeting, namely
the respondent No. 1 and Shri P.H. Chinoy, as stated in these minutes while in
the draft minutes at Annexure “C” collectively to the petition, even the name
of Shrimant Fatehsinhrao Gaekwad was mentioned as the Chairman present in the
meeting. It was also submitted that this conflicting version put under cloud
the entire process of allotment of shares to the members of the company by the
Managing Committee. It was also submitted that since the Managing Committee
admittedly consisted of three persons, namely Shrimant Fatehsinhrao P. Gaekwad,
the respondent No. 1 and Shri P.H. Chinoy, the decision taken by two of the
three numbers of the Managing Committee was not a decision of the Managing
Committee. It was further contended that since Rs. 15 lakhs, were already
standing to the credit of the petitioner No. 1 in the books of account of the
company, there was no fear of not being able to recover from her the face value
at which the shares were to be allotment to the members. It was submitted that
there was, under the law, no time limit for getting entitlement transferred to
the name of the heir and therefore, even when the letter dated 29-11-1990 was
written by the petitioner No. 1 to the company, the shares could have been
registered in her name on the basis of such entitlement. It was contended that
the respondent No. 1 could not have made allotment of 6475 shares to himself
and to his family members, in absence of any valid decision for such allotment.
It was submitted that his minor children, the respondent Nos. 4 and 5 were not
entitled to be allotted the shares in view of the fact that the shares could
not have been allotted to non-members. It was argued that by showing himself as
the natural _ondent No. 1 had cornered a large portion of the shares which was
intended only for the members of the company. Moreover, these minor children on
becoming major, continued as the members of the company in the record of the
company. It was submitted that minors could not have been made the members of
the company because a minor is not capable of entering into a contract. It was
further argued that if the decision of 21-3-1988 of the Managing Committee is
to be accepted, then a firm allotment of 8,000 shares or 51 per cent of the
total of 15,000 shares which were to be issued ought to have been allotted to
the petitioner No. 1, who was the sole heir of Shrimant Fatehsinhrao Gaekwad,
who passed away on 1-9-1988. It was submitted that instead of doing that, 3000
shares out of those shares were allotted in favour of the respondent Nos. 4 and
5 by their father, the respondent No. 1 and the rest of the issue was treated
as closed without the matter being referred to board of directors, which had
decided to issue 15,000 shares to its members. It was further contended that
the respondent Nos. 1 to 5 had transferred 9415 shares to Indreni without
giving any transfer notice to the company for the exercise of the right of
pre-emption by the members under the articles of association of the company. It
was also argued that since the transfer to Indreni had reduced the shareholding
of the respondents group to 66 and the resolution Nos. 3 to 10 which were on
the agenda at the AGM of 20-12-1990 were all defeated, the story that the
transfer which was made by the respondent Nos. 1 to 5 to Indreni was rescinded
on 9-8-1990 has been invented by these respondents. It was submitted that the
‘notarised’ true copies which were supplied to the petitioner No. 1 by the
director of the company on 10-12-1990 clearly indicated that uptil that date,
the shares were not transferred back from Indreni to the respondent Nos. 1 to
5. It was also argued that the respondent Nos. 1 and 2 had removed the
registers and other documents of the company and shifted the office of the
company from
8.1 In support of his above
submissions, the learned counsel relied upon the following decisions:—
1. Decision
in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding
Ltd. AIR 1981 SC 1298 was cited for its prosecution that if the conduct of the
directors lacks in probity and is unfair and causes prejudice to the exercise
of shareholders’ legal and proprietary rights, it would amount to oppressive
conduct. It was held therein that such conduct must be continuous acts on the
part of the majority shareholders showing that the affairs of the company were
being conducted in a manner oppressive to some part of the members. This
decision was also relied upon to point out that it was held that clause (c) of
section 81(1) of the Act cannot apply to the erstwhile private companies which
had 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 section 3(1)(iii) of the Act, and that, if clause (c) were
to apply to section 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,
which would result directly in the infringement of the article relating to the
matters specified in section 3(1)(iii)(b) because, under clause (c) of section
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. It was held that 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 manner specified in section 3(1)(iii)(c), because an offer
which give 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.
2. Decision
in World Wide Agencies (P.) Ltd. v. Mrs. Margarat T. Desor AIR 1990 SC 737 was
relied upon for the proposition that the legal representatives of deceased
member whose name is still on the register of members were entitled to file a
petition under sections 397 and 398.
3. Decision
in Nanalal Zaver v. The Bombay Life Assurance Co. Ltd. AIR 1950 SC 172 was
referred to for the proposition that the directors cannot act against the
interest of the company or mala fide.
4. Decision
in Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd. AIR 1966 Cal. 512 was
cited for the proposition that once all the evidence is before the Court and
the case of oppression clearly emerges from the facts disclosed, it would not
be proper to measure the rights of the parties only in terms of the assertion
made in the petition.
5. The
decision in Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd.
[1984] 55 Comp. Cas. 160 was cited to point out that the Calcutta High Court
had held mala fide allotment to reduce a majority shareholder to minority would
be void for mis-management.
6. The
decision of the Supreme Court in John Tinson & Co. (P.) Ltd. v. Mrs.
Surjeet Malhan AIR 1997 SC 1411 was referred to for the proposition that it was
well settled that articles of association of a private company was a contract
between the parties. This was cited in context of the minors being allotted the
shares of the company at the instance of the respondent Nos. 1 and 2, who were
their parents.
7. The
decision in Life Insurance Corpn. of India v. Escorts Ltd. AIR 1986 SC 1370 was
cited for the proposition that while a transfer of shares may be effective
between the transferor and transferee from the date of transfer, the transfer
is truly complete and the transferee becomes a shareholder in the true and full
sense of the term, with all the rights of a shareholder, only when the transfer
is registered in the company’s register.
9. The
learned Senior Counsel appearing for the contesting respondents supported the
judgment and order of the learned Single Judge and contended that the
oppression on the part of the petitioners was neither subjectively felt by
them, nor was it objectively established. It was contended that from the
averments which were made in the petition as it was originally filed, it was
clear that there was no dispute raised about the issue and allotment of 6475
shares in favour of respondent Nos. 1 to 5 and the only dispute that was raised
was in respect of 3,000 shares issued to respondent Nos. 4 and 5 and in respect
of alleged entitlement of the petitioner No. 1 to 8,000 shares which were kept
apart for Shrimant Fatehsinhrao Gaekwad. It was submitted that initially no
relief was sought for transfer and recession in record to the said 6475 shares.
It was submitted that in order to ascertain whether the cardinal principle that
the oppression must be subjectively felt and objectively established was
satisfied, one should view the matter from the manner in which the ‘players’
have perceived it. It is submitted that the petitioner No. 1, the supporting
respondent No. 13 who had filed Civil Suit No. 867 of 1990 and Shri Ajitsinh
Gaekwad, who had filed Special Civil Suit No. 872 of 1990 had all in their
pleadings referred to the total holding of the respondent Nos. 1 to 5 of 9481
shares in respect of which no grievance was raised so far as the allotment to
the respondent Nos. 1 to 5 in respect of 6475 shares were concerned. It was
therefore contended that since the petitioner’s group did not perceive any
oppression in respect of 6475 shares allotted to the respondent Nos. 1 to 5,
the petitioners cannot be heard to say that they were oppressed by such
allotment. It was submitted that the factum of the issue of these shares was
reflected in the accounts of the company which were approved at the AGM of
13-9-1989, in which the respondent No. 1 was not even present. It was argued
that if the respondent No. 1 had any guilty mind, he would have remained
present at that meeting. It was submitted that even in the annual return of
30-11-1989, it was shown that the issued capital of the company was 10,500
shares and there was nothing clandestine about it. It was also submitted that
the share certificates which were issued were signed by Shri Shinde, who was
the director and the Company Secretary Shri Khade. It was therefore, submitted
that everybody knew about these allotments including the allotment of 3,000
shares. The learned counsel argued that the whole problem started because of
the filing of the Suit by the other company Alaukik Trading and Investments
(P.) Ltd. (“Alaukik”). It was submitted that by letter dated 17-5-1990, the
respondent No. 6 was suddenly informed that Alaukik was no more its subsidiary
and since this was done behind the back of the respondents’ group, the Suit was
filed against the petitioners’ group. It was submitted that nobody in fact had
any objection to issuance of 9481 shares to the respondent Nos. 1 to 5 and it
was only because the said was Suit filed that the petitioners retaliated by a
flurry of Suits and this petition in which they had not questioned the
allotment of 9481 shares, but questioned only 3000 out of them, though by an
amendment in the petition they had thereafter questioned everything. It was
also submitted that petition under sections 397 and 398 should not be
entertained by the Court where civil proceedings were filed and pending, and which
covered the reliefs claimed in the petition or a part of them. It was submitted
that since the reliefs in respect of the transfer to Indreni of the shares of
respondent Nos. 1 to 5 were also claimed in the Suits filed by some
shareholders who supported the petitioners’ group, the present petition ought
not to be entertained when alternative remedy forum was already chosen. It was
submitted that shorn of the Indreni issue which was the subject-matter of Civil
litigation the complaint of issuance of shares was impossible to sustain. It
was further contended that the petition under sections 397 and 398 has been
filed for collateral purpose, as can be seen from prayer clause (c) of the
petition, in which it was prayed that it should be declared that the petitioner
No. 1 as the mother and sole heir of late Shrimant Fatehsinhrao P. Gaekwad was
entitled to be in the majority and or control of the respondent No. 6 company.
It was submitted that the learned Single Judge had correctly lifted the
corporate veil of Indreni and seen to it that it was a company consisting of
the members of the respondent No. 1 family, who completely controlled it. It
was submitted that the learned Single Judge had exercised discretion against
the petitioners which should not be lightly interfered with. It was also
submitted that the controversy in respect of the AGM on 20-12-1990 raised by
the petitioners was not justified and the contemporaneous record showed that a
‘pursis’ was filed by 3 p.m. in the Civil Suit at Baroda on 20-12-1990 on
behalf of these respondents that their group had exercised voting rights. (The
said ‘pursis’ was filed in Civil Suit No. 872 of 1990, which was filed by Shri
Ajitsinh Gaekwad and it was stated therein that the AGM of the company had
taken place on 20-12-1990 at 11 a.m. as schedule and was over at 11.25 a.m. It
was mentioned that the defendant Nos. 3 to 7, i.e., respondent Nos. 1 to 5 had
exercised their voting right therein and that voting was done in respect of all
the important resolutions. The outcome of the voting was however, not mentioned
in that Pursis. It was submitted that there was no reason for the petitioner’s
group that had attended the said meeting to feel scared because of the
so-called complaint which was filed with the Police. It was submitted that the
petitioners’ group was not so naive as to get afraid by the letter written by
an Advocate to the Police Inspector, in which it was requested to make an
arrangement to prevent any possible disturbances at the meeting. It was also
submitted that since Indreni was not an outsider was it as completely
controlled by the respondent Nos. 1 to 5, there was no need to give any
transfer notice when the shares were transferred by the respondent Nos. 1 to 5
to Indreni. It was argued that Mr. M.N. Khade who was supposed to circulate the
notice in respect of the transfer had misinformed the respondent Nos. 1 to 5 as
a result of which the transfer to Indreni was later on rescinded. It was
submitted that the real object of the petition was to exert pressure for
restoration of power, which shows the mind-set of the petitioner. Since the
petition is filed for a collateral purpose, it constitutes an abuse of the
process of the Court. He submitted that since the respondent Nos. 1 to 5 were
in majority, they were entitled to take the decisions in the board of directors
in respect of the affairs of the company and such decisions cannot be assailed
on the ground that they were oppressive to the minority.
9.1 In
support of his submissions, the learned Senior Counsel referred to the relevant
material on record and also the following citations:—
1. He
referred to Pennington’s Company Law, Seventh Edition p. 901 for the
proposition that a petition for relief from oppression under the statutory
provision would be dismissed, if it was not presented in good faith solely in
order to obtain such relief.
2. Decision
in Hungerford Investment Trust Ltd. v. Turner Morrison & Co. Ltd. ILR 1972
(1) Cal. 286 was cited for pointing out that the Calcutta High Court in
paragraph 55 of its judgment at page 313 held that serious and disputed
questions of title and controversies already the subject of pending legal
proceedings, should not generally be adjudicated in a summary proceeding under
section 397 of the Act.
3. Decision
in Bengal Luxmi Cotton Mills Ltd., In re [1965] 35 Comp. Cas. 187 (Cal.) was
referred to for pointing out that the High Court held at page 249 of the report
that where a winding up order on the just and equitable ground cannot be made
as there is another remedy available for redress of the grievance relating to
transfer of shares and that remedy was resorted to, no order can be under
section 397 of the Act.
4. The
decision of this Court in Shantilal Manibhai Patel v. Laxmi Film Laboratory
& Studios (P.) Ltd. [1984] 56 Comp. Cas. 110 was cited to point out that
the High Court had at page 127 of the report, taking note of the fact that a
Civil Suit was filed for declaration that the plaintiff had continued to be
director of the company, held that the question raised in the petition that the
notices were not served on him could be decided in the suit and that it could
be satisfactorily disposed of after the parties have had an opportunity of
leading oral evidence in the suit pending before the Court. It was held that it
was not proper to decide the question on affidavits particularly when the suit
was pending in the subordinate Court in which this question could be
satisfactorily resolved only on evidence properly adduced by the parties.
10. The
respondent No. 6 company is a Private Limited Company to which Regulations in
Table “A” of Schedule I to the Companies Act, 1956 except in so far as they are
excluded by article 2 of the articles of association of the respondent No. 6
company apply. The power to allot or otherwise dispose of the shares in the
capital of the company was in the directors. Under article 3(a) read with
article 6 of the articles of association of the company, the right to transfer
its shares was restricted in the manner and to the extent provided in articles
7 to 15, article 7 provided for the pre-emption right of members of the company
by restricting the transfer of shares first to a member selected by the
transferor emphasising that no share shall be transferred to a person who is
not a member so long as any member was willing to purchase the same at the fair
value. The purpose of such restriction, common in the articles of a private
company, is to preserve the proportionality of the other members’ shareholding
as between themselves. A member cannot evade such provision for pre-emption by
contracting to sell his shares to an outsider. It was therefore, incumbent on a
proposing transferor to give a transfer notice in writing to the company that
he desires to transfer the share. Such notice shall specify the fair value and
shall constitute the company as agent for the sale to any member of the
company. A transfer notice could not be revoked without the sanction of the
directors as provided by article 8 of the articles of association. The company
was required, within 28 days after being served with the transfer notice to
find out the purchasing member to whom the proposing transferor was bound to
transfer the share upon payment of its fair value as per article 9. The
transfer rules incorporated in article 13 provided that the share specified in
any transfer notice shall be offered by the company to the members other than
the proposing transferer as nearly as may be in proportion to the existing
shares held by them respectively and the offer shall, in each case, limit the
time within which the same, if not accepted, shall be deemed to be declined. If
the members do not claim their proportions, the unclaimed shares were to be
used for satisfying the claims in excess of members who desired to have excess
shares. The transfer was required to be registered in the name of the
transferee as provided by article 15. Article 14 under which shares could be
transferred by a member to their issues or other beneficiaries under a will did
not originally provide for the transfer of shares by the members of the
respondent No. 6 company to a wholly owned company of the existing shareholders
or the company owned by the family members of the shareholders, and, for this
reason mentioned in the explanatory statement as required by section 173(2) of
the Act attached to the notice said to have been given on 5-1-1991 for
Extraordinary General Meeting of the company convened on 14-1-1991, Article 14
was amended by a resolution passed at that meeting for this purpose.
10.1 Articles
23 to 27 of the articles of association provided for appointment of directors
and articles 28 and 29 for their powers and duties. Accordingly, the minimum
number of directors was fixed at two and maximum at fifteen. The directors
could appoint ‘Alternate Directors’ during absence of a director as provided in
Article 24 and casual vacancy occurring in the board of directors could be
filled up for the remaining period by the directors under article 25. At every
AGM one third of the directors were liable to retire by rotation under article
27. Managing Director could be appointed under article 31 by the directors but
he was liable to be removed or dismissed as stipulated therein though not
subject to rotational retirement. There is no provision in the articles of
association for appointment of a permanent director or Chairman.
11. By
a special resolution passed in the Extraordinary General Meeting of the company
held on 17-12-1987, the board of directors of the company was authorised to
issue 25,000 shares to any members they deem fit. Thereafter, in the Board
meeting of 8-1-1988 it was resolved that out of 25,000 equity shares, 15,000 be
issued to the members of the company ‘at present’ and the balance as and when
required. The Managing Committee was authorised to issue these shares to
members in such proportion as it deemed fit. As per the admitted break-up of
the original 425 shares held by the members, before 15,000 equity shares were
offered to the members at par by letter dated 12-2-1988 out of 425 total number
of equity shares, 301 stood in the name of Shrimant Fatehsinhrao P. Gaekwad, 7
in the name of his mother the petitioner No. 1 Smt. Shantadevi Gaekwad, 10 in
the name of his brother Shri Ranjitsinh Gaekwad the petitioner Nos. 4, 1 in the
name of Smt. Devyanidevi Chandrasen Gaekwad - the petitioner No. 2, 10 in the
name of the petitioner No. 3 Capt. V.S. Hazare, 5 in the name of the petitioner
No. 5 - Smt. Lalitadevi Kirdatt, 10 in the name of the supporting respondent
No. 12 Dr. (Mrs.) Mrunalinidevi Puar and 5 in the name of the supporting
respondent No. 13 Smt. Shubanginidevi Raje Gaekwad. The respondent No. 1 Shri
Sangramsinh P. Gaekwad and his wife respondent No. 2 Smt. Ashraraje S. Gaekwad
had 1 and 5 shares respectively in the company. Thus, prior to the disputed
fresh allotments of shares, according the appellants, their group owned 348
shares out of 425 while the respondent Nos. 1 and 2 together held six shares.
There is no dispute about the fact that late Shrimant Fatehsinhrao P. Gaekwad’s
only class one heir was his mother, the petitioner No. 1 - Smt. Shantadevi
Pratapsinh Gaekwad, because he died intestate on 1-9-1988. When the member of
the respondent-company bequeaths his shares under a will, the succession will
be given effect to as per article 14 of the articles of association without the
restriction in article 16 of the directors’ right to refuse to register any
transfer or transmission being attracted. Regulations 25 to 28 of Table A of
Schedule I to the Companies Act, which applied to this company under article 1
read with article 2 of the articles of association, relate to transmission of
shares. Accordingly, on the death of a member, who was a sole holder, his legal
representatives shall be the only persons recognised by the company as having
any title to his interest in the shares. Any person becoming entitled to a
share in consequence of the death of a member may elect either to be registered
himself as holder of the share or to make such transfer of the share as the
deceased could have made as provided in regulation 26, read with regulation 27
of Table “A” of Schedule I to the Act. A person becoming entitled to a share on
death of a member is, as recognised by regulation 28, entitled to the same
dividends and other advantages to which he would be entitled if he were the
registered holder of the share except any membership right in relation to the
meetings of the company which he can get only on getting himself registered.
Thus, the fact that the property in share passes by inheritance to the heir of the
deceased member like his any other property is duly recognized. The words
‘other advantages’ in regulation 28 suggest that all the entitlements of a
deceased member will pass on to his heir who becomes entitled to a share of
such deceased member. The transmission of share related rights will take place
irrespective of the factum of registration of the successor. The only thing
that a Board can do is to give a notice requiring any such person to elect to
be registered himself or to transfer the share and if the notice is not
complied with within ninety days, the Board may thereafter withhold payment of
all dividends, bonuses or other moneys payable in respect of the share, until
the requirements of the notice have been complied with as laid down in regulation
28. In the present case, therefore when Shrimant Fatehsinhrao P. Gaekwad died
intestate on 1-9-1988, his mother, i.e., petitioner No. 1 who was the only
class one heir succeeded to the shares which were already held by him and
became entitled under regulation 28 to the same dividends and other advantages
to which she would be entitled if she were the registered holder of the shares
of Shrimant Fatehsinhrao P. Gaekwad. This statutory entitlement did not depend
upon the mercy of the board of directors which could have, at the best, given a
notice as required by the proviso to regulation 28. There is no time limit
provided in regulation 28 for exercising the option given to such successor to
get registered as holder of the share or to make transfer of the share as the
deceased could have made. In other words, there is no contingency provided by
which the rights which devolved on the heir would lapse, and the attribute of a
vested right in the share of the deceased member devolving on the successor is
duly recognised. Therefore, if there was a valid decision taken to allot new
shares and such shares are earmarked for such allotment to a member who became
entitled to subscribe therefore and received them, such entitlement of the
deceased member would also devolve on his heir who would step into his shoes
and can claim that advantage to which the deceased member was entitled as if
the successor were the registered holder of shares. The petitioner No. 1
therefore, as a sole heir of the deceased member Shrimant Fatehsinhrao P.
Gaekwad, became entitled to his entire shareholding out of 425 shares at the
time of his demise on 1-9-1988 with all its advantages under the said
regulation.
11.1 The
petitioner No. 1 had addressed a letter dated 29-11-1990 as per Annexure “R” to
the petition, as stated in paragraph 21 of the petition, in which it was stated
by her that after the death of Shrimant Fatehsinhrao P. Gaekwad, she was
entitled as his sole legal heir to the 8,000 equity shares of Rs. 100 each
which were set apart in favour of and for Shrimant Fatehsinhrao P. Gaekwad, on
payment for the same. It was stated that she had paid to the company in or
around November 1988 a sum of Rs. 15 lakhs of which Rs. 11,15,000 was still
lying with the company to her credit. It was stated that a sum of Rs. 8 lakhs
be appropriated therefrom as share money. However, if the company so required,
she would send Rs. 8 lakhs by Demand Draft. In the meeting held on 30-3-1990
wherein transfer of 9415 shares by the respondent Nos. 1 to 5 to ‘Indreni’ was
approved, transmission of 23 shares standing in the name of Shrimant
Fatehsinhrao P. Gaekwad to the name of the petitioner No. 1 Smt. Shantadevi
Gaekwad was also approved. Therefore, the petitioner No. 1 was already treated
as the sole heir who was entitled to the shares of Shrimant Fatehsinhrao P.
Gaekwad on his demise. However, the question whether the entitlement of
Shrimant Fatehsinhrao P. Gaekwad to 8,000 shares stood transmitted to her on
his demise was never put upon the agenda though the fact that she being the
sole heir of Shrimant Fatehsinhrao P. Gaekwad was known to all. It appears that
no reply was sent to the letter dated 29-11-1990 addressed by the petitioner
No. 1 to the respondent No. 1 in his capacity as Chairman of the company.
12. This
brings us to the stand taken up by the contesting respondents that Shrimant
Fatehsinhrao P. Gaekwad had before his demise renounced his entitlement to
8,000 shares which were decided to be allotted to him, in favour of the
respondent No. 1 and his children. This story has surfaced in the
affidavit-in-reply of the respondent No. 1. According to the respondent No. 1,
after the company resolved in its Extraordinary General Meeting held on
17-12-1987 to increase the share capital, it was resolved in the Board meeting
of 8-1-1988 that 15,000 equity shares of Rs. 100 each be issued at par to the
members of the company and that the Managing Committee of the company be
authorised to issue equity to members in such proportion that it may deem fit.
The Secretary of the company Mr. M.K. Khade thereupon issued letter dated
12-2-1988 as per Annexure ‘16’ to the affidavit-in-reply of the respondent No.
1, communicating the decision to increase the equity share capital of the
company by issuing to its member 15,000 equity shares at Rs. 100 each at par
and requesting them to convey their acceptance for the number of shares the
member would like to subscribe, with a cheque for the full amount on or before
10-3-1988, failing which it would be presumed that the member was not
interested in the offer and the shares will be offered to the other members.
There is some dispute over the fact whether this letter was sent to all the
members, because the copy at Annexure “16” of the affidavit-in-reply of
respondent No. 1 shows that it was addressed to Shrimant Fatehsinhrao P.
Gaekwad. The minutes of the Board meeting held on 13-2-1988 as per Annexure
‘9A’ to the affidavit-in-reply of the respondent No. 1 however, shows that the
Board was apprised of the fact that necessary action was taken on the agenda of
the Board’s meeting dated 8-1-1988 and that letters were addressed on 12-2-1988
to the shareholders informing them that the company had issued 15,000 equity
shares of Rs. 100 each to members an to convey their acceptance on or before
10-3-1988.
12.1 It
is an admitted fact that no acceptance was conveyed by any of the members for
the subscription of the new shares till 10-3-1988. According to the respondent
No. 1’s case as reflected in paragraph 9(g) of his affidavit-in-reply filed on
11-4-1992 in the Company Petition No. 7 of 1992, since no offers were received
from the existing shareholders, the Managing Committee decided at its meeting
on 21-3-1988 to extend time for the offer and further decided that out of
15,000 shares, 8,000 be kept apart for the time being for Shrimant Fatehsinhrao
P. Gaekwad. The balance 7,000 shares were kept apart for the other existing
members of the company. Thereafter, the respondent No. 1 instructed the Company
Secretary Mr. Khade “to give first option to other family members to subscribe
for shares according to their request and the remaining be put in the name of
myself and my family”. His version in paragraph 6(g) and (h) of the
affidavit-in-reply is that : “Since no offers were received from the existing
shareholders. Managing Committee decided in its meeting on 21-3-1988 to extend
the time for the aforesaid offer. It further decided that out of 15,000 shares
8,000 shares be kept apart for the time being for Shrimant Fatehsinhrao P.
Gaekwad as he was desirous of subscribing to the same. The balance 7,000 shares
were kept apart for the other existing members of the company including 6475
shares for myself and my children.”
12.2 It
is stated by the respondent No. 1 in paragraph 31(b)(vi) of his affidavit-in-reply
dated 1-4-1992 in Company Petition No. 7 of 1992 (CLB) that subsequently, i.e.,
between March and 9-6-1988, Shrimant Fatehsinhrao P. Gaekwad was reminded to
subscribe to 8,000 shares which were offered to him but he indicated that he
would not subscribe to these 8,000 shares and renounced the offer in favour of
the respondent No. 1 and his children. In para II(2)(viii) of the
affidavit-in-reply filed in this company petition it is stated by the
respondent No. 1 that ultimately on 11-6-1988 addressed a letter to him through
his personal Secretary renouncing the offer made to him “in my favour and in
favour of my children”. A copy of the letter dated 11-6-1988 said to have been
addressed to the respondent No. 1 by the Secretary to Shrimant Fatehsinhrao P.
Gaekwad, Mr. K.V. Khoth is annexed at Annexure 10 of the said
affidavit-in-reply. Much reliance is placed on this letter on behalf of the
contesting respondents to contend that the entitlement to get 8,000 shares
which were kept apart for Shrimant Fatehsinhrao P. Gaekwad could not have been
inherited by his mother the petitioner No. 1 on his demise, because, it was
already renounced in favour of the respondent No. 1 and his children. Thus,
even according to the respondent No. 1, Shrimant Fatehsinhrao P. Gaekwad was
entitled to subscribe to the additional share capital, but he renounced his
rights in favour of the respondent No. 1 and his children through his
Secretary’s letter. Obviously, if the entitlement was renounced by Shrimant
Fatehsinhrao on 11-6-1988 in favour of the respondent Nos. 1, 4 and 5, there
was no advantage in form of such entitlement which could have devolved on his
mother by succession on his demise on 1-9-1988. The communication dated
11-6-1988, therefore, merits a close look. It is a letter which was addressed
to the respondent No. 1 in his personal name and not to the company. The new
shares were offered to Shrimant Fatehsinhrao P. Gaekwad by the company and
admittedly no communication was addressed by him to the company in response to
that offer. After the alleged communication of the letter dated 1-6-1988 said
to have been written by his Secretary to the respondent No. 1, the Board’s
meetings took place according to the respondent No. 1, on 8-7-1988, 26-8-1988,
26-10-1988 and 3-12-1988, but the said letter dated 11-6-1988 was not placed or
even referred to before the board of directors and it was for the first time
mentioned in the minutes of the Managing Committee said to have been held on
10-12-1988 (Certified copy at Annexure A/3 of the rejoinder of the petition),
in which it was recorded that in terms of the offer made in the letter dated
12-2-1988, response was received only from the four existing shareholders and
that the Chairman of the company Shrimant Fatehsinhrao P. Gaekwad who was
offered 51 per cent shares out of the additional 15,000 shares also declined to
accept the offer, vide his Executive Secretary’s letter dated 11-6-1988. Hence,
in terms of the decision taken in the Committee meeting held on 21-3-1988, the
shares were offered for subscription amongst the family members of the
shareholders. It was further stated that accordingly the company had received
applications, namely for 2,000 shares from the respondent No. 1, 1475 shares
from the HUF of the respondent No. 1, 1,000 shares from Smt. Mrunalinidevi
Puar, 25 shares from Smt. Shubanginidevi, 1500 shares from the respondent No. 2
Smt. Ashraraje and 1500 shares from Shri Pratapsinh Gaekwad, son of the
respondent No. 1 - that is in all 7500 equity shares. It was recorded in the
minutes that the Committee decided to allot 7500 shares, in the above
proportions to them. Out of the remaining 7500 shares it was decided to offer
3,000 equity shares of Rs. 100 each between Shri Pratapsinh Gaekwad and Miss
Priyadarshini Gaekwad in the proportion as they liked and as soon as the
application money of Rs. 3 lakhs for 3000 equity shares was received, the
subscription of additional shares be closed at 10,500 equity shares. Shrimant
Fatehsinhrao P. Gaekwad had passed away on 1-9-1988 and a meeting of board of
directors was held on 26-10-1988 where the respondent No. 1 and Mr. P.H. Chinoy
were present for a condolence resolution. The decision was taken therein for
sale of Manav Mandir property of the company for not less than Rs. 50 lakhs and
the respondent No. 1 was authorised to finalise the agreement. Similarly, for
Kamalja property, it was decided to sell it for not less than Rs. 20 lakhs and
it was left to the respondent No. 1 to finalise the agreement. Other important
decisions were also taken in the said meeting, but there was no mention made at
all to the letter dated 11-6-1988 by which Shrimant Fatehsinhrao P. Gaekwad was
said to have renounced through his Secretary his entitlement to 8,000 shares in
favour of the respondent No. 1 and his children which was to tilt the balance
of power in his favour. Even in the meeting of the board of directors held on
14-3-1989 convened after the alleged allotment made by the Managing Committee
on 10-12-1988, there was no mention made about it as can be seen from the
minutes. The last meeting of the Board attended by Shrimant Fatehsinhrao P.
Gaekwad was of 13-2-1988. The meetings of the Board held after 10-12-1988,
i.e., the date of the allotment of the additional shares by the Managing Committee,
on 14-3-1989, 26-5-1989, 1-7-1989, 21-7-1989, 2-9-1989, 3-10-1989 and
27-12-1989 were attended by only two persons i.e., the same respondent No. 1 as
Chairman and Shri P.H. Chinoy. These were the only two persons who were present
even at the meeting of the Managing Committee said to have been held on
10-12-1998 for allotment of shares.
12.3 There
was admittedly no response to the notice dated 12-2-1988 in which the members
were required to indicate the number of shares that they desired to subscribe with
a cheque for the value thereof by 10-3-1988. None responded the deadline was
not specifically extended beyond 10-3-1988. According to the respondent No. 1,
on 21-3-1988 it was decided to allot the 15,000 shares of which 8,000 were
decided to be allotted to Shrimant Fatehsinhrao P. Gaekwad. The minutes of the
meeting of the board of directors held thereafter on 16th April, 1988 show that
a transfer of 22 shares of 5 members was sanctioned in favour of Shrimant
Fatehsinhrao P. Gaekwad. This transfer makes it clear that Shrimant
Fatehsinhrao P. Gaekwad had not lost interest in holding shares in respondent
No. 6 company. If he could care to buy 22 shares on 16-4-1988, it does not
stand to reason that he would renounce 8,000 valuable shares on 11-6-1988. Renouncing
8,000 shares would have been a major event in which all shareholders would be
interested and were entitled to be informed. No such renouncement was addressed
to the company by Shrimant Fatehsinhrao P. Gaekwad. Admittedly, Shrimant
Fatehsinhrao P. Gaekwad did not himself send any letter to the company or for
the information of the shareholders who were close relatives and friends. The
letter of so-called renouncement therefore does not inspire any confidence.
13. The
petitioner’s case in paragraph 6.6 of the petition was that there was a family
meeting on 23-3-1988, wherein it was decided to broaden the capital base of the
company by issuing 15,000 shares of Rs. 100 each. It was decided therein and
also subsequently at a meeting of the company’s board of directors that out of
the 15,000 equity shares, 8,000 equity shares would be allotted to Shrimant
Fatehsinhrao P. Gaekwad, 500 equity shares to Smt. Mrunalinidevi, 25 equity
shares to Smt. Shubhanginidevi and 6475 equity shares to respondent No. 1 Shri
Sangramsinh Gaekwad. It will be seen that these averments were based on a note
of Shri N.K.K. Mohammed, Personal Secretary of the respondent No. 1 and the
letter dated 29-3-1988 of Shri M.N. Khade forwarding draft minutes of the
meeting of 21-3-1988 on the basis of that note, which were annexed at Annexures
‘B’ and ‘C’ to the petition. In the type written draft minutes attached to
letter Annexure ‘C’, the words ‘and others’ are added in hand after the name of
the respondent No. 1. On the basis of these words, the respondent No. 1 seeks
to derive authority to get shares for his family members also. Here however, it
becomes important to see what were the final minutes drawn in respect of the
meeting of the committee held on 21-3-1988. It will be noted from the draft
minutes that the Managing Committee referred to therein consisted of (1)
Shrimant Fatehsinhrao P. Gaekwad, (2) respondent No. 1 Shri Sangramsinh
Gaekwad, and (3) Shri P.H. Chinoy. It was during their arguments confirmed by
the learned counsel for both the sides that these three were the only members
of the Managing Committee, which were authorised by the Board meeting of
8-1-1988 to issue equity shares to members in such proportion as the Committee
deemed fit. The final minutes of the decision of the meeting of the Managing
Committee held on 21-3-1988 which are duly signed by the respondent No. 1 as
Chairman are on record at Annexure “A/2” of the affidavit-in-rejoinder of the
petitioner No. 1 Smt. Shantadevi. The original minutes book of the Managing
Committee is not forthcoming and according to the petitioners, the minutes
books of the AGM board of directors meeting and Committee Meetings were sent to
the Secretary of the respondent No. 1 by letter dated 20-11-1990, while
according to the respondent Nos. 1 to 5, the minutes book of the Committee
meetings was not received. It will however, be seen that the copy of the
minutes of the meeting of the Managing Committee said to have been held on
21-3-1988 produced with the affidavit-in-rejoinder at Annexure A/2 by the
petitioner No. 1 was notarised as a true copy on 10-12-1990 by a Notary of
Baroda Mr. M.C. Vaidya as stated in paragraph 11 of the said rejoinder of the
respondent No. 1. The signature of the respondent No. 1 appearing as Chairman
therein, which was not disputed before us, shows that these minutes were duly
authenticated by him. A copy of the minutes of the Managing Committee meeting
held on 21-3-1988 signed by the respondent No. 1 as Chairman is also at
Annexure “E” to the company petition No. 7 of 1992 filed by the respondent No.
12 before the CLB Delhi. A comparison between the draft minutes of the meeting
of the Managing Committee held on 21-3-1988 forwarded under letter dated
29-3-1988 of the Company Secretary Mr. Khade at Annexure ‘C’ collectively to
the petition and the minutes of that meeting signed by the respondent No. 1 as
Chairman at Annexure “A/2” to the rejoinder of the petitioner No. 1 shows the
following differences:—
(a) In the draft minutes it was mentioned that the following three
were present (1) Shrimant Fatehsinhrao Gaekwad Chairman, (2) Shrimant
Sangramsinh Gaekwad, and (3) Mr. P.H. Chinoy; while in the final minutes signed
by the respondent No. 1, it is stated that (1) Shrimant Sangramsinh Gaekwad,
and (2) Shri P.H. Chinoy were present. Thus, the name of Shrimant Fatehsinhrao
Gaekwad who was shown present as the Chairman of the meeting in the draft
minutes, said to have been forwarded under the signature of Shri M.N. Khade,
the Company Secretary, on 29-3-1988 to N.K.K. Mohammed, Bombay who was the
Secretary to the respondent No. 1, is conspicuously absent in the final
minutes.
(b) The final minutes of the Committee held on 21-3-1988 show
that the respondent No. 1 was in the Chair and the minutes were signed by the
respondent No. 1 as the Chairman of the meeting while in the draft minutes
Shrimant Fatehsinhrao Gaekwad was shown to be the Chairman of the meeting.
(c) In the draft minutes there was no specific reference made to
the resolution passed at the Board meeting on 8-1-1988 for issuance of 15,000
equity shares and about the offer letters dated 12-2-1988 having been sent to
the shareholders, while in the final minutes these are specifically mentioned.
(d) In the draft minutes it was stated that
after the discussion the allotment was decided as under:—
(i) Shrimant Fatehsinhrao P. Gaekwad - 8,000
shares of the value of Rs. 8 lakhs;
(ii) Shrimant Sangramsinh Gaekwad and others (these last two words
“and others” are written in hand) 6475 shares of the value of Rs. 6,47,500;
(iii) Smt. Mrunalinidevi Puar 500 shares of the
value of Rs. 50,000; and
(iv) Smt. Shubhanginidevi Gaekwad 25 shares of the
value of Rs. 2,500
In the final minutes however, there is no
mention of allotment of shares by number as stated in the draft minutes.
Instead, it has been stated: “Out of these additional equity shares, it is
decided to issue 51 per cent additional equity share capital to Lt. Col. Dr.
Fatehsinh Gaekwad and the balance 49 per cent to be issued to the existing
members depending on the offer accepted by them. In case the existing members
do not subscribe to the additional share capital offered to them in terms of
the letter of offer dated 12-2-1988 sent to all the members of the company, it
was decided to offer these equity share capital remaining unsubscribed to the
persons as the Committee deem fit. “Thus, in the final minutes of the meeting
of the Managing Committee held on 21-3-1988, which were signed by the
respondent No. 1 there was absolutely no reference to allotment of 6475 shares
to the respondent No. 1. These minutes disclose that a firm decision to issue
51 per cent additional equity share capital to Shrimant Fatehsinhrao P. Gaekwad
was already taken while the balance of 49 per cent was yet to be issued to the
existing members depending on the offer accepted by them. It is only when the
existing members did not subscribe to the offer made to them in letter dated
12-2-1988, it was decided to offer the unsubscribed shares to the persons as
the committee deemed fit.
13.1 The
version of the respondent No. 1 in paragraph 9(g) of his affidavit in reply in
company petition No. 7/92 is that: “at the meeting of the Managing Committee
held on 21-3-1988, 8,000 shares were kept apart for the time being, for
Shrimant Fatehsinhrao P. Gaekwad. The balance 8,000 shares were kept apart for
the other existing members of the company. Thereafter, I specifically
instructed Mr. Khade to give first option to the other family members to
subscribe for shares according to their request and the remaining be put in the
names of myself and my family. The only two persons who responded to these were
Mrs. Mrunalinidevi Puar for 500 shares and Mrs. Shubanginidevi Gaekwad for 25
shares and so automatically whatsoever was remaining was put down in my and my
family’s name by Mr. Khade, which amounted to 6475 shares”. In contrast to this
version, the respondent No. 1 has stated in para 11(2)(vi) of his affidavit in
reply in the present petition that: “despite his (i.e., Shrimant Fatehsinhrao
Gaekwad’s) reluctance, 8000 shares were kept apart for him if he chose to
subscribe for the same. It is for this reason that the committee meeting of
21st March, 1988 (draft minutes whereof are annexed at page 102 of the
petition) specifically recorded that the shares would be allotted as and when
amounts are received. At the said meeting it was further decided that 6475
shares would be kept apart for myself ‘and others’. Since I was basically
handling Baroda Rayon Corpn. and in this company, I was given liberty to either
subscribe in my own name or through others including family members, whereas as
far as others were concerned they, could be considered only if they themselves
made the application personally and not by others”. It is further stated by
him:“...pursuant to the decision taken on 21-3-1988 by the Managing Committee I
and my family members subscribed for 6475 shares which were available to me for
subscription. I actually put in the subscription monies and was allotted shares
in the period between April and June 1988. In the meanwhile Smt. Shubanginidevi
Raje Gaekwad was allotted 25 shares and Smt. Mrunalinidevi for whom only 500
shares were kept apart applied and was allotted 1,000 shares in the aggregate
on 30-5-1988.” It is then stated that: “Thus, the position that obtained in end
of May/June 1988 is that 7500 shares were issued and allotted and certificates
issued and only balance 7500 shares were yet to be allotted.” Then after
referring to the so called renouncement by Shrimant Fatehsinhrao Gaekwad
through his Secretary’s letter dated 11-6-1988, the respondent No. 1 in para
11(2)(viii) of his affidavit in reply stated that “Once again efforts were made
to find out if any other members would like to give an offer for subscription
of shares of the company, but no offer was forthcoming. With a view to augment
the equity resources of the company, the respondent Nos. 4 and 5 (i.e., his
minor son and minor daughter) made an application for 3000 shares of the
company. No other persons were interested in subscribing out of the said
balance of 7,500 shares. Under the circumstances, further allotment of 3,000
shares was made in favour of my children, the respondent Nos. 4 and 5 on
6-12-1988”. In paragraph II(2)(x), he states that “under the circumstances, a
further allotment was made in favour of my children on 6-12-1988. With this
final allotment of 3,000 shares, the issue of 15,000 shares proposed on
8-1-1988 stood finally closed with the total allotment of 10,500 shares”. In
his version in the affidavit-in-reply filed in Company Petition No. 7 of 1992,
in paragraph (j) the respondent No. 1 has stated that: “That existing members
specifically refused to take up any shares out of balance 7500 shares, saying
that they were short of funds. Ultimately, my children Mr. Pratapsinh S. Gaekwad
and Kum. Priyadarshini Raje S. Gaekwad applied for further 3000 shares through
me as their guardian and in view of the availability of shares, it was decided
to issue and allot the said 3000 shares to them thereby leaving only an
unallotted quantum of 4,500 shares. These 4,500 shares remained unallotted and
in any event are not available for allotment after the issue was closed on
10-12-1988.”
13.2 In
the background of the above discrepancies in the version of the respondent No.
1 about his having been allotted 6475 shares for himself and his family, we may
now refer to the minutes of the meeting of the Managing Committee said to have
convened on 10-12-1988. A notarised true xerox copy of these minutes is
produced at Annexure “A/3” of the affidavit-in-rejoinder of the petitioner No.
1, read with para 14 thereof. Heavy reliance was placed on behalf of the
respondent Nos. 1 to 5 on these minutes in context of letter dated 11-6-1988
written by the Secretary to Shrimant Fatehsinhrao P. Gaekwad, which is referred
to therein, by which Shrimant Fatehsinhrao P. Gaekwad is said to have declined
to accept the offer of shares contained in the letter dated 12-2-1988, as well
as, in respect of allotment of 3,000 shares to the respondent Nos. 4 and 5.
These hand-written minutes bear the signature of the respondent No. 1 as the
Chairman of the meeting at which the same two directors, namely the respondent
No. 1 Shangramsinh Gaekwad and Shri P.H. Chinoy were present. It is recorded in
these minutes that in terms of the offer letter dated 12-2-1988 sent to all the
shareholders of the company pertaining to the issue of 15,000 equity shares of
Rs. 100 each of the company, the response was received only from the four
existing shareholders of the company. The Chairman of the company Shrimant
Fatehsinhrao P. Gaekwad who was offered 51 per cent shares out of the 15,000
additional equity shares of Rs. 100 each also declined to accept the offer vide
his Executive Secretary’s letter dated 11-6-1988. Hence, in terms of the decision
taken in the Committee meeting held on 21-3-1988 the shares were offered for
subscription amongst family members of the share-holders. Accordingly, the
company had received application for 7500 equity shares as per the details
given in the minutes, i.e., (1) Shri S. Gaekwad (individual) 2000 shares, (2)
Shri S. Gaekwad (HUF) 1475 shares, (3) Smt. Mrunalinidevi Puar 1000 shares, (4)
Smt. Shubanginidevi Raje Gaekwad 25 shares, and (5) Pratapsinh S. Gaekwad 1,500
shares i.e., in all 7,500 shares were applied for. Then comes the material part
of the minutes which reads thus: “The Committee decided to allot 7500 equity
shares of Rs. 100 each in the above mentioned proportions to the respective
applicants of shares. Out of the remaining 7500 equity shares it was decided to
offer 3,000 equity shares of Rs. 100 each between Pratapsinh Sangramsinh
Gaekwad and Miss Priyadarshini Sangramsinh Gaekwad in the proportions as they
like. As soon as the applicants money for 3,000 equity shares of Rs. 100 each
amounting to Rs. 3,00,000 is received the subscription of additional shares be
closed at 10,500 equity shares of Rs. 100 each amounting to Rs. 10,50,000”. It
would appear from these minutes of the Managing Committee that 7,500 shares
were allotted out of the total 15,000 shares offered to the applicants for the
first time on 10-12-1988 at a decision taken at this meeting. Out of the
remaining 7,500 shares 3,000 shares were allotted to respondent Nos. 4 and 5
and the issue was closed on that day. The stands taken up by the respondent No.
1 in context of these minutes of 10-12-1988 in his affidavits are conflicting.
In his sur-rejoinder to the rejoinder of the petitioner No. 1 in the petition,
he has stated in paragraph 14 that he did not admit that the said minutes are
genuine, but, in para 31(g) of his affidavit-in-reply filed in Company Petition
No. 7 of 1992 on 11-4-1992, he has stated, in response to paragraph 6(9) of
that petition in which a xerox copy of these very minutes was placed at
Annexure “F” with an allegation that these were fraudulent and fabricated and
brought about by Shri Sangramsinh P. Gaekwad (who is respondent No. 2 therein)
with the sole object of gaining control of the company, that: Although the
shares were to be allotted as and when the money came these minutes were
written on 10-12-1988”. He has denied in para 31(g)(i) of the said reply the
allegation that these minutes of 10-12-1988 were fraudulent or fabricated. In
para 31(g)(ix) the respondent No. 1 in response to the allegation that the
alleged decision of the Managing Committee of 10-12-1988 was not placed before
the Board meeting held on 14-3-1989 and that it was not ratified by the Board
has stated thus: “I submit that as the very power of allotment of shares was
given to the Managing Committee the question of ratification by the board of
directors did not arise. The decision was, therefore, not required to be placed
before the board of directors for its ratification or approval”. When as per
these minutes of the Managing Committee said to have held on 10-12-1988, the
Committee took the decision to allot the shares for the first time at that
meeting, the theory of the respondent No. 1 that 6475 shares were already
allotted by the committee to the respondent Nos. 1 to 5 earlier, stands badly
exploded. In the Board’s meeting of 16-4-1988, there was no mention of any such
allotment but only a mention in paras 3 and 4 of the minutes that “the Board
discussed the issue of 15,000 equity shares of Rs. 100 each of the company.”
There was no reference made to any decision of the Managing Committee meeting
held on 21-3-1988 but a generally worded resolution was recorded to the effect
that the share certificates to cover equity shares be issued to the members and
they be signed by respondent No. 1 and Shri H.A. Shinde, directors and
counter-signed by Mr. Khade, the Secretary of the company. It was also resolved
that common seal of the company be affixed to the equity share certificates
when ready in the presence of the respondent No. 1, a director of the company.
In para 6 of these minutes, it is recorded that the Board sanctioned transfer
of 22 equity shares in favour of Shrimant Fatehsinhrao Gaekwad. It will be
noted from the minutes that the name of Shrimant Fatehsinhrao P. Gaekwad was
initially written “present as Chairman” but appears to have been scored out and
added in the list of directors who were granted leave of absence and the
numbering is altered accordingly at all places. The only minutes that reflect a
decision for allotment of shares to the respondent Nos. 1 to 5 of 6475 equity
shares and to respondent Nos. 4 and 5 of 3,000 equity shares are these minutes
of the meeting of 10-12-1988. It is not possible to believe that the respondent
No. 1 would have signed these minutes recording the decision to allot 6475
shares to the respondent Nos. 1 to 5 on 10-12-1988 if the shares were already
allotted to them earlier by the Managing Committee. No such earlier decision of
the Managing Committee to allot 6475 shares is forthcoming. As noticed above,
there was no indication to make any such allotment to the respondent Nos. 1 to
5 in the minutes of the Managing Committee held on 21-3-1988 which were signed
by the respondent No. 1. We may note here that throughout the hearing there was
no dispute raised over the fact that both the notarised minutes of the
Committee dated 21-3-1988 and 10-12-1988 produced at Annexures A/2 and A/3 of
the affidavit in rejoinder of the petitioner No. 1 with the particulars of such
notarisation stated in para 11 thereof, contained the signature of the
respondent No. 1 put as Chairman of these meetings and on our own perusing
these signatures and keeping in view his other signatures on record it is clear
that these are rightly not disputed. In fact as noted above the minutes dated
10-12-1988 have been admitted by the respondent No. 1 to be true in his
affidavit-in-reply filed on 11-4-1992 in the company Petition No. 7 of 1992
before the CLB. It is obvious that being confronted by the notarised xerox copy
of these minutes the respondent No. 1 has tried to avert his embarrassment that
they caused as much as possible in the said affidavit-in-reply dated 11-4-1992
after having taken a different stand in the affidavit-in-reply dated 21-3-1991
and his sur-rejoinder dated 22-4-1991 filed in the petition before this Court.
13.3 It
will be noted that in the minutes of 10-12-1988, there is no reference to the
type of allotment referred in the draft minutes of 21-3-1988 which were
forwarded to the Secretary or respondent No. 1 Mr. N.K.K. Mohammed under note
dated 29-3-1988 of the Company Secretary. In the minutes of 21-3-1988 which
were signed by the Chairman, there was no mention that the shares would be
allotted as and when the amounts were received as was contained in the draft of
the meeting. There was a firm decision to issue 51 per cent additional equity
shares to Shrimant Fatehsinhrao P. Gaekwad and as regards balance 49 per cent
they were to be offered to the existing members and if the existing members did
not subscribe then to persons as the Committee deem fit. In this context, if we
refer to the requisition note which is at Annexure “B’ to the petition, read
with para 6.5 thereof and also at Annexure “D” to the Company Petition No. 7 of
1992 (Volume 10 at page 81), it would appear that there are figures written
therein showing the requisitions received till that day from the members
mentioned therein. As per the particulars mentioned in it, the Chairman, i.e.,
Shrimant Fatehsinhrao P. Gaekwad, had requisitioned 8,000 shares, Maharani of
Dhar (i.e., respondent No. 12) 500 shares, Princes Shubangini Raje 25 shares
and the respondent No. 1 Shri Sangramsinh Gaekwad had requisitioned 6475
shares. There is an endorsement in the margin of these requisitions that the
Chairman had okayed this. There is another endorsement below the type-written
portion which reads: “Minutes of Committee meeting on this basis” and is signed
by Shri N.K.K. Mohammed, Secretary to the respondent No. 1 Shri Sangramsinh
Gaekwad with the dated 23-3-1988. The said date below the endorsement, i.e.,
23-3-1988 is not shown as the date of any family meeting but the date on which
the endorsement was put stating that the minutes be prepared on that basis.
Since on the endorsement appears the dated 23-3-1988 for preparing the minutes,
the draft minutes which was forwarded on 29-3-1988 would have been prepared on
the basis thereof. However, in the draft minutes the words ‘and others’ were
added alongside the name of the respondent No. 1 which were not there in the
said note of requisition which was said to have been approved by the Chairman.
In the notarised copy of the minutes of the meeting of the Managing Committee
held on 21-3-1988, signed by the respondent No. 1 as Chairman, there was no
mention therein of Shrimant Fatehsinhrao Gaekwad even being present at that
meeting. Only the respondent No. 1 and Mr. P.H. Shinoy were shown as present.
Therefore, the story of 6475 shares being requisitioned by the respondent No. 1
and allotted to him which is reflected from the note of requisitions which
bears the endorsement made by the Secretary of the respondent No. 1 on
23-3-1988 to the effect that the minutes of the Committee meeting be prepared
on this basis and that the Chairman of the meeting (i.e., the respondent No. 1)
had okayed this, has clearly emanated for the first time from the respondent
No. 1 through his Secretary who caused the draft minutes being prepared on the
basis of that note. Therefore, while in the final minutes of the meeting on
21-3-1988 there was no decision recorded for allotting any shares to the
respondent No. 1 or that shares will be allotted in the names as stated in any
such requisition note, it appears that by sending the requisition note with a
direction issued by an endorsement made thereon by his Secretary at his own
instance the respondent No. 1 got the minutes prepared by the Company Secretary
Mr. Khade, which were forwarded under a note (Annexure “C” to the petition) to
Mr. N.K.K. Mohammed, Secretary of the respondent No. 1 on 29-3-1988 by the
Company Secretary, as can be seen therefrom. This course was not open to the
respondent No. 1 on the basis of the decision taken at the meeting of
21-3-1988, as recorded in the minutes of that meeting (Annexure A/2 to the
petition), which were signed by the respondent No. 1 as its Chairman.
13.4 The
minutes book of the Managing Committee according to the affidavit of the
Company Secretary Mr. Khade, was forwarded by him to Mr. N.K.K. Mohammed on
20-11-1990 (paragraph 9 of the affidavit) along with the minutes books of the general
meetings and the meetings of the board of director. He has stated that they
were delivered to Mr. N.K.K. Mohammed through a personal messenger and Shri
N.K.K. Mohammed, “received the same and okayed having been received by putting
in his own hand-writing the words “O.K.” on the carbon copy of my said letter
dated 20-11-1990.” He has produced a photocopy thereof. Not being aware of the
fact that xerox copies of the minutes of the meeting held on 21-3-1988 and
10-12-1988 bearing his signatures as chairman will be produced, the basis of
allotment was tried to be worked out in the manner reflected in the requisition
note okayed by him and forwarded to the company Secretary by his Secretary for
preparing minutes and on the basis of which the draft minutes were prepared and
forwarded to his Secretary on 29-3-1988, the respondent No. 1 seems to have
taken up a convenient stand that the minutes book of the meetings of the
Managing Committee was not received from Mr. Khade. Merely because the minutes
books were sent under a letter dated 20-11-1990 to the Secretary of the
respondent No. 1 at Bombay, it cannot be inferred that they remained at Bombay
and were not available at the registered office of the company at Baroda when
the notarised xerox copies thereof were taken on 10-12-1990. In fact, these
minutes of 10-12-1988 have been admitted by the respondent No. 1 in his
affidavit-in-reply filed on 11-4-1992 in the company petition No. 7/92 as noted
hereinabove and, therefore, the stand taken up in para 14 of his sur-rejoinder
by the respondent No. 1 that the minute book of the Managing Committee meetings
was lying at Bombay and its copy could not have been taken out on 10-12-1988 is
insignificant and misleading. The averments contained in paragraph 11 of the affidavit-in-rejoinder
of the petitioner No. 1 that she had along with her daughter inspected on
10-12-1990 the Register of members, Register of transfer, minute books of the
board of directors and the minutes book of the committee meetings and saw the
minutes dated 21-3-1988 and 10-12-1988 which were under the signature of
respondent No. 1 as stated by her and obtained xerox copies thereof from the
director Shri P.U. Rana which were verified by Shri M.C. Vaidya after comparing
the same with the original and certified by him as true copies, is a version
which deserves to be accepted in view of the notarised copies not only of these
minutes but also of the register of members and other documents duly notarised
on 10-12-1990 having been produced on the record of this petition. It is clear
that on that day all these registers and minute books including the minutes
book of the Managing Committee were lying in the Registered office of the
company at
13.5 The
allotment of 51 per cent of the new shares to Shrimant Fatehsinhrao Gaekwad
firmly reflects from the minutes of 21-3-1988 and there was no reference
therein or even in the minutes of 10-12-1988 about any decision to issue any
share to the respondent No. 1. That decision has emerged in the requisition not
on which the Secretary of respondent No. 1 made endorsement for preparing
minutes on 23-3-1988, at the instance of the Chairman who had okayed it. That
Chairman was none other than the respondent No. 1 who had signed the minutes of
21-3-1988. On the basis of that requisition note the draft minutes were made to
show as if it was decided to give 6475 shares to the respondent No. 1 and
others while in fact no such decision was recorded in the minutes of the
meeting of the Managing Committee of 21-3-1988 or of 10-12-1988 in which that
decision of 21-3-1988 was referred and which were signed by the respondent No.
1. Since admittedly the Managing Committee consisted of three Directors, i.e.,
Shrimant Fatehsinhrao P. Gaekwad, the respondent No. 1, Shri Sangramsinh
Gaekwad and Shri P.H. Chinoy, the endorsement in the requisition note was
capable of being construed to mean that Shrimant Fatehsinhrao P. Gaekwad had
okayed the allotment as Chairman. Only the respondent No. 1 was interested in
bringing about such a situation on record because Shrimant Fatehsinhrao P.
Gaekwad’s allotment of 51 per cent share was firmly mentioned as reflected in
the minutes of 21-3-1988 was that would have gone to his heir on his demise.
Thus, though there was no decision for allotment of 6475 shares to respondent
No. 1 as per the minutes of the meeting of the Managing Committee dated
21-3-1988 signed as chairman by him the respondent No. 1 who was the director
of the company brought about the allotment of such shares to himself and his
family members, which were later transferred by the respondent Nos. 1 to 5 to
Indreni. Such issuance of shares coupled with blocking of 51 per cent equity
shares from devolving on the sole heir of Shrimant Fatehsinhrao P. Gaekwad was
obviously intended by the respondent No. 1 to enhance his power and position by
allotting shares to himself and his family members. The exercise was obviously
intended for destroying the existing majority and creating a new majority of
his group. The transfer of the new shares in the Register and issuance of share
certificates in favour of the respondent Nos. 1 to 5 was clearly not warranted
by any valid decision of the Managing Committee or the board of directors.
13.6 Self-interest
is the commonest instance of improper motive leading to abuse of power. Where
the question is one of abuse of powers the state of mind of those who exercised
power as reflected from the surrounding circumstances and the materials which
throw light upon that aspect so as to show whether they were honestly acting in
discharge of the powers in the interest of the company or were acting for their
own advantage of improperly favouring themselves or one section of the
shareholders against another is to be examined. Where directors have acted in
what they believe to be an interest which they were entitled to serve, their
exercise of power can only be set aside, if it be found that the interest they
were serving was an inadmissible or corrupting interest, such as self-interest.
The power to issue shares being of fiduciary nature its exercise can be set
aside when it is exceeded or abused. There can be no dispute over the
proposition that a majority shareholders cannot control the directors as to the
exercise of their fiduciary powers. The directors of a company, however, cannot
use their fiduciary powers over the shares of a company for the purpose of
destroying an existing majority. The purpose of altering the balance of voting
power is never permissible. If the purpose of issuing shares was solely to
alter the voting power, the issue would be invalid. The directors cannot
manipulate the issue of shares for private purposes, or merely to secure voting
power. A power of the directors to issue shares must be exercised for the
benefit of the company because primarily it is given to them for the purpose of
enabling them to raise capital when required for the purpose of the company.
There may be occasions when the directors may fairly and properly issue shares
in case of a company. However, when shares are issued to persons who are
obviously meant and intended to secure necessary statutory majority that will
not be a fair and bona fide exercise of power. If the shares are issued under
the general and fiduciary powers of the directors for the express purpose of
acquiring an unfair majority for the purpose of altering the rights of parties
under the articles, the Court ought to interfere because it would be
unconstitutional for the 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. If there is added to this immediate purpose
an ulterior motive 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 will be considered to be greater. This precisely was done
by the respondent Nos. 1 and 2 who were the directors of the company for their
self-aggrandisement and in breach of their fiduciary duty to the company and
the shareholders.
14. In
the meeting held on 27-12-1989, the respondent No. 1 who chaired it and the
other director Mr. P.H. Chinoy took some interesting decisions as reflected
from the minutes. The Chairman ‘informed’ in the meeting where these two alone
were present that it was necessary to expand the Board by appointing additional
directors “so that the company can get the benefit of their guidance and
experience”. The chairman, i.e., the respondent No. 1 was authorised to invite
his wife - the respondent No. 2 Mrs. Ashra Raje, Mr. Dilipbhai Thakker, Mr.
Bhupat Singhji Jadeja and Capt. V.K. Raichand to join the Board as directors.
These minutes also indicate that the Board approved the transfer of shares by
the respondent Nos. 1, 2 and their son P.S. Gaekwad. There is an indication
that no objections were received from the shareholders in response to transfer
notices but no particulars regarding the nature of transfer or number of shares
of the transferee were mentioned.
14.1 In
the meeting of the Board held on 30-3-1990 the respondent No. 1, Mr. P.H.
Chinoy and the above four newly invited directors were present and they
participated. The other four directors remained absent. The respondent No. 1
took the Chair and informed the Board that the company’s day-to-day management
hither to was looked after by the Managing Committee of directors, and that,
with the appointment of the new directors on the Board, it was proposed that
the day-to-day management could be vested in one of the directors. The minutes
record that the matter was discussed and it was proposed that the respondent
No. 2 Mrs. Ashra Raje be appointed as the executive director of the company.
The Board resolved that the Managing Committee of the directors of the company
be dissolved forthwith, i.e., with effect from 30-3-1990 and that Mrs. Ashra
Raje, the respondent No. 2 be appointed as the executive director of the
company with effect from 1-4-1990 which powers; (a) to look after the
day-to-day management of the company and to exercise such powers from time to
time as may be required, (b) to buy and make investments on behalf of the
company in shares/securities of other companies and in immovable properties up
to Rs. 50 lakhs in a financial year, (c) to sell and disinvest
shares/securities of other companies held in the name of the company and
immovable properties of the value of Rs. 50 lakhs in a financial year, and, (d)
to do all that was necessary for conducting exports business of the company as
a merchant exporter in the interest of the company. Such transactions and
business were to be placed before the Board for ratification. The Chairman
placed before the Board the documents received for transmission of shares from
the name of late Shrimant Fatesinhrao P. Gaekwad to the name of his mother Smt.
Shantadevi Gaekwad and it was resolved that 23 equity shares of the company
standing in the name of Shrimant Fatehsinhrao Gaekwad be transmitted to the
name of Smt. Shantadevi Gaekwad. Even here it was not mentioned that the
entitlement of Shrimant Fatehsinhrao Gaekwad to 8,000 shares was not available
to her because he had renounced the shares in favour of the respondent No. 1
and his children. The Board then took a decision on the basis of the transfer
documents placed before the meeting by the respondent No. 1 and resolved that
the transfer of 9415 equity shares of the company be approved. By this
resolution the transfers of, 1495 shares of respondent No. 2 Smt. Asha Raje, of
2740 shares of the respondent No. 4 Mr. Pratapsinh, 1975 shares of the
respondent No. 1 Shri Sangramsinh Gaekwad, 1465 shares of his HUF and 1740
shares of his daughter the respondent No. 5 Priyadarshini were approved and
necessary entries in the transfer register and issuance of certificates was
authorised to be made by the respondent No. 2 the executive director. These
9415 shares were transferred to a company named Indreni Holdings Pvt. Ltd. (Indreni
for short) by the respondent Nos. 1 to 5.
14.2 The
minutes of the meeting held on 30-3-1990 are said to have been confirmed at the
meeting held on 29-6-1990. At that meeting it was resolved to remove the name
of the respondent No. 1 as the guardian of Pratapsinh who had become major. It
was resolved to maintain a new share transfer register as directed by the
Chairman on the ground that the share transfer register of company was not
traceable at the company’s office. It was further resolved to approve purchase
of 4,000 equity shares of the Baroda Rayon Corporation Ltd. by the company. The
meeting of the Board held on 13-7-1990, as per the minutes, took decisions on
important financial transactions and fixed the remuneration of the executive
director to be paid with effect from 1-4-1990. It was also resolved that the
transfer of 9415 equity shares in favour of Indreni Holdings Pvt. Ltd. be
reconsidered and the matter be referred to transferors. It was decided to pay
the dividend to Indreni Holdings (P.) Ltd. and subject to its refunding the
same to the transferees “in the event the same being found irregular”. The
Board took a serious view of the Alaukik Trading & Investments (P.) Ltd.
having issued further shares without informing the company, which held more
than 80 per cent shares of Alaukik & decided to seek legal opinion. The
Alaukik Trading & Investments Pvt. Ltd. had informed by letter dated
17-5-1990 that it had ceased to be the subsidiary of this company. In the
minutes of the meeting of the Board meeting allegedly held on 9-8-1990, relied
upon by the respondent Nos. 1 to 5, the Board had resolved to rescind the
transfer of shares and permit revocation of transfer notice and rescinded the
resolution dated 30-3-1990 by which transfer of 9415 equity shares had been
approved in favour of Indreni. The respondent No. 2 executive director was
authorised to make the required endorsements in the register and on the share
certificates and the transferors and transferees were permitted to cancel the
transfer.
15. The
case of the respondent No. 1 in para 6(9) of his affidavit-in-reply was that
before it was decided by the respondent Nos. 1 to 5 to transfer the shares to
Indreni, Mr. Khade the company Secretary was told to inform the existing
shareholders about it. It was stated that though he prepared a letter dated
15-11-1989 to all the shareholders as per copy at Annexure “17” to the reply,
he did not deliver these letters to any one of them and on the contrary he
falsely informed them that there was no response to the proposed transfer. In
the minutes of the meeting of board of directors held on 27-12-1989, there is
reference to a report from the secretary of the company about the procedure
followed in response to the transfer notice received from the shareholders of
the company but no such report is forthcoming Mr. Khade who was the company
Secretary has stated in his affidavit at Annexure “5” collectively to the
rejoinder of the petitioner No. 1 that there was no talk about transfer of
shares to Indreni in the Board meeting of 13-7-1990 and that there was no Board
meeting held on 9-8-1990. He states that he had taken the minute book of the
Board meetings to the auditors in or about October/November 1990 and till that
time the last minutes written were of the Board meeting held on 3-3-1990 and
that no minutes were written in the minutes book of the Board meetings after
30-3-1990 till he went on leave on or about 5-12-1990. He has categorically
denied that there was any talk about transfer notices to the shareholders on
13-7-1990. He has denied the allegation of wilful default made by the
respondent No. 1 against him and has stated in para 7 of his affidavit that the
minutes as now produced were neither true nor correct. He also states that he
was present in the meeting of the board of directors held on 29-6-1990 and
there was no mention about the transfer register being not traceable or about
maintaining a new transfer register. He states in para 9 of his affidavit that
he had sent the minute books of the General Meetings, Board Meetings and
Committee Meetings under the forwarding letter dated 20-11-1990 to Mr. N.K.K.
Mohammed, the Secretary of the respondent No. 1 and they were delivered to him
through a personal messenger which he acknowledged on the copy by endorsing
“OK”.
15.1 Before
the shares were transferred to Indreni, it was incumbent upon the transferor to
give a transfer notice to the company as required by clause 8 of the articles
of association. Admittedly, no such transfer notice was given in respect of
9415 shares to the company by the respondent Nos. 1 to 5. Therefore, the
transfer in favour of Indreni by them which was effected at the behest of the
respondent Nos. 1, 2 and their group at the meeting of 30-3-1990 in breach of
the articles of association and ignoring the rights of other members to be
offered by the company shares specified in a transfer notice as nearly as may
be in proposition to their existing shares, as envisaged by clause 13 of the
articles of association. The transfer notice under clause 8 of the articles of
association was required to be given by the respondent Nos. 1 to 5 in writing
and in absence of such transfer notice there could have arisen no question of
the company Secretary sending offer letter in respect of shares to the members.
Therefore, the story put up by the respondent No. 1 that the company Secretary
Mr. Khade was told to inform the share-holders as per the articles of
association and that even-though he prepared the letter dated 15-11-1989
(Annexure “D”), he did not deliver it to any of the members does not inspire
confidence. In any event, the fact remains that no transfer notice was given to
the company by the respondent Nos. 1 to 5 and the members also did not receive
any intimation before 9415 shares were transferred to Indreni. The transfer
documents were executed in favour of Indreni by the respondent Nos. 1 to 5 and
the transfers were duly recoded in the Register of members. Therefore, if these
transactions had to be undone, that could be done only by Indreni resolving to
retransfer the shares to respondent Nos. 1 to 5 by executing appropriate
retransfer documents. It is abundantly clear that the title in 9415 shares that
had passed on to Indreni was not conveyed back in this manner. Such retransfer
would again have required transfer notice as per clause 8 of the articles of
association, because, Indreni’s name had already been entered in the Register
of members and the other members again had pre-emption right if Indreni were to
transfer the shares back. All these hurdles were conveniently crossed by
resorting to the device of so-called rescission retrospectively recorded in the
minutes of 9-8-1990 which is not borne out from the entries in the Register of
members even up to 10-12-1990 as is clear from the certified copies taken out
on that day of the register of members. Even if Indreni was a company
controlled by the respondent No. 1 and his family, in the eye of law it was a
separate legal entity and not an existing member of the respondent No. 6
company to whom the shares could have been transferred or by whom they could
have retransferred back without a transfer notice. Therefore, transfer of
shares to Indreni by the respondent Nos. 1 to 5 was not a transfer to a member.
Such a transfer was therefore, clearly impermissible and in violation of the
transfer rules contained in the articles of association. This aspect has
significance in the present case not from the view point as to who is the owner
of these 9415 shares, i.e., respondent Nos. 1 to 5 or Indreni but it has a
great bearing on the conduct of the respondent Nos. 1 to 5 and shows that the
provisions of articles of association were being violated by them with
impugnity and that the directors respondent Nos. 1 and 2 committed breach of
their fiduciary duty towards the company by keeping their self-interest
paramount.
15.2 As
per the minutes of the meeting of board of directors held on 10-12-1990, and
presided over by the respondent No. 2 it was resolved to approve the minutes of
9-8-1990 which she signed. It is however, not mentioned in the minutes whether
the respondent No. 2 who was authorised under those minutes had made entries in
the Register of members to show that 9415 shares were transferred back from the
name of Indreni to the names of respondent Nos. 1 to 5. On this very day the
Civil Court had issued injunction against Indreni and inspection of the
Register of members was taken and the notary public attested a copy of the
register of members in which the shares stood in the name of Indreni and were
not transferred back to respondent Nos. 1 to 5. Had the shares really been so
transferred back the respondent Nos. 1 and 2, who were at the helm of affairs,
would have carried out the change in the Register of members which was in their
charge. It appears from these minutes that the respondent No. 1 Shri S.P.
Gaekwad and Dr. G.M. Oza were to retire by rotation. The additional directors
who were invited by the respondent Nos. 1 and 2 as aforesaid i.e., Capt. V.K.
Raichand, Shri Dilip Thakkar, Shri B. Jadeja and the respondent No. 2 Smt. Asha
Raje were to hold office only till the conclusion of the ensuing AGM. The
matter of their reappointment was therefore approved at this meeting and it was
resolved to convene the AGM on 20-12-1990 and a draft notice was approved for
the purpose. The executive director-respondent No. 2 was authorised to invite
Shri Rajan Chhabaria and Mrs. Estelle Cowerjee as directors of the company.
15.3 In
the affidavit-in-reply of the respondent No. 1 filed in Company Petition No. 7
of 1992 before the CLB, in paragraph 9(s) and (y), it was alleged that Mr.
Khade was asked to make entries in the register of members since it was only a
clerical job but Mr. Khade did not record rescission of transfer in the
register which took place on 9-8-1990, while in the minutes of the meeting said
to have been held on 9-8-1990, it is recorded that it was resolved to authorise
the executive director, i.e., the respondent No. 2, to make the required
endorsements in the Register of members and the share certificates for this
purpose on behalf of the company. There was no mention made in the minutes
about any instruction to Mr. Khade to make any entries in the register. The
version of Mr. Khade is that no such meeting was held on 9-8-1990 and the true copies
of register shows that when it was inspected on 10-12-1990, there were no
entries of rescission made therein and the shares which were transferred in
favour of Indreni by the respondent Nos. 1 to 5 stood in the name of that
company which was also paid dividend. In paragraph 9(y) of the
affidavit-in-reply of the respondent No. 1 in company petition No. 7 of 1992,
it was stated that the register of the members was rectified with retrospective
effect from 9-8-1990 before the AGM of 20-12-1990. There is however, no mention
of any such retrospective amendment of the register even in the minutes of the
Board meeting said to have been held on 10-12-1990, in which the minutes of the
previous alleged meeting of 9-8-1990 were confirmed it will be significant to
note that though it was recorded in the minutes of the meeting held on 9-8-1990
that leave of absence was granted to the directors Shri P.U. Rana, Shri H.A.
Shinde and Shri S.G. Shirke pursuant to requests made on their behalf, Shri
P.U. Rana, Shri H.A. Shinde and Shri S.G. Shirke had in their affidavits at
Annexure “5” collectively and Annexure “11” to the rejoinder of the petitioner
No. 1, categorically stated that they had not received any notice of the
meeting of the board of directors scheduled to be held on 9-8-1990 and that
they had not sent any letter for granting leave of absence to them. The
respondent No. 1 in paras 89, 99 and 101 of his sur-rejoinder has vaguely dealt
with these averments and not come out with any material to show that Shri P.U.
Rana, Shri H.A. Shinde and Shri S.G. Shirke were served with any notice of that
meeting or that they had sought leave of absence as alleged. The true copies
certified by the notary on 10-12-1990 which are on record clearly show that on
10-12-1990, no such decision in respect of 9415 shares which would have them
restored in the names of the respondent Nos. 1 to 5 was recorded which now
appears in the original register of the members shown to the Court by the
learned counsel for the respondent Nos. 1 to 5. It therefore becomes clear that
the shares which were transferred under the transfer documents to Indreni by
the respondent Nos. 1 to 5 as approved by the Board meeting on 30-3-1990
remained in the name of Indreni, which was controlled by the respondent No. 1
and his family and to which “for wealth-tax purposes” 9415 shares were
transferred as stated in his affidavit in reply [paragraph 9(m)] filed by the
respondent No. 1 in the company petition No. 7 of 1992. It is in this
background that the proceedings of the AGM of 20-12-1990 are to be viewed.
15.4 Indreni
was admittedly restrained by an injunction order dated 12-12-1990 of the Civil
Judge (Senior Division), Baroda, made in Civil Suit No. 867 of 1990 filed by
Smt. Shubanginidevi Raje, from attending meeting of GIC or exercising any
rights in respect of 9415 equity shares. Similar injunction orders dated
28-11-1990 was served in respect of these shares on the defendants of Suit No.
305/1990 filed by the shareholder Smt. Premila Raje at Rajkot. Thus, the net
position which obtained just prior to the AGM of 20-12-1990 was that 9415
shares continued to be held by Indreni in the Register of the company and that
there were Court injunctions preventing exercise of voting rights in respect of
9415 shares transferred to that company by the respondent Nos. 1 to 5. It is
obvious from the facts on the record that the story of rescission on 9-8-1990
is thought out with a view to meet with this situation which had reduced the
voting power of the respondent Nos. 1 to 5 to only 66 shares at the AGM
scheduled to be held on 20-12-1990.
16. It
will be seen from the minutes of the AGM convened on 20-12-1990 that the
petitioner Nos. 1, 4, 5 and their supporting respondent Nos. 12 and 13 were
present at the meeting with Mr. Ajit Gaekwad. Two of the directors Shri P.U.
Rana and Shri H.A. Shinde, who according to the respondent No. 1 supported them
were also present. The proxy holders of other members supporting that group
were allowed to exercise their rights as stated in the minutes. The opposition
against the resolutions for electing respondent No. 1 Shri Sangramsinh Gaekwad
as the director, proposed by the respondent No. 2 Smt. Asha Raje and seconded
by their son (Resolution No. 3), Shri P.S. Gaekwad, for electing Dr. G.M. Oza as
a director (Resolution No. 4), for electing respondent No. 2 Asha Raje as
director (Resolution No. 5), for electing Dilip Thakkar, Shri Bhupatsinh Jadeja
and Shri V.K. Raichand as directors (Resolution Nos. 6, 7 and 8) as proposed by
the respondent No. 2 were all opposed by Shri Ajitsinh Gaekwad who spoke on
behalf of his group as recorded in the minutes. The resolution seeking
confirmation of the respondent No. 2 as the executive director was also opposed
by that group. The proceedings thereafter as recorded in the minutes make a
curious reading. As per the minutes, ballots were distributed amongst
shareholders and the proxies present, who were required to exercise their vote
on Resolution Nos. 3 to 10. The ballot box was shown to them to indicate that it
was empty. It was noticed that the majority of persons present had not cast
their vote by ballot. After the process of voting came to an end, Shri Ajitsinh
Gaekwad and Shri Bipin Shah were requested to compile the report on the poll
and bring the poll result to the Chairman. Shri Bipin Shah reported to the
Chairman that Shri Ajitsinh Gaekwad refused to sign the poll register to
witness his consent as a scrutiniser on the polling. Thereafter, the Chairman
substituted Shri P.S. Gaekwad as the second scrutiniser. Thereafter, Mr. Bipin
Shah and Mr. P.S. Gaekwad submitted a report on the poll to the Chairman who
declared the result and stated that resolution Nos. 3 to 10 were passed without
any opposition “as shareholders holding 9481 equity shares had cast their votes
in favour and none against”. This outcome recorded in the minutes does not
stand to reason. The opposition to these resolution was itemwise expressed by
Shri Ajitsinh Gaekwad for his group as recorded in the minutes and there was no
reason why the same group should shy away from the same view been expressed by
them and their proxies in the ballots which were distributed to them. In the
minutes it is stated that the ballots were distributed to the shareholders and
proxies who were present. If the group had decided not to vote by ballot that
fact would have been recorded in the minutes. No. opposition to voting by
ballot was recorded in the minutes. Moreover, as recorded in the minutes “after
the process of voting came to an end the scrutiniser were requested to compile
the report on poll”. This means the group of which Shri Ajitsinh Gaekwad was
the spokesman had not walked away before the poll and they were in fact
present. It is therefore impossible to believe that his group that had
meticulously opposed the resolution Nos. 3 to 10 and whose members had accepted
the ballot papers would, for no apparent reason, refrain from voting so as to
bring about a resounding victory for the respondents’ group by enabling that
group to get the resolutions passed without any opposition. The affidavits of
the directors and shareholders who were present at that meeting state that they
had all voted at the meeting and the resolution Nos. 3 to 10 were defeated by
1122 to 66 votes. The minutes however, record that shareholders holding 9481
equity shares had cast their votes in favour and none against which is
obviously wrong. This means that despite the Court injunctions preventing
participation in respect of 9415 shares which stood in the name of Indreni,
there was a purported exercise of votes in respect of that share-holding also.
The entire exercise reflected from these minutes smacks of a desperate attempt
on the part of the respondent Nos. 1 to 5 to tilt the power in their favour in
total disregard of the fiduciary nature of the directors powers and to serve
their self-interest.
16.1 The
minutes of the AGM dated 20-12-1990 record on agenda item No. 4 that a
resolution was proposed for reappointing Dr. G.M. Oza as a director and that it
was opposed and therefore the respondent No. 1 as Chairman directed that that
resolution also be put to vote. It is recorded in the minutes that even this
resolution was passed without any opposition. This is obviously wrong, because,
Dr. G.M. Oza had by his letter dated 17-12-1990 informed the company that he
had not offered himself for re-election nor did he wish to be re-elected as a
director of the company. Dr. Oza had affirmed in his letter dated 1-3-1991 at
Annexure “D’ Collectively to the sur-rejoinder of the respondent No. 1, in reply
to the letter dated 28-2-1991 of the respondent No. 2 that he had left the
original letter of 17-12-1990 and copies addressed to other directors (also at
Annexure “E” to the petition) on the table of the Secretary Mr. M. N. Khade at
the office of the company and that he had no intention to be re-elected as a
director. Mr. P.U. Rana has in his affidavit at Annexure “5” collectively to
the rejoinder of petitioner No. 1, stated that the events took place as
narrated in his letter of 30-1-1990 at Annexure “N” to the petition. In that
letter it was stated that it was pointed out by Shri Ajitsinh Gaekwad at the
meeting that Dr. Oza had informed him that he had already written to the
company and its directors that he did not want to be reappointed as a director
of the company and several directors present had confirmed having received the
said letter from Dr. Oza and that therefore that item was dropped. It was
stated that the voting took place by ballot separately but simultaneously on
each item of the agenda and that he and Shri Ajitsinh were appointed as
scrutiniser. The fact that though Dr. Oza had written on 17-12-1990 that he did
not offer himself as director there is stated in the minutes that the
resolution proposing him was passed without opposition exposes the falsity of
the minutes of the AGM held on 20-12-1990.
16.2 According
to the version of Shri P.U. Rana was reflected in his letter dated 30-1-1991,
which gains support for the affidavits of the share-holders at Annexure “5
collectively” to the rejoinder of the petitioner No. 1, when the voting was
completed, while counting the number of votes each member/proxy holder was
entitled to, the register of members was taken out from the cupboard and the
number of shares standing against each Member’s name who were present
personally or by proxy were taken to be the number of his votes, the
particulars of which are mentioned therein. It was stated that all the
resolutions put to vote, except the resolution in respect of re-appointment of
Dr. Oza, which was dropped, were defeated by a majority of 1122 votes. It was
further stated that on finding that all these resolutions including
re-appointment of various directors including the respondent Nos. 1 and 2 were
defeated by majority, the respondent No. 1 took in his possession the register
of members proxy register, the appeal papers, proxy forms, attendance register,
etc. and threatened others of dire consequences, if he was prevented. It was
also stated by Shri P.U. Rana in that letter that he had done nothing wrong in
supplying copies of various documents to the shareholders. This letter dated
30-1-1991 was preceded by special notice dated 5-1-1991 convening the
Extraordinary General Meeting of 14-1-1991 for removal of Mr. P.U. Rana and Mr.
H.A. Shinde.
16.3 In
the meeting of the board of directors held on 5-1-1991, as per the minutes the
respondent No. 4 Pratapsinh’s notice of his intention to move a resolution in
the General Meeting for removing the two directors Mr. P.U. Rana and Mr. H.A.
Shinde was also considered. At that meeting it was resolved that the respondent
No. 1 Shri Sangramsinh Gaekwad be made a permanent director of the company and
its permanent Chairman, subject to the approval by the shareholders and to the
compliance of the provisions of the Companies Act. It was also resolved to give
consent to the shifting of the registered office of the company to Surat from
Baroda and the executive director was authorised to take necessary action for
shifting the office records and gave intimation to the Registrar of Companies.
It was also resolved, subject to the approval of the shareholders and
compliance of the Companies Act, to consent to the alteration to article 14 of
the articles of association of the company as formulated. As per the alteration
so formulated it was provided therein for transfer of share by a member to a
company incorporated under the Companies Act, provided such company continued
to be owned, managed and controlled by the existing member of the company. It
would be recalled here that the respondent Nos. 1 to 5’s transfer of 9415
equity shares in favour of Indreni which was controlled by them had boomaranged
and their holding stood reduced to 66 shares in face of the challenge against
the voting rights of Indreni company to whom the shares were transferred by
them, which transfer on a legal opinion obtained by them was tried to be
retracted by the respondent Nos. 1 to 5. The alteration formulated in article
14 of the articles of association was therefore obviously an exercise in the interest
of the group of the respondent Nos. 1 to 5 that had attempted such transfer to
a non-member company and does not appear to have been done in the larger
interest of the respondent No. 6 company. It was further resolved in view of
the Board deciding to remove the two directors Mr. P.U. Rana and Mr. H.A.
Shinde, to change the Bank accounts, operating instructions by authorising
respondent Nos. 1 and 2 to operate the Banking accounts of the company. It was
also resolved to give consent to the removal of Shri P.U. Rana and Smt.
Mrunalinidevi Puar as directors of Alaukik Tradings and to appoint Shri Rohit
Amin and Shri S.P. Gaekwad in their place.
16.4 On
the basis of the meeting of the board of directors held on 5-1-1991, notice
dated 5-1-1991 for convening the Extraordinary General Meeting on 14-1-1991 was
issued which proposed the resolutions for (1) appointment of respondent No. 1
Shri Sangramsinh Gaekwad as a permanent director and Chairman of the company,
(2) shifting the Registered office of the company from Baroda to Surat, (3)
amending article 14 of the articles of association to enable a member of the
company to transfer any share to a company owned, managed and controlled by the
existing member of the company or by himself together with members of his
family, (4) removal of Shri P.U. Rana as a director of the company, and (5)
removal of Shri H.A. Shinde as a director of the company. At the said
Extraordinary General Meeting held on 14-1-1991, the respondent No. 1 was the
Chairman and the executive director as well as other directors Shri Bhupatsinh
Jadeja, Shri P.H. Chinoy, Shri Dilip Thakkar were present. Respondent No. 4
Shri P.S. Gaekwad was also present. No other member was present. At that
meeting, as per its minutes, all the above resolutions were passed. This
Extraordinary General Meeting was convened on 14-1-1991 by notice dated
5-1-1991 without giving a clear fourteen days notice.
17. It
will thus be seen from the above discussion that the respondent No. 1 and his
group adopted the following calculated course of conduct to achieve their
personal interest:—
(i) The respondent No. 1 abusing his position as a director
converted his group into a majority by allowing 9475 shares (6475 + 3000) to
himself and his family members respondent Nos. 2 to 5 without there being any
valid decision to that effect by the Managing Committee or the board of
directors;
(ii) Though the allotments of new shares were not made to the
respondent Nos. 1 to 5, their names were entered in the Register of members
prior to 10-12-1988 in respect of 9475 shares;
(iii) Allotment of shares were made in favour of non-members, i.e.,
the HUF of the respondent No. 1 - 1475 shares, his minor son (2750 shares), his
minor daughter Priyadarshini (1750 shares), which was not permissible under the
articles of association of the company or any Resolutions of the AGM of
17-12-1987 or the board of directors on 8-1-1988;
(iv) Allotments were made beyond 10-3-1988 which was the last date
for receiving requisitions as per the letter of 12-2-1988 endorsed at the Board
meeting of 13-2-1988 though there was no extension given by the Board or even
by the Managing Committee;
(v) Even though no renunciation or decline letter was addressed
by Shrimant Fatehsinhrao Gaekwad in favour of respondent Nos. 1, 4 and 5, 3000
shares were appropriated on that footing by the respondent No. 1 by allotting
them to his minor children the respondent Nos. 4 and 5;
(vi) The Managing Committee was removed with immediate effect from
30-3-1990 and the respondent No. 2 Smt. Asharaje, wife of the respondent No. 1
was made executive director to exercise all the powers of the Managing
Committee;
(vii) Transfer of 9414 shares by the respondent Nos. 1 to 5 was
sanctioned at the behest of the respondent Nos. 1 and 2 in favour of a non-member
company Indreni without issuing transfer notice and its name was entered in the
Register as member contrary to the articles of association;
(viii) Though the name of Indreni continued in the Register of members
even on 10-12-1990, as per the notarised copies of the Register folios, and
shares were not retransferred to the respondent Nos. 1 to 5, minutes of a
meeting alleged to have taken place on 9-8-1990 were manipulated by the
respondent Nos. 1 and 2 and their group to show as if those shares were
transferred back to respondent Nos. 1 to 5 though no such transfer notice was
given as per the articles of association nor was it recorded in the Register;
(ix) The right of pre-emption guaranteed by the articles of
association to the shareholders was thrown to wins by the group of respondent
Nos. 1 to 5 and they effected transfers to Indreni without offering the shares
to the members first or even without giving a transfer notice to the company
which was a must;
(x) The respondent No. 1 tried to adopt an ingeneous device for
nullifying the effect of the decision to issue 51 per cent of the new shares to
Shrimant Fatehsinhrao P. Gaekwad, taken at the Managing Committee meeting of
21-3-1988 which decision was also referred in the minutes of the meeting held
on 10-12-1988, were chaired by the respondent No. 1, by creating a story that
Shrimant Fatehsinhrao Gaekwad had renounced his allotment in favour of the
respondent No. 1 and his children and on that footing managed to allot 3,000
shares to his minor children on 10-12-1988;
(xi) The minutes of the meeting of AGM held on 20-12-1990 prepared
under the signature of respondent No. 1 as Chairman, did not disclose the
correct state of affairs about the outcome of voting by the shareholders proxies present and voting (even in the
pursis filed by the respondents in the Suit at 3 p.m. on 20-12-1990, it was not
disclosed by them that the resolution were passed but it was only generally
stated that the voting was done);
(xii) The respondent No. 1 was made a permanent director and Chairman
though there was no such provision for a permanent director under the articles
of association;
(xiii) Mr. P.U. Rana and Mr. H.A. Shinde were removed as directors and
Mr. Khade as the Company Secretary because they did not to the line of the
respondent Nos. 1 to 5;
(xiv) The Registered office of the respondent No. 6 company was
resolved to be removed from Vadodara to Surat after the AGM of 20-12-1990; and
(xv) The Registers and other records of the company were authorised
to be removed from the Registered office by the respondent No. 2.
18. It
is at once clear from the above course of conduct of the respondent Nos. 1 to 5
that they have acted in a high-handed manner and in gross breach of the
fiduciary duty of the respondent Nos. 1 and 2 as the directors of the company,
treating the company as their private affair and trying to gain a total control
over it by improper means to the detriment of the interests of other
shareholders including the petitioners and the respondent Nos. 12 and 13. Such
engineered takeover of the respondent No. 6 company by the respondent Nos. 1 to
5 and their group cannot be recognised. A director of a company is precluded
from dealing on behalf of the company, with himself, and from entering into
engagements or arrangements in which he has a personal interest conflicting, or
which possibly may conflict, with the interests of those whom he is bound by
fiduciary duty to protect, and this rule is as applicable to the case of one of
the several directors as to a managing or sole director and any affirmance or
adoption by the company of any such dealing, engagement or arrangement, brought
about by unfair or improper means which is illegal, fraudulent or oppressive
towards the shareholders who oppose it, cannot be recognised. Power of the
directors to issue shares to the members of the company is a fiduciary power to
be exercised by them bona fide for the general advantage of the company and the
directors are not entitled to use their power of issuing shares merely for the
purpose of maintaining their control over the affairs of the company or merely
for the purpose of altering a majority shareholding. Breaches of fiduciary duty
by the controlling directors would entitle a minority shareholder to bring an
action against them and the Court would be justified in redressing the wrong.
If the persons in control of the company have acted in their own interest by
allotting shares to themselves or to their associates so as to enable
themselves to control the voting at the General Meetings or to enhance their
power or position, the members who are unfairly prejudiced by such conduct
would become entitled to have the affairs of the company properly conducted
according to law. The Court’s reluctance to examine business decisions would
disappear if it were shown that the directors or controlling shareholders
concerned did not make the decision in good faith in the interest of the
members of the company as a whole. The Court has ample powers to make such
order as it thinks fit to give relief in respect of the matters complained of,
and can fashion the remedy to suit the circumstances of a particular case. The
Court’s jurisdiction in such matters is equitable in character although
originating in a statutory provision. In a matter of this type, the Civil
Courts would be wholly ill-equipped in power to deal with this gross case of
oppression and mis-management by the contesting respondents. There is also no
substance in the contention that the relief against allotment of 6475 shares to
respondent Nos. 1 to 5 was not initially prayed and should therefore not be
countenanced. The contest from the entire record shows that the parties were at
issue even on this relief which was prayed for by an amendment.
19. In
view of what we have said hereinabove, we are, with respect, unable to accept
the findings of the learned single Judge or the contentions which have been
raised on behalf of the contesting respondents in these appeals in support of
that decision.
20. As
a result, the appeals are allowed and the impugned order passed by the learned
single Judge on 17-4-1995 in Company Petition No. 51 of 1991 is hereby set
aside and the Company Petition is allowed with the following reliefs:—
1. It
is hereby declared and ordered that all the allotments of shares from the
additional share capital increased pursuant to the resolution of the
Extraordinary General Meeting held on 17-12-1987 and the resolution of the
board of directors dated 8-1-1988 and the decisions for such allotments, of the
Managing Committee be treated as invalid and ineffective for all purposes and
the shareholdings of all the members of the respondent No. 6 company hereby
stand restored to the original 425 shares held by the members ignoring such
subsequent allotments. The Register of members and other record of the company
will stand rectified accordingly.
2. The
Registered office of the respondent No. 6 company is hereby declared to be
continuing at the same place, i.e., “Indumati Mahal” at Baroda, irrespective of
the resolution to shift it to Surat and the respondent Nos. 1 and 2 are
directed to forthwith restore the entire record of the company to its
Registered Office at Baroda.
3. All
the directors or purported directors of the respondent No. 6 company stand
removed forthwith. They will from today, not deal with the affairs of the
company in any manner
4. An
Extraordinary General Meeting of the shareholders of the company will be
convened on 14-10-2000 at 11.00 a.m. at the Registered office of the company at
Baroda, for appointing directors of the company on the basis of the existing
shareholding of 425 shares of the members of the company, in accordance with
the articles of association.
5. The
aforesaid meeting scheduled to be held on 14-10-2000 will be conducted under
the Chairmanship of the Additional Registrar of the High Court Shri V.B.
Gandhi. All the shareholders of 425 shares including the petitioner No. 1 as
the sole heir of the deceased Shrimant Fatehsinhrao P. Gaekwad in respect of
the shares which stood in his name in the register of the members of the
company at the time of his demise out of the said 425 shares in respect of
which he had voting rights, will be entitled to vote by themselves or through
their proxies at the said meeting for appointing the directors of the company.
No outsider will be allowed to remain present at the meeting except the
Additional Registrar who will Chair and conduct the meeting with his official
assistants. The Additional Registrar will be assisted by a Section Officer of
the High Court of his choice in the said work.
6. All
the shareholders who are parties to the present proceedings are hereby put to
notice about the date of the said Extraordinary General Meeting to be held on
14-10-2000 at 11.00 a.m. at the Registered Office of the respondent No. 6
company at ‘Indumati Mahal’, Baroda. The Additional Registrar will however, get
published the notice of the meeting in one English daily and one Gujarati daily
having circulation in the area. The Additional Registrar will also immediately
issue individual notices of the said meeting to the shareholders. The
Additional Registrar is authorised to seek assistance for conducting the
meeting from all or any of the parties to these proceedings and/or the
officials of the company who shall be bound to assist him in that regard. No
adjournment motion will be entertained at the said meeting.
7. The
Additional Registrar will on completion of the said meeting, prepare and sign
the minutes of the meeting recording its outcome and declare in writing the
names of persons who are appointed by the shareholders as the directors of the
respondent No. 6 company at the said meeting, and thereupon such directors
shall assume the management of the company on such declaration being made.
8. The
remuneration of the Additional Registrar is fixed at Rs. 10,000 and the
remuneration of the Section Officer will be Rs. 3,000, for the said purpose.
The respondent No. 6 is permitted to withdraw the said amount and also a
further amount towards the expenses for publishing notice etc. totalling Rupees
30,000 from its Bank/s for the purpose of depositing it in the registry. The
learned Counsel for the respondent No. 6 company states that the respondent No.
6 will deposit the amount of Rs. 30,000 in the Registry of this Court within 15
days.
9. The
learned Counsel for the respondent No. 6 company has agreed to supply the names
and present addresses of all the shareholders of the 425 shares of the company,
to the Additional Registrar on or before 19-8-2000.
10. There shall be no order as to costs.
The learned Counsel of the respondent No. 6
company prays for the respondent No. 6 company as well as for the respondent
Nos. 1 to 5 that this order be stayed for three months to enable the contesting
respondents to approach Hon’ble the Supreme Court in the matter. In the facts
and circumstances of this case, this request cannot be acceded to and is
therefore, rejected.
Order accordingly.
[1956] 26 COMP. CAS. 313 (BOM.)
East And West Insurance Company Limited
v.
Mrs. Kamla Jayantilal Mehta.
CHAGLA, C.J.
DIXIT, J.
FEBRUARY 13, 1956
CHAGLA, C.J.-The defendant, who is the respondent before
us, was at all material times a shareholders of the plaintiff company who are
the appellants. The plaintiff company filed a suit, out of which this appeal
arises, to recover from the defendant a sum of Rs. 4,835 being the amount due
in respect of call made by the company and interest thereon. The contention was
accepted by the trial court which proceeded to dismiss the plaintiffs' suit.
The appellants have now come in appeal.
At
a meeting of the board of directors held on March 3, 1948, the directors
resolved that a further call of Rs. 40 per share on B class shares of the
company and a notice of one month be given to all B class shareholders to pay
the same. The b class shares are of the face value of Rs. 50 and Rs. 10 were
paid up, and the defendant held 100 B class shares of this company. Another
meeting of the board of directors was held on June 22, 1948, and at this
meeting the minutes showed that the opinion of the directors was divided as to
the manner of requiring the calls to be paid, and the evidence of the manager
Mr. Samant on this point is that the division of the directors was on the
question as to whether the call should be for Rs. 40 at one time or whether the
call should be by instalments. They were also divided as to what time should be
given if the call was to be by instalments. The minutes of this meeting go on
to state: "It was therefore resolved that the draft notice be finalised in
consultation with the company's solicitors." It is also in the evidence of
Mr. Samant that he had produced before the meeting of the board a notice to be
sent to the shareholders with regard to this call prepared by the solicitors.
In this notice, there were various blanks which were filled in by him, and
turning to this draft notice it proceeds on the basis that the call was payable
by four instalments and in this draft notice the dates of payment of the
instalments are mentioned, the first instalment being payable on August 5,
1948, the second on September 5, 1948, the third on October 5, 1948, and the
fourth on November 5, 1948. It is not quite clear from the language used in the
minutes of this meeting as to what exactly was intended by the expression,
"it was therefore resolved that the draft notice be finalised in
consultation with the company's solicitors." But the evidence of Mr.
Samant is that he finalised the draft notice himself and he then sent out
notices to the shareholders in the form of the draft notice which was the final
form of the notice. It is common ground that the final form never came before
the board of directors. This particular notice was sent to the defendant on
July 7/9, 1948, and she was called upon to pay the first instalment on August
5, 1948. As she failed to pay the first instalment, another notice was served
upon her on August 17, 1948, by which she was reminded that the first
instalment remained unpaid and notice was given to her to pay the remaining
three instalments on the due dates, viz., September 5, October 5, and November
5, 1948. She failed to pay also the second instalment on the due date and a
notice was served upon her on September 28, 1948, reminding her that the two
instalments on their due dates. A third reminder was sent to her on November
10, 1948, when she had failed to pay the remaining two instalments and she was
requested to pay the whole amount of Rs. 4,000 with interest thereon due by
her. Finally, an attorney's notice was given to her on January 26, 1949, and in
this notice it was stated:
"By
a resolution of the board of directors dated the 3rd March, 1948, it was
decided that a further sum of Rs. 40 per share be called from B class
shareholders. By another resolution of the board of directors of the company
dated the 22nd June, 1948, it was decided to forward to the shareholders the
notice demanding payment of the said call in the manner decided at that
time."
The
letter further says that in pursuance of these resolutions various notices were
sent to the defendant and she was called upon to pay the amount. As she failed
to comply with this requisition a suit wa filed in the
Turning
to the articles of association which constitute the contract between the
company and the shareholders and according to which a call can be made and the
liability for the call can be imposed upon a shareholder, the two material
articles are articles 18 and 19.
Article
18 provides:
"The
directors may, from time to time, make such calls as they think fit upon the
members in respect of all monies unpaid on the shares held by them
respectively, and not by the conditions of allotment thereof made payable at
fixed times, and each member shall pay the amount of every call so made on him
to the persons and at the time and places appointed by the directors. A call
may be made payable by instalments."
And
article 19 provides:
"A
call shall be deemed to have been made at the time when the resolution of the
directors authorising such call was passed."
It
is clear that article 18 divides itself into two parts. The first deals with
the authority of the directors to make a call and the second deals with the
imposition of liability upon the shareholder, and as a condition for imposition
of the liability upon the shareholder the second part provides that the
directors must appoint the person to whom the payment has to be made, the time
at which it has to be made and the place at which it has to be made. Neither
the first part nor the second part of article 18 lays down the mode by which
either the directors should make the call or impose the liability upon the
shareholder. it is true, as pointed out by Mr. Desai, that the directors can
only act at a meeting of the board of directors through resolutions passed at
such a meeting, and therefore it was contended by Mr. Desai that the action of
the directors both with respect of making of the call and the imposition of the
liability must be by resolution passed at a meeting of the board of directors.
Our attention was drawn to article 115 which makes it competent for a meeting
of directors to exercise all or any of the authorities, powers and discretions
by or under the articles of the company for the time being vested in or
exercisable by the directors generally, and it was rightly pointed out that but
for this article action could only be taken by all the directors jointly, but
article 115 makes it competent to a meeting of directors, where all the
directors are not present, provided a quorum is there, for such a meeting to
transact the business which otherwise all the directors will have to transact.
But as the argument was advanced to us with regard to the power of delegation
of the directors, which we shall examine later, it is necessary to look at
articles 18 and 19 on the assumption that the directors could delegate their
power vested in them under article 18. Article 19 when read with article 18
makes it clear that whatever power of delegation the directors may have
generally, as far as the making of the call is concerned, a call can only be
made by a resolution of the directors, because article 19 fixes the time when
the call is deemed to be made and the time fixed is when the resolution of the
directors authorises the call. Therefore it is clear that article 19
contemplates and indeed requires the making of the call by a resolution passed
by the directors at a meeting of the board of directors.
If
every valid call has to be made by a resolution of the board of directors, the
next question that we have to consider is, what are the essential features of a
valid resolution making a call? It cannot be disputed that the amount of the
call must be mentioned in the resolution. The question in controversy before us
has been whether it is equally essential that the time when the call money
should be paid by the shareholder should be mentioned in the resolution. Apart
from authority, it is difficult to understand how the fixing of the time for
the payment of the call is not an essential feature of the making of the call.
A call imposes a liability upon a shareholder and that liability only commences
from the time when he becomes liable to pay the call, and therefore authorising
the call and fixing the amount of the call by themselves do not fix the
liability upon the shareholder. It is further necessary that the time when the
shareholder should pay the amount should be indicated so that the shareholder
knows when he has to pay the amount and he also knows that failure to pay the
amount will entail serious consequences. The other two requisites for imposing
liability upon the shareholder, viz., the fixing by the directors of the person
to whom the payment is to be made and the place where the payment is to be
made, are not material requisites. Whatever the place that may be fixed and
whoever the person may be to whom the payment is to be made, does not in any
way affect either the quantum of the liability or the time from which the
liability is fixed. What is urged against this view is that although by reason
of article 19 a call can only be made by a resolution, article 18 makes a
distinction between the making of the call and the appointing by the directors
of the place at which, the person to whom, and the time when the payment is to
be made, and therefore it is urged that all these three factors must stand on
the same footing. If it is not necessary to fix the person to whom and the
place at which payment is to be made by a resolution it is equally not
necessary to fix the time of payment. The fallacy underlying this argument is
that although the second part of article 18 mentions all these factors it does
not, as already pointed out, indicate how these factors should be appointed by
the directors. It may be by a resolution or it may not be; the second part of
article 18 is silent. Therefore, if any of these factors are essential for the
making of a call, then by reason of article 19 that factor must form part of a
valid resolution making the call. Therefore, there is not much substance in the
contention that no distinction can be made as between person and place on the
one hand and time on the other. A distinction has to be made because these
three factors do not stand on the same footing. Whereas the person to whom the
payment is to be made and the place at which the payment is to be made are
trifling requirements of no substance and of no consequence, the time at which
the payment is to be made is of considerable substance and of great consequence
to the shareholder. We might also look at the provision with regard to the call
being made payable by instalments. This provision appears at the end of article
18 after article 18 has dealt with the authority of the directors to make the
call and the conditions imposing the liability upon the shareholders, and in
our opinion this provision relates tot he making of the call and therefore it
must form part of the resolution authorising the call. This again is a matter
of substance. Whether a call should be paid in one sum or by instalments goes
to the question of the liability of the shareholder, and therefore this
provision is as much of substance as the provision with regard to the fixing of
time for the payment of the call. Therefore, the provision that a call should
be made payable by instalments by reason of article 19 can only be made by
resolution properly passed by the directors.
Turning
to the first aspect of the matter whether it is essential to indicate the time
of payment in the resolution authorising a call, it is not disputed in this
case that neither the resolution of March 3, 1948, nor the resolution of June
22, 1948, fixes the time for payment, but what is urged by Mr. Engineer on
behalf of the company is that it is not necessary for the validity of a
resolution authorising a call that the time for the payment of the call must be
stated in the resolution itself. There seems to be some conflict of judicial
opinion on this point and it is necessary to briefly consider how the matter
stands. The first important pronouncement on this point was in a very early
case reported in Newry and Enniskillen Railway v. Edmunds. In that case Baron
Parke expressed the opinion that the resolution to make a call need not specify
either the time or place for payment; but the directors must appoint a time and
place, which must be notified to the shareholder by a notice allowing him 21
days for the purpose of payment, and the learned Baron referring to an earlier
case of Great North of England Railway Co v. Biddulph, says that that case
proves that the resolution need not contain the place of payment and he thought
that by implication it also proved that it need not contain the time of
payment, and he added:
"The
resolution is nothing more than a determination, that thereafter `a call' shall
be made, that is, that an application shall be made to each shareholder for a
proportion of his share; and it is enough if the directors appoint a time or
place, either by public advertisement, (where such a mode is allowed by the
private act), as in the case referred to, or under the general act, by an
individual notice to each shareholder."
These
observations naturally have been very strongly relied upon by Mr. Engineer and
he says that in this case the call having been made by the directors, the time
and the place and the person to whom the payment is to be made was appointed by
means of the notice served by the manager upon the shareholder.
There
are two subsequent English cases which have struck a discordant note. The first
is Johnson v. Lyttle's Iron Agency. In that case there are weighty observations
of so eminent an authority as Jessel M.R., who seems to have taken the same
view as Baron Parke in the earlier case. This is what the learned Master of the
Rolls says at page 690:
"Now,
it is quite clear that the Act of Parliament [and he was considering the
sections which are similar to our articles] does not require the day for the
call to be named in the same resolution as the one by which the call is made.
You may make the call, and then you may by subsequent resolution or direction
name the day for the payment. Nor does the Act of Parliament require the day to
be named by any particular formal act by the directors. No doubt it requires
their sanction and authority, but it does not require it to be made by a formal
resolution put in that shape, or by resolution entered in the minutes. It is
sufficient if they direct it. What shall be sufficient evidence of direction is
another matter."
In
that case, when it went to the Court of Appeal, although the observations of
Lord Justice James were obiter, the learned Law Lord did say at page 694:
"I
may add that, as at present advised, I think that the time for the payment of
the call could not properly be fixed by a mere verbal direction to the
secretary; it ought to be fixed by a formal resolution of the directors."
Neither
Lord Justice Mellish nor Justice Baggallay expressed any opinion on this
matter. This observation of Lord Justice James seems to have started a chain of
thought which was contrary to the view taken by Baron Parke and Jessel M.R. as
already indicated, and, as we shall presently point out, this indication given
by Lord Justice James which is the contrary view seems to have ultimately
stabilized itself in England as the correct view of the law.
The
next case to which reference has been made is the case In re Cawley and Co. It
may be said that the articles which came up for consideration by that court
were different from the articles we have to consider here, and Mr. Justice
Chitty in the trial court came to conclusion that inasmuch as there was first a
resolution making a call and a subsequent resolution where the time for payment
was fixed, taking the two resolutions together there was a valid call as from
the passing of the first resolution and not the second resolution. When the
matter went in appeal the case was decided on a point with which we are not
concerned, but Lord Esher M.R. says (at page 228):
"That
would be an end of the case had it not been for the equity which has been
alleged, and which I will deal with presently."
Then
he proceeds to deal with this equity and he considered the question whether
there was a good call on the date when the first resolution was passed, and
this is what he says (at page 228):
"Therefore,
there could be no valid call in this company until the time and place for its
payment had been appointed by the board; that is to say, until it had been
resolved by the directors that the call should be payable uncertain instalments
and in a certain manner and at a certain time appointed by the board."
Lord
Justice Cotton agrees with the Master of the Rolls on this point and this is
what he says (at page 232):
"When
a man takes a share in a company, of course, he thereby contracts with the
company to pay the full amount of the share, but only to pay when and if the
directors call for it to be paid up; and when one comes to look at article 38
and other articles following it, I should say that a requisition on the
shareholder to pay up the amount of his share should be by a resolution stating
the amount to be paid and the time when it is to be paid."
Lord
Justice Fry also took the same view and he observes (at page 235):
"I
am clearly of opinion that, according to the constitution of this company, no
call was made until the time for payment was fixed."
What
has been urged by Mr. Engineer is that these observations apply to the
particular articles which those Law Lords were considering and if our articles
are different, then that case is no authority for the construction of the
articles before us. Unfortunately for Mr. Engineer, Lord Esher M.R., after
having already delivered the main judgment, thought it proper to deliver a
supplementary judgment which is at page 236, and this is what the learned
Master of the Rolls says:
"I
do not wish it to be supposed that my decision in this case rests only on the
articles. I take it to be of the very essence of a call that the time and place
for payment should be determined."
When
we turn to the acknowledged text books on Company Law, where one would normally
expect the correct statement of the law to be laid down, first in Palmer's
Company Law, page 127, where the learned author says:
"In
making a call care must, therefore, be taken that the directors making it are
duly appointed, and duly qualified, that the meeting of directors has been duly
convened, that the proper quorum is present, and that the resolution making the
call is duly passed and specifies the amount of the call, the time and place of
payment-for these are of its essence-and to whom the call is to be paid."
Therefore,
according to this learned author, time and place are both of the essence,
apparently following the view of Lord Esher M.R., but he puts the person to
whom the call is to be made in a different category. Then turning to Buckley on
the Companies Act, 12th edn., at page 805 the learned author says:
"A
resolution for a call must state not only the amount of the call, but also the
time (or, if payable by instalments, the several times) at which it is to be paid.
If the date for payment be left in blank there is no valid call.
The
time fixed for payment of a call should be fixed by a formal resolution of the
directors, not by a mere verbal direction to the secretary."
Therefore,
Buckley does not attach the same importance to the place where the payment is
to be made and confines his observations with regard to the validity of the
resolution only to the time for payment. Then turning to Stiebel's Company Law
and Precedents, 3rd edn., at page 197, the learned author says:
"The
date when a call is payable is of the essence of the call, and there will be no
proper call until a resolution has been passed fixing both the amount and the
date of the call; it would appear to be probable that a verbal direction to the
secretary fixing the date of the call is not enough."
Halsbury,
3rd edition, Vol. VI, page 227, says:
"The
resolution must comply with the provisions of the articles and must in any case
state the amount of the call and the time at which it is to be paid; otherwise
the call will be invalid."
It
will be noticed again, following the view of Lord Esher, that the learned
author makes the time at which the call has to be paid an essential ingredient
of a valid resolution intendently of the provisions of the articles. Therefore,
whatever might have been the position when Baron Parke and Sir John
Jessel-undoubtedly both eminent authorities-made observations on which Mr.
Engineer has relied, the position today in
It
is then argued by Mr. Engineer that whatever the English law might be, we are
bound by the decision of a Division bench of this court, and the decision
relied on is the decision of Sir John Beaumont, Chief Justice, and Mr. Justice
Blackwell in Dhanraj v. Wadia. As Sir John Beaumont says, it was rather a
startling case. It was a claim by the company to include a shareholder whose
shares had been forfeited as a contributor, and the ground on which this
application was made was that the forfeiture was bad because the resolution
making the call was not a valid resolution. The most significant feature of
that case is that as a matter of fact this particular resolution did mention
the time for paying the call. What was not mentioned was the place at which the
payment should be made and the person to whom the payment should be made.
Therefore, strictly, the observations of the learned Chief Justice with regard
to the question of time are obiter, but even so one must respect the observations
of such an eminent Judge as Sir John Beaumont, and let us see whether these
observations really are of help to Mr. Engineer. At page 30 the learned Chief
Justice says:
"As
matter of construction I can see no justification for reading the conditions necessary
to impose inability to pay upon the member into the first part of the article
authorising the directors to make a call."
We
might point out that the articles the learned Chief Justice was considering
were identical with articles 18 and 19. It may be said that these are really
model articles 18 and 19. It may be said that these are really model articles
which are to be found in most articles of association. Then the learned Chief
Justice goes on (page 30):
"It
seems to be that the directors may (as they did in this case) pass a resolution
making a call of a particular amount payable at a particular time, and that
that resolution constitutes a valid call and fixes the date of the call,
although before the payment of the call can be enforced the directors must
appoint the persons to whom and the place where the call is to be made."
Therefore,
the learned Chief Justice emphasises the fact that the resolution constituted a
valid cause because it made a call of a particular amount payable at a
particular time. Then the learned Chief Justice refers to the case of Newry and
Enniskillen Railway v. Edmunds to which we have already referred, and then he
deals with the case of Johnson Lyttle's Iron Agency, and says that he decision
and view of Sir George Jessel M.R. was a direct and a view necessary for
arriving at that decision and that the views expressed by Lord Justice James
were merely tentative views, and then the learned Chief Justice observes at
page 32:
"It
appears to me that that case is a direct authority for the proposition that
under such articles as we have in this case it is not necessary for the
resolution making the call to specify the time for payment, and it would seem
to follow a fortiori that it is not necessary to specify the person to whom or
the place where the call is to be made. I need hardly say that the opinion of
Sir George Jessel as to the construction of articles of association is entitled
to very great weight."
This
is the passage on which Mr. Engineer has very strongly relied, but it must be
borne in mind that the learned Chief Justice was not really concerned with the
aspect of the matter with which we are concerned. He did not have a resolution
before him which did not mention the time of payment. He was concerned with a
resolution where the place at which the payment should be made and the person
to whom the payment should be made were not mentioned, and therefore the
weight, the value, and the validity of this observations really attaches to the
question the learned Chief Justice has to consider with regard to the absence
of the place and the person from the resolution. He then refers to Cawley's
case and he dissents from the view taken by Lord Esher M.R. Unfortunately, with
very great respect to the learned Chief Justice, his dissent does not seem to
have been followed by all the learned text writers on the subject who all seem
to have preferred the views of Lord Esher M.R. to the views of the other Master
of the Rolls Sir George Jessel. Then the learned Chief Justice refers to the
two Indian decisions. First is the judgment of Mr. Justice Taraporewala in
Pioneer Alkali Works v. Amiruddin. In that case Mr. Justice Taraporewala
followed Cawley's case, but the learned Chief Justice distinguished it on the
ground that inasmuch as the amount of the call was not specified in the
resolution, the resolution was bad anyhow. Then there is a subsequent judgment
of a Division Bench in Bhagirath Spinning & Weaving Company v. Balaji,
which follows the judgment of Mr. Justice Taraporewala, and the learned Chief
Justice dismissed the learned Judge's observation by saying that the learned
Judges who decided the case do not mention the terms of the articles which the
court had to construe. Then there is rather an illuminating passage in the judgment
of the learned Chief Justice at page 34:
"But
speaking for myself, I do not think that it is necessary to have a formal
resolution of the directors specifying the person to whom, and the place where,
a call is to be made. These are minor matters of much less consequence to a
shareholder than the fixing of the time for payment, and, as I have pointed
out, Sir George Jessel M.R. in Johnson v. Lyttle's Iron Agency held that even
the fixing of time need not be the subject of a formal resolution, though James
L.J. differed from this view."
Therefore,
the learned Chief Justice himself realised the vital distinction between the
person to whom and the place where a call is to be made and the time for
payment, and really it is on this vital distinction that the text book writers
following Lord Esher M.R. have made a difference in requiring that whereas to
the validity of a resolution the mention of the place and the person is not
necessary, the time for payment is necessary. Again, with respect to the
learned Chief Justice, we are not at all satisfied that if he had to consider a
case of a resolution making a call where the time for payment was not
specified, in view of his observation just referred to he would have come to
the conclusion that the resolution was still valid. It is strictly not
necessary for us to say that we dissent from the view taken in Dhanraj v.
Wadia, because it is not very clear what view the learned Chief Justice takes
on this point. But in any view of the matter, the observations of the learned
Chief Justice, even if they help Mr. Engineer, are clearly obiter and all that
is binding on us is the decision that where the place at which and the person
to whom the call is to be made are not mentioned in the resolution, that does
not affect the validity of the resolution.
If,
therefore, this be the correct view of the law that a resolution making the
call must specify the time of payment, then it is clear that the resolutions on
which the plaintiff company relies are not valid resolutions making a call. The
first resolution of March 3, 1948, merely mentions the amount and the period of
the notice. The second resolution gives the interesting information that the
directors are divided in their view and resolves that the draft notice be
finalised in consultation with the company's solicitors. Therefore, in our
opinion, apart from any other consideration the two resolutions, even taken
together and read together and accepting the view of Mr. Engineer that these
two resolutions make a call, as neither of these two resolutions specifies the
time for making the payment, they fail to make a valid call as required by law.
We
are also in agreement with Mr. Desai that these resolutions suffer from another
infirmity, and that is that they do not decide that the amount of the call
should be paid by instalments. We have already indicated our opinion on a
construction of articles 18 and 19 that the payment of call by instalments is
as essential a feature of a resolution making a call as fixing of time for
payment, and on the evidence of Mr. Samant it is clear that the directors had
not made up their minds nor did they know their minds as to whether the call
should be paid in one sum or by instalments. Therefore, the directors never
resolved that this call should be paid by instalments. Faced with this
difficulty Mr. Engineer has relied on the principle of delegation and his
contention is that the fixing of the time can be delegated by the directors by
a proper resolution to the manager and in his submission the manager has fixed
the time by reason of the power delegated to him. Mr. Engineer advanced the
proposition which seems to us rather startling that there is nothing in law to
prevent the directors from delegating to a manger the power to make a call, and
according to him the directors could leave it to the manager to decide whether
a call should be made at all, when it should be made and what the amount of the
call should be. When one remembers that the power to make a call is in the
nature of a trust and it is to be exercised in the interests of the company, it
is rather difficult to accept the proposition that such an important power
which is vested in the directors could be delegated by them to any one and
could be exercised by any one.
Reliance
was placed on article 130 for this purpose, and that article provides:
"(a) The directors may from time to time entrust to and confer upon a
manager and/or managing director for the time being such of the powers
exercisable under these presents by the directors as they may think fit, and
may confer such powers for such time, and to be exercised for such objects and
purposes, and upon such terms and conditions, and with such restrictions as
they think expedient; and they may confer such powers, either collaterally
with, or to the exclusion of, and in substitution for, all or any of the powers
of the directors in that behalf; and may from time revoke, withdraw, alter, or
vary all or any of such powers."
Mr.
Engineer's contention is that the powers referred to in this article would
include the power of making a call. It is significant that article 115 which
deals with the exercise of powers by the directors at a meeting where a quorum
is present, deals with the authorities, powers and discretions vested in or
exercisable by the directors. In article 125(3) also, which deals with setting
up of a local management outside the place where the head office is situated
the power is given to the directors to delegate to any person appointed a local
manager any of the powers, authorities and discretions for the time being
vested in the directors. But when we turn to article 130, obviously the
intention was to confer upon the directors the right of delegation which was
much narrower in its extent than the one referred to in article 115 or article
125(3). Mr. Engineer says that there is no distinction between the two
expressions used. Now, the normal canon of construction either of a statute or
of articles of association is that when different expressions are used they are
intended to connote something different, and the draftsman of these articles
had article 115 and article 125(3) before him and having used words of the
widest import, when he comes to article 130 he uses an expression of a narrower
application. Clearly the intention must be not to refer to every authority and
every discretion exercisable by the directors under the articles. It would
indeed be a serious view to take that under article 130 the directors could
leave it to the manager to exercise the discretion or exercise the authority
which the articles require they should exercise, and nothing is more patent
than this that the contract between the company and the shareholders which is
embodied in the articles requires that the directors must exercise their
discretion and decide whether a call should be made. We refuse to countenance
the contention that such a power could be delegated by the directors to the
manger or to any one else. But really in a sense this argument is academic. We
only noticed it because it was strenuously urged before us, because as we have
already pointed out even Mr. Engineer concedes that even though there may be a
power of delegation under article 130 of the widest character, when we look at
article 18 and read it with article 19, a call can only be made by a resolution
of the directors, and therefore as far as the making of the call is concerned
that is a power or a discretion or an authority which cannot be delegated to
the manager or to any one else.
It
is then urged that when we look at the second resolution of June 22, 1948, in
effect the directors have fixed time for payment, and therefore even on the
assumption that the fixing of time is essential for the validity of a
resolution of call, the requirement is satisfied. Really, the resolution of June
22, 1948, is very difficult to understand. One thing is clear that the
directors could not make up their minds as to whether the call should be paid
in one sum or by instalments and the time of the payment of instalments. In
view of this position, we fail to understand how it could be seriously urged
that by this resolution the directors fixed the time when the payment of the
call should be made. What is urged is that we must look at the second part of
the resolution which resolves that the draft notice be finalised in
consultation with the company's solicitors, and what is pointed out is that the
evidence of Mr. Samant is that the draft notice which was placed before the
board of directors was on the basis of the call being paid by instalments and
also mentioned the time when these instalments should be paid. We will accept
the evidence of Mr. Samant-there is no reason why we should not-, but even
accepting that evidence it is impossible to take the view that the board of
directors on June 22, 1948, accepted the basis of that notice and concurred
with the view of the manager which seemed to have been given expression to in
the draft notice that the call should be made by instalments and as to the time
when the instalments should be paid. If that had been the position, there was
no reason why the resolution of June 22, 1948, should have proclaimed to the
world the disagreement among the directors, nor was it necessary to resolve
that the draft notice should be finalised in consultation with company's solicitors.
If the basis of the draft notice was accepted, nothing was simpler than to pass
a resolution approving of the draft. But that was not done precisely because
the draft was not approved.
There
is further confusion caused by this resolution because it does not state who is
to finalise the notice. Mr. Samant does suggest that he was given to understand
that he had to go to the solicitors and get the notice finalised. But the
expression "finalised" can only refer to the form and not to the substance.
This part of the resolution does not seem to have left it to the manager to
decide the substance of the notice or to resolve the conflict which was present
among the directors as to whether the call should be paid in one amount or by
instalments. Therefore, if only the finalising in the sense of settling the
proper form was left to the manager, then it is clear that the resolution
expected the notice to come back to the directors for their imprimatur. The
most curious feature of this case is that at no time did the directors ever
express their approval to the substance contained in the notice, substance of
the most vital importance, substance with regard to the payment of the call by
instalments, substance with regard to the time at which those instalments were
to be paid. Nor does this resolution clearly authorise the manager to issue the
notice after it was finalised. Mr. Engineer says that this was merely a
ministerial act and the notice was issued and the notice purports to have been
issued by order of the board of directors. We agree with Mr. Engineer that when
a notice issued by an officer of a company purports to have been issued by
order of the board of directors, there is a presumption that it was issued by
order of the board of directors, there is a presumption that it was issued
pursuant to such an order, and unless the presumption is displaced, the court
must act on that presumption. But what we are dealing with here is the
resolution which is before us and which speaks for itself. We are not concerned
with any authority that the directors might have given to the manager
independently of this resolution. It was therefore not a formal matter for the
directors to decide that the notice should be issued. Having failed to
directors to decide that the notice should be issued. Having failed to agree on
a substantial question, having directed the manager, assuming it was the
manager, to finalise the notice in consultation with the company's solicitors,
it was essential that the board of directors, after the notice was finalised,
should direct the manager to issue the notice. Therefore, in this case this is
not a mere technically but something which goes to the root of the matter,
because it shows clearly that the directors never applied their minds to the
question of the call being payable by instalments or the time the instalments
should be paid.
Therefore,
in our opinion, on the terms of this resolution, even assuming it was open to
the directors to delegate to the manager the fixing of the time and the decision
with regard to instalments, there is no clear delegation established on the
terms of this resolution. If the power of delegation is to be exercised, it
must be clearly exercised. If the directors do not wish to do what the articles
require them to do and leave the doing of it to some one else, they must
clearly resolve to that the directors, assuming they had the power of
delegation, delegated to the manager not only the finalising of the notice in
the sense of seeing that it was in proper form, but the substance of the matter
that he was to decide whether the call was payable by instalments and the time
when the instalments were to be paid. Therefore, the notice issued by the
manager was without authority. Therefore, even on this narrow ground, apart from
the more important ground that we have considered, there was no authority in
the manager, no authority given to him by the directors, to issue a notice
calling upon the shareholders to pay the call by instalments and the time when
those instalments should be paid.
Another
point has been urged by Mr. Desai to which a passing reference might be made.
The original resolution of March 3, 1948, as already pointed out required that
a notice of one month should be given to all the B class shareholders to pay the
call, and Mr. Desai points out that when in fact the notice came to be given on
July 7/9, 1948, the shareholder was called upon to pay the first instalment on
August 5, 1948, which gave him less than one month's notice. It was attempted
to be argued by Mr. Engineer that in law the shareholder could only be
proceeded against when he had failed to pay the last instalment and no
liability would arise till the date fixed for the payment of the last
instalment, and on that basis it was sought to be argued that the notice of
July 7/9, really required the payment in law on November 5, 1948, and not
August 5, 1948, and therefore the notice was a proper notice. Mr. Desai has
rightly drawn our attention to the articles which require calls payable by
instalments to be paid at the due date of every instalment and he has also
pointed out that not only is there a liability upon the shareholder to pay the
instalment on the due date, but the consequence of not paying the instalment on
the due date is the liability to have his share forfeited. Therefore, whatever
the decisions on which Mr. Engineer relies lay down-and those decisions would
only be true with reference to the particular articles there-on the articles
that we have before us it is clear that there is a liability could have been
enforced by the company and therefore Mr. Desai is right that one month's
notice failed to carry out the mandate given by the resolution of March 3,
1948. There are two answers given by Mr. Engineer to this contention. One is
that even assuming the notice with regard to the first instalments is
insufficient, there is no answer with regard to the notice to the second, third
and fourth instalments which are all made payable more than one month after the
notice, and Mr. Engineer also relied on certain English cases for the purpose
of contending that a notice which is irregular does not invalid the call. We
should have thought on first principles that a requirement with regard to a
notice being a concession given to the shareholder by the articles that
concession may be waived, but if it is not waived the requirement of the notice
must be strictly complied with, and as no plea has been made here of a waiver
of the notice by the shareholder, it is difficult to understand how if the
notice is bad the court could uphold the claim for the call. But in our opinion
it is unnecessary to decide the rather interesting question raised by counsel
at the Bar.
Some
faint suggestion was also made by Mr. Engineer that the doctrine of
ratification would come into play in this case and the doctrine of ratification
is relied upon by reason of a resolution to which we have not yet referred
which was passed by the board of directors on September 12, 1949, and that
resolution considered the notice issued by the manager on July 7/9, 1948, and
resolved to adopt and ratify the said notice in the manner, mode and time of
recovering the unpaid balance of Rs. 40 on each B class share. Therefore, this
was the first time, on September 12, 1949, that the directors in their wisdom
considered the notice which had been issued as far back as July 7/9, 1948. It
will be noticed that what has been ratified is the notice and the manner, mode
and time of recovering the unpaid balance of Rs. 40. The resolution does not
even purport to ratify the resolution making the call on March 3, 1948, and the
subsequent resolution of June 22, 1948. It is difficult to understand how, if
the resolution making the call was invalid, it could be subsequently rendered
valid by anything that the directors might do on September 12, 1949. The basis
of the call and the basis of the liability of the defendant is the two
resolutions on March 3 and June 22, 1948. If those resolutions are invalid,
they cannot be rendered valid by the resolution of September 12, 1949. This is
not a case where a valid resolution has been passed by some one lacking the
necessary authority. In that case the persons with the requisite authority may
adopt the resolution validly passed and thereby ratify it. But where the
objection to the resolution is not the want of authority but illegality in the
very making of it, in the very passing of it, then it is impossible to accept
Mr. Engineer's contention that the doctrine of ratification can validate a
resolution which when it was passed was invalid.
Under
the circumstances we are of the opinion that the call was not validly made and
the learned Judge below was right in dismissing the plaintiff's suit. The
result will be that the appeal is dismissed with costs.
[1933] 3 COMP. CAS. 153 (ALL.)
v.
NIAMATULLAH
AND BENNET, JJ.
JANUARY 19, 1933
P.L. Banerji,
M.N. Raina and Govind Das for the Appellant.
Bhagwati Shankar, S.N. Seth,
Niamatullah, J.—This is an appeal from an
order of temporary injunction passed by the learned Additional District Judge,
Cawnpore, in a pending suit brought by the plaintiff-respondents for certain
reliefs to be presently mentioned.
The suit was instituted by eight plaintiffs for
themselves and for plaintiff No. 9, a limited liability company, styled as
Ramchand Gursahaimal Cotton Mills., Ltd., registered under the Indian Companies
Act, of which the first eight plaintiffs claim to be the directors. Eight
persons were impleaded as defendants. B. Panna Lal Burman, defendant No. 8, was
the general manager of the company; but the plaintiffs allege that he was
lawfully dismissed in July 1932. Defendants 1 to 7 claimed to be the directors
of the company—a fact which is denied by the plaintiffs, according to whom most
of the defendants had either never been appointed directors by any lawful
authority or had ceased to be such prior to the institution of the suit. The
plaintiffs' case, as set forth in the plaint, is that the defendants have
practically excluded the plaintiffs from participation in the management of the
affairs of the company, the actual control of the business being with defendant
8, who is in collusion with defendants 1 to 7. The reliefs prayed for in the
plaint include one for a declaration that plaintiffs 1 to 7 are directors of
the company. The position of plaintiff 8 as a lawfully appointed director was
never disputed by the defendants but the plaintiffs pray for a declaration that
plaintiff 8 is also the chairman of the board of directors. A further
declaration is sought to the effect that defendants 1 to 6 are not the
directors of the company and that defendant 8 is no longer the general manager
thereof.
The suit was instituted on August 18, 1932. On
September 3, 1932, the plaintiffs presented an application asking for a
temporary injunction in somewhat indefinite terms. In substance they prayed for
an injunction directing all the defendants to refrain from interfering with the
plaintiff's management of the affairs of the company, defendant No. 8 to
refrain from acting as the general manager of the company and Gur Prasad and
defendant 1, to refrain from acting as the chairman of the board, of directors,
a position which he claimed as against plaintiff 8. The application was
supported by an affidavit, and the parties produced a number of documents which
enabled the learned Additional District Judge to arrive at findings on certain
questions having an important bearing on the plaintiffs' application for
injunction.
That plaintiffs 1 to 7 are directors of the company
is denied by the defendants. If the determination of the question had depended
upon facts seriously controverted, it would not have been desirable for the
court to prejudge the case; but facts, either admitted or proved by
unimpeachable evidence, enabled the learned Judge to determine the question at
an early stage of the case. We were addressed on that question at length and
reference was made to facts admitted or sufficiently proved, and we are in a
position to safely pronounce an opinion on the question already referred to for
the purposes of these proceedings.
If plaintiffs 1 to 7 are found to be the directors of
the company but are being excluded from participation in the management of the
affairs of the company by the defendants, it is clear that there is a
continuing invasion of the plaintiffs' rights, and the case is a fit one in
which the court should grant a temporary injunction to prevent what is undobutedly
an injury to the plaintiffs, rights. It has not been argued by the learned
advocate for the defendants that the court has no power, in the circumstances
of the case, to grant a temporary injunction. Order 39, Rule 2 of the Code of
Civil Procedure, which is clearly applicable, gives very wide power to the
court to give protection against injury to the plaintiffs during the pendency
of suit.
Under the articles of association of the company the
maximum number of directors should be nine, with a minimum of five. It is
common ground that prior to March 29, 1930 the following seven persons were the
directors of the company:—
(1) R.B. Vikramajit Singh, plaintiff No. 8. (2) B.
Dwarka Prasad Singh, defendant No. 6 (3) B. Ram Gopal, defendant No. 7. (4) B.
Parshotam Das, since deceased. (5) L. Ram Kumar, plaintiff No. 6. (6) B. Behari
Lal, defendant No. 5, and (7) B. Sri Ram Khanna, since resigned.
Parshotam Das died sometime before March 29, 1930, so
that there were only six directors left, and three more could be appointed.
Three new directors were elected by the Board of directors on that date. They
were Mr. Gur Prasad Kapoor, defendant 1, Mr. Ranjit Singh, plaintiff 2, (who is
the son of R.B. Vikramajit Singh, plaintiff 8) and Mr. Sri Kishen Khanna.
Sometime afterwards, but before the next general meeting of the shareholders,
Sri Kishen Khanna resigned. On March 21, 1931, L. Harcharan Das, defendant 2,
was elected by the board of directors in place of Sri Kishen Khanna. The
general meeting of the shareholders took place on April 18, 1931, when the
appointment of Gur Prasad, Ranjit Singh and Harcharan Das was brought up for
confirmation. Gur Prasad and Harcharan Das were duly elected by the
shareholders, but Ranjit Singh was not. It should be mentioned at this stage
that the election of a person by directors as a director entitles him to hold
office till the next general meeting; while if he is elected at the general
meeting of the shareholders, he is entitled to hold office for three years.
Sri Ram Khanna, who was an old director, resigned
sometime before February 6, 1932, on which date the Board of directors elected
Rameswhar Prasad Bagla, plaintiff 1, and Ranjit Singh, plaintiff 2, to fill the
two vacancies which existed: one in consequence of the resignation of Sri Ram
Khanna, and the other in consequence of Ranjit Singh not having been elected at
the general meeting of the shareholders. There was some controversy as regards
the legality of this election. It was urged as against Ranjit Singh that he,
having been rejected by the shareholders, was not eligible for re-election by
the directors. Nothing definite was urged as against Rameshwar Prasad Bagla. We
do not think that any flaw exists in the election of Ranjit Singh by the
directors on February 6, 1932 in view of the provisions of Rule 100 of the
Articles of Association. The circumstance that he failed to secure his election
at the general meeting merely implied that he was not elected for a longer
term. It did not, in any way, detract from the authority of the directors to
co-opt him for the limited time which would expire on the next general meeting.
An extraordinary general meeting of the shareholders
was convened on February 14, 1932. One of the resolutions moved at that meeting
was that the number of directors be increased to sixteen. The resolution was
carried, and the plaintiffs 1 to 5 were elected directors for a full term of
three years. It is not disputed by the plaintiffs that this resolution was not
a "special resolution" within the meaning of Section 81 of the Indian
Companies Act. A special resolution to be valid must be confirmed at a
subsequent meeting. Section 20 of the Indian Companies Act lays down that no
alteration in the Articles of Association can be made except in pursuance of a
special resolution. The learned abvocate for the appellants contended that, in
so far as the increase in the number of directors involved an alteration of
Article 98 of the Articles of Association, it should have been sanctioned by a
special resolution and that, in the absence of such a resolution, the number of
directors could not be increased. Article 98 is worded as follows:—
'Until otherwise determined by a general meeting, the
number of directors shall not be less than five, nor more than nine.'
Having carefully considered the argument addressed to
us , on behalf of the appellants, I think that merely increasing the numbers of
directors does not involve any alteration in Article 98, which itself gives
latitude to the shareholders in that respect. The words "Until otherwise
determined by a general meeting" clearly imply that it was open to the
shareholders to alter the number of directors mentioned in Article 98. If the
shareholders do alter it, their action is in pursuance of Article 98 and not
otherwise. If the contention put forward on behalf of the appellants be
accepted, the article will have to be read as if the aforesaid words were not
part of it. No clear authority was quoted in support of the view urged on one
side or the other. The cases that were referred to in course of the argument
are those in which the question did not directly arise and no opinion was
definitely expressed. It is, therefore, unnecessary to examine them in this
connection. In my opinion the right construction of the articles is, as already
indicated, that it is open to the shareholders to vary the number of directors
therein referred to without in any way necessitating an alteration in the
article itself. In the view of the case I have taken, it must be held that
plaintiffs 1 and 2, who had been previously elected by the directors at their
meeting of February 6, 1932, and plaintiffs 3 to 5 were validly elected for the
normal term at the general meeting of shareholders held on February 14, 1932.
The learned Additional District Judge has taken a different view on this part
of the case, but the above conclusion affords an additional ground in support
of his order.
Another crucial point in the case relates to what
transpired on June 25, 1932, and April 22, 1932. At a meeting of directors held
on the former date, it was resolved that R.B. Vikramajit Singh, plaintiff 8, be
authorised by a power of attorney to be executed by two of the directors named
in the resolution, "to appoint at his discretion, remove, or suspend
agents, secretaries, managers, officers, clerks and servants of the
company." Such power of attorney was, in fact, executed, and Mr.
Vikramajit Singh passed an order dismissing B. Panna Lal Burman, defendant 8,
who was the general manager. On July 22, 1932, the directors themselves passed
a resolution terminating the services of B. Panna Lal Burman as general
manager. The plaintiffs' case is that defendant 8 ceased to be the general
manager on the order of dismissal passed by Mr. Vikramajit Singh and, at any
rate, on July 22, 1932, when the directors resolved to that effect. As regards
the resolution of the directors passed on July 22, 1932, dismissing defendant
8, it is pointed out by the defendants that no notice of the meeting was given
to some of the directors, particularly defendants 1 and 2. It is not necessary
to consider the legality or otherwise of the directors' resolution of July 22,
1932, in reference to defendant 8, as the resolution of July 22, 1932,
authorising two of their numbers to execute a power of attorney in favour of
R.B. Vikramajit Singh, authorising him to dismiss servants of the company,
coupled with what happened in pursuance thereof is enough to make out the
plaintiffs' case as against defendant 8. It cannot be disputed that the board
of directors had power to terminate the services of any of the company's
servants. It is equally undeniable that they could delegate their power in this
respect to one of themselves acting as their agent. There is no flaw in the
argument addressed to us on behalf of the plaintiffs, namely, that the two
director who executed a power of attorney, had the power to do so and that R.B.
Vikramajit Singh became vested with the authority which was conferred on him by
the power of attorney. This being so, his order terminating the services of
defendant 8 as general manager is unquestionable, and defendant 8 ceased in law
to be the general manager of the company from the date of that order. It is, of
course, true that some other persons, who were either directors or claimed to
be such, took a different view and continued to recognise defendant 8 as the
general manager, who has had the control of the affairs of the company up to
date. We are, however, concerned with the legal aspect of the matter and as
already indicated, defendant 8 was lawfully dismissed by the order of R.B.
Vikramajit Singh.
July 16, 1932 is another eventful date. A general
meeting of shareholders took place on that date. A meeting of directors had
also been fixed for that date to be held at 2 p.m., at the registered office of
the company. Defendants 1 and 2 issued a notice calling another meeting of the
directors to be held at 1-45 p.m. at the residence of L. Gur Prasad
Kapoor, defendant 1.
It is in evidence that the meeting which was to be
held at the registered office of the company had been decided on several days
before July 16, 1932, and due notice thereof had been given to all the
directors. Of the other meeting, convened by the defendants' party, very short
notice was given to some directors and none to those who had been elected on
February 14, 1932. Apparently the defendants did not recognise them as lawfully
elected directors, as they have now been found to be. The meeting cannot,
therefore, be considered to be that of the directors of the company and any
resolutions passed at such meeting cannot be deemed to be valid. The question
assumed importance because at the meeting of the directors held at the
registered office of the company defendant 1 L. Gur Prasad Kapoor, defendant 5,
B. Behari Lal, and defendant 6 B. Dwarka Prasad, were declared to have retired
according to the rule of retirement by rotation. At the meeting held at the
residence of defendant 1, Gur Prasad Kapoor, defendant 1 was elected chairman
of the board of directors, while at the other meeting R.B. Vikramajit Singh was
elected chairman of the board of directors. One of the important questions
raised in the case is whether R.B. Vikramajit Singh is the chairman. Reference
has already been made to the fact that Mr. Gur Prasad Kapoor and L. Harcharan
Das, who called the meeting of directors held at the residence of the former,
did not send notices to plaintiffs 1 to 5, who in my view had been duly elected
on February 14, 1932, and, as already held, no resolution passed at that
meeting can be regarded as valid and binding. In this view, Gur Prasad Kapoor,
defendant 1, cannot be considered to have been duly elected as chairman. As
regards the meeting held at the registered office of the company, no flaw has
been suggested. The meeting had been duly called. There was a quorum, and the
directors had the power to elect one of their number as the chairman. In these
circumstances, R.B. Vikramajit Singh, plaintiff 8, should be considered to have
been duly elected as the chairman of the board of directors.
On the same day, July 16, 1932, a general meeting of
shareholders was held at which Lalas Behari Lal, defendant 5, Dwarka Prasad,
defendant 6, and Gur Prasad Kapoor, defendant 1, were declared to have retired
in accordance with rules, as had been done at the meeting of the directors. The
question whether these persons were in fact due to retire, as was declared at
the meetings of directors and shareholders held on July 16, 1932, is highly
controversial, and it is not desirable to express a definite opinion on it. That
question will have to be decided after the entire evidence, oral and
documentary, have been examined by the lower court.
L. Kamlapat and L. Balmakund Burman, defendants 3 and
4, claim to be the directors by virtue of a resolution passed at the meeting of
directors held at the residence of L. Gur Prasad Kapoor, defendant 1, on July
16, 1932, the regularity of which has been already considered in relation to
the appointment of L. Gur Prasad, as chairman of the board of directors. For
the same reasons, defendants 3 and 4 cannot be considered to have been fully
elected directors of the company.
The learned advocate for the appellants impugned the
elections held on February 6, and 14, 1932, also on the ground that the
proceedings on those dates had not been taken in good faith to further the
interests of the company but had been designed merely to give a clear majority
to the party of R.B. Vikramajit Singh. His contention was that any proceeding,
not taken in good faith for advancing the interests of the company, is invalid
in law. The propositions involved in this contention are of facts and law. It
is not possible to examine them at this stage and to pronounce a definite
opinion as to whether or not the proceedings on February 6 and 14, 1932, had
been taken bona fide, and whether, as the law stands, they were illegal, even
though they were not characterised by any error of procedure. This is a
question which will have to be decided by the trial court, if it is persisted
in. Similarly, it cannot be held at this stage that L. Kishan Lal, plaintiff
No. 7, who claims to be the director under a resolution passed at the meeting
of July 22, 1932, was validly elected on that date, as the legality of that
meeting is in issue and cannot be satisfactorily examined in these summary
proceedings.
The result is that the plaintiffs 1 to 6 and 8 and
defendants 2 and 7 may, subject to what the court may eventually decide and for
the purposes of these proceedings, be accepted as directors. Defendants 3 and 4
cannot be accepted as such. The position of defendants 1, 5 and 6 is
problematical and is left to-be decided after the trial of the case. The
plaintiffs 1 to 6 and 8 are entitled to discharge their duties as directors of
the company and the defendants have no
right to do anything which may amount to an infringement of their right. I have
also found that B. Panna Lal Burman, defendant 8, ceased to be the general
manager sometime in June 1932. The suit, which is pending before the learned
Additional District Judge, may have protracted trial: and in the meantime,
unless a temporary injunction is granted, the plaintiffs will not be allowed by
the defendants to participate in the management of the affairs of the company.
In my opinion a case has been made out for the exercise by the court of its
powers under under Order 39 Rule 2 of the Code of Civil Procedure.
The terms in
which the injunction has been prayed for by the plaintiffs are somewhat vague
and indefinite. The learned Judge has granted an injunction in terms of the
application. I think he meant to pass the same order substantially as I think
should be passed. In my opinion the injunction should be in precise terms.
Accordingly I direct the defendants to refrain from interfering with the
discharge by the plaintiffs 1 to 6 and 8 of their duties, and with the exercise
by them of their powers, as directors of the Ramchand Gursahaimal Cotton Mills
Co., Ltd. I direct B. Panna Lal Burman, defendant 8, to refrain from performing
the functions of the general manager. I further direct the defendants to
refrain from interfering with R.B. Vikramajit Singh, plaintiff 8, in performing
the function of the chairman of the board of directors. B. Gur Prasad,
defendant 1, is directed to refrain from acting as chairman of the board of
directors. Subject to the directions set out above, I confirm the order
appealed from and dismiss this appeal with costs.
Bennet, J.—I agree with the judgment of my learned
brother and desire to add a few words on the argument of the appellants on
Article 98 of the Articles of Association. The appellants correctly pointed out
that, under Section 20 of the Indian Companies Act, any alteration or addition
to the Articles of Association must be by a special resolution. The chief
points about a special resolution are that, under Section 81 of the Indian
Companies Act, a special resolution must be passed by a majority of not less
than three-fourths of the members entitled to vote at a general meeting, and
the special resolution must be confirmed by a majority of the members entitled
to vote at a subsequent general meeting under certain conditions of
notice. The Act draws a distinction between the matters which are to be dealt
with by special resolutions and the ordinary matters. The matters which are to
be dealt with by special resolutions are those which relate to the constitution
of the company, that is, its articles of association. The question before us is
whether there was alteration or addition to Article 98 by the resolution passed
at the general meeting of February 14, 1932. The article states that, until
otherwise determined by a general meeting, the number of directors shall not be
less than five, nor more than nine. The resolution altered the maximum from 9
to 16. The argument for the appellants is that, by this alteration, the article
has been altered. No direct authority was shown for this proposition. There are
the following reasons to consider that the raising of the maximum is not an
alteration of the article:—
Firstly, the increase in the number of directors is
not a matter which the Act lays down in any part as requiring a special
resolution. On the contrary, we find in Schedule 1, Table A, Regulation 83, the
following provision:—
"The company may from time to time in general
meeting increase or reduce the number of directors..."
The lower court took a peculiar view that this Table
A was no part of the Act; but in Section 17, Sub-section 2, it is stated that
articles of association may adopt all or any of the regulations contained in
Table A in the First Schedule. I consider that there is an analogy between this
Regulation 83 of Table A and the Article 98 in question. It is true that
Regulation 83 does not lay down the number of directors; but there is a
provision in Regulation 68 that the number of directors shall be determined in
writing by a majority of the subscribers of the memorandum of association.
Regulation 83, therefore contemplates a change being made in the original
number of directors, and that change to be made by a general meeting and not by
a special resolution.
Another authority against the appellants is Palmer's
Company Precedents, 13th Edition, 1927, Part I, page 698, where there is a
specimen of one of the articles of association exactly similar to Article 98.
This specimen says,
"Until otherwise determined by a general
meeting, the number of directors shall not be less than three or more, than
seven."
This article
gives the English practice, and apparently under this article the number of
directors is altered by a general meeting, as a note given by Palmer states
that there is only a doubt in the absence of the first seven words as to
whether a special resolution is necessary. Palmer, therefore, considers that,
when these first seven words were present, there was no doubt that a general
meeting could make the alteration required.
Lastly, in
regard to the ruling quoted by the lower court, Navnitlal Chabildas v. Scindia
Steam Navigation Co., Ltd., that ruling has been reported more fully in 29 Bom.
L.R. 1362. In the Law Reporter the terms of the article in question are given,
and we find that the words "unless otherwise determined by a general
meeting" do not appear in the article which was the subject-matter of that
case. That case, therefore, is no authority for the case before us.
For these
reasons I consider that the number of directors was validly altered by the
resolution of the general meeting of February 14, 1932.
By the Court—We
grant an injunction to the plaintiffs directing the defendants to refrain from
interfering with the discharge by the plaintiffs 1 to 6 and 8 of their duties,
and with the exercise by them of their powers, as directors of the Ramchand
Gursahaimal Cotton Mills Co., Ltd., and directing B. Panna Lal Burman,
defendant 8, to refrain from performing the function of the general manager.
The defendants are further directed to refrain from interfering with R. B.
Vikramajit Singh, plaintiff 8, in performing the functions of the chairman of
the board of directors. B. Gur Prasad, defendant 1, is directed to refrain from
acting as chairman of the board of directors. Subject to the directions set out
above, we confirm the order appealed from and dismiss this appeal with costs.
[1959] 29 COMP CAS 501 (BOM.)
v.
Kamani
Brothers Private Ltd.
MODI, J.
SUIT NO. 300 OF 1957
JANUARY 6, 1958
MODY, J. - This is a
suit filed by the plaintiff, who admittedly was one of the joint managing
directors and a director of the first defendant company, against the first
defendant company and his co-directors for a declaration that the resolution
dated 23rd September, 1957, passed by the board of directors of the first
defendant company is inoperative and that the plaintiff continues to be the
joint managing director and is entitled to act as such managing director and to
exercise all rights and powers to carry out all duties assigned to him as such
managing director.
The
facts relevant to the decision of the disputes herein are not in dispute, with
the result that no oral evidence whatever has been led. The only evidence led
is documentary evidence, the same being relevant and necessary for the purpose
of the decision herein. It is therefore not necessary to set out the
contentions as contained in the pleadings of the parties. It will suffice to
set out the facts which give rise to the disputes herein.
The
first defendant company is a private limited company. At all relevant times the
plaintiff and the defendants Nos. 2 to 8 have been directors of the first
defendant company. The first defendant company are the managing agents of two
public limited companies being the Kamani Metals and Alloys Ltd. and the Kamani
Engineering Corporation Ltd. The plaintiff and the eighth defendant are
directors of another private limited company called the Shanta Brothers Private
Ltd., the plaintiff being also the chairman of the board of directors, thereof.
A finance agreement which is recorded in writing dated 14th May, 1954, was
arrived at between the said Shanta Brothers Private Ltd. and the first
defendant company, whereby the former agreed to lend to the latter a sum of Rs.
28 lakhs on the terms and conditions recorded in that writing. That agreement
in writing is exhibit F before me.
Under
the finance agreement the first defendant company agreed, inter alia, to pledge
in favour of the said Shanta Brothers Private Ltd. 4500 ordinary shares of the
first defendant company along with the pledge of certain other shares and an
equitable mortgage of certain immoveable properties. Clauses 7(b), (c) and (e)
of the said finance agreement run as follows :
"7.
So long as moneys advanced by the lenders to the borrowers under these presents
or any interest thereon shall remain unpaid the borrowers shall ...
(b)
have subject to the approval of the Central Government if required one
representative nominated by the lenders and approved by the board of directors
of the borrowers appointed as a director on their board of directors with a
monthly remuneration of rupees one thousand and five hundred and all such
allowances as are allowed by the borrowers to their other directors in the same
manner and to the same extent and such remuneration and allowances shall be
paid to him so long as he takes active interest as a director in the management
of the affairs of the borrowers and of the said Kamani Metals and Alloys Ltd.
and Kamani Engineering Corporation Ltd. of which the borrowers are the managing
agents and such appointment shall be made immediately after the first advance
is made by the lenders under these presents and such remuneration shall
commence from the date of the first advance. Provided, however, that if any
such representative shall be a brother of Major General Shamsher Jung Bahadur
Rana, the chairman of the lenders or any relative or member of his family then
and in such cases he will not be required to be approved by the board of
directors of the borrowers;
(c)
get subject to the approval of the Central Government if required Major General
Shanta Shamsher Jung Bahadur Rana the chairman of the lenders or any other person
nominated by the lenders appointed as a director on the boards of Kamani
Brothers Ltd., Kamani Metals and Alloys Ltd. and Kamani Engineering Corporation
Ltd. Provided that no person nominated by the lenders and not being a relative
or a member of the family of the said Major General Shanta Shamsher Jung
Bahadur Rana shall be appointed as such director unless he is approved of by
the respective board of the said Kamani Brothers Ltd., Kamani Metals and Alloys
Ltd. and Kamani Engineering Corporation Ltd. on whose respective boards he is
to be appointed a director;
(e)
see that the respective holders of the said shares shall cast their votes at
any meeting of the said Kamani Brothers Ltd., Kamani Metals and Alloys Ltd. and
Kamani Engineering Corporation Ltd. in accordance with the directions of the
lenders and not otherwise and give their proxies to such person or persons as
they the lenders may nominate and procure to the lenders an undertaking in that
behalf from the respective holders of the said shares."
In
pursuance of the said finance agreement the said Shanta Brothers Private Ltd.
lent and advanced to the first defendant company the aggregate sum of Rs. 28
lakhs and created the stipulated pledge and equitable mortgage. Towards the end
of February, 1956, the said Shanta Brothers private Ltd. nominated and the
first defendant company accepted the plaintiff as a director of the first
defendant company under the provisions of clause 7(b) of the said finance
agreement and similarly the said Shanta Brothers Private Ltd. nominated and the
first defendant accepted the eighth defendant a director under the provisions
of clause 7(c) of the said finance agreement. The said respective appointments
of the plaintiff and of the eights defendant became effective as from 1st
March, 1956. On the 2nd of March, 1956, the board of directors of the first
defendant company passed a resolution (exhibit 2) which provides as follows :
"Resolution
No. 372 :
Resolved
that Major General Shanta Shamsher Jung Bahadur Rana be and is hereby appointed
in the whole-time services of the company on a monthly remuneration of Rs.
2,000 from March 1, 1956, in the grade of Rs. 2,000-10-2500-plus rent free
house."
On
the 1st of April, 1956, the Indian Companies Act, 1956, came into operation. As
the plaintiff held an office of profit and as section 314 of the said Act
required that the plaintiff could not hold the said office of profit except
with the provisions consent of the first defendant company accorded by a
special resolution, a special resolution was passed at a general meeting of the
first defendant company held on March 29, 1956, according such consent. The
appointment of the plaintiff under the said resolution of the board of
directors dated March 2, 1956, became effective from April 2, 1956. The second
defendant was then the managing director of the first defendant company and he,
under his signature, issued a memorandum on behalf of the first defendant
company dated March 2, 1956 (exhibit A) stating that it had been decided that
the plaintiff would, in addition to the Secretarial and Legal Department, look
after the General Department with the functions mentioned in the said
memorandum.
On
June 15, 1956, the board of directors of the first defendant company passed a
resolution (exhibit 3) whereby the plaintiff who was then a director was
appointed as executive director of the first defendant company. Thereafter on
June 27, 1956, the second defendant as the managing director of the first
defendant company issued on behalf of the first defendant company a circular
stating that the plaintiff had been designated as the executive director of the
first defendant company on and from June 15, 1956, and that the functions and
powers of the executive director would be circulated in due course.
On
September 26, 1956, the eleventh ordinary general meeting of the shareholders
of the first defendant company passed a special resolution whereby the then
existing articles 99 and 100 of the articles of association of the first
defendant company were amended. The said amended articles run as follows :
"99.
Directors may appoint managing directors and/or executive director. The
directors may from time to time appoint any one or more of their body to be
managing director or managing directors and or executive director for such
period and upon such terms as they think fit, and may vest in such managing
director or managing directors and/or executive director such of the powers
hereby vested in the directors generally as they may think fit and such powers
may be exercisable for such period or periods and upon such conditions and
subject to such restrictions, and generally upon such terms as to remuneration
and otherwise as they may determine. The remuneration of a managing director
and/or executive director may be by way of salary or commission or
participation in profits, or by any or all of those modes."
"100.
Special position of managing director and/or executive director.
A
managing director or managing directors and/or executive director shall not
while he continues to hold that office be subject to retirement by rotation and
he shall not be taken into account in determining the rotation and he shall not
be taken into account in determining the rotation of retirement of directors,
but he shall, subject to the provisions of any contract between him and the
company be subject to the same provisions as to recognition and removal as the
other directors of the company and if he ceases to hold the office of director
he shall ipso facto and immediately ceases to be a managing director."
The
memorandum and articles of association of the first defendant company are
exhibit 1 before me. Both the original and the amended articles 99 and 100 are
to be found in exhibit I. The original articles 99 and 100 made a provision for
"a managing director or managing directors." The only amendment made
in the said two articles by the said resolution dated September 26, 1956, is
the addition of the words "and/or executive director "wherever they
appear after the words "a managing director or managing directors" in
the above amended articles.
On
June 24, 1957, the board of directors of the first defendant company held a
meeting and the relevant portions of the minutes of the said meeting have been
put in as exhibit 4. As appearing from the said minutes, the board passed a
resolution which reads as follows :
"Resolved
that the responsibilities of the management be divided between the managing
director who will look after the work of Kamani Metals and Alloys Ltd. this
company and its associates and the executive director who will look after the
work of Kamani Engineering Corporation Ltd. including its branches and other
activities thereto.
It
is further resolved that the executive director be designated as joint managing
director."
As
a result of this resolution the second defendant was designated as a managing
director and the plaintiff as a joint managing director of the first defendant
company. The responsibilities of the management were divided between them and
the second defendant was to look after the said Kamani Metals and Alloys Ltd.
the first defendant company and its associates and the plaintiff was to look
after the work of Kamani Engineering Corporation Ltd. By his memorandum
(exhibit C) dated June 28, 1957, issued by the second defendant gave intimation
of the passing of the said resolution dated June 24, 1957, and also intimated
that the managing director would look after the work of the Kamani Metals and
Alloys Ltd. the first defendant company and its associates and that the
plaintiff as a joint managing director would look after the work of the Kamani
Engineering Corporation Ltd. with immediate effect.
A
meeting of the board of directors of the first defendant company was scheduled
to be held on September 21, 1957. An agenda for the said meeting as also a
supplementary agenda for the same were circulated amongst the directors of the
first defendant company. The said agenda and the supplementary agenda have been
put in as exhibit D collectively. In view of the case as argued such agenda and
supplementary agenda are not at all relevant. For certain reasons which are not
relevant the said board meeting stood adjourned to September 23, 1957.
On
September 23, 1957, the said adjourned board meeting was held. Agreed portions
of the minutes of that meeting have been put in as exhibit 5. As appearing from
the said minutes the said meeting passed the following resolution :
"In
view of the consensus of opinion of the majority of the board of directors that
the arrangements earlier resolved of division of responsibilities between the
managing director and joint managing director having not worked as desired by
the resolution dated June 24, 1957, the resolution of the board of directors
dated June 15, 1956, appointing General Shanta Shamsher J.B.R. as the executive
director of the company and the resolution dated June 24, 1957, appointing
General Shanta as joint managing director of the company be and are hereby
superseded and revoked. Further resolved that Shri P. K. Kamani do act as sole
managing director of the company and as such he is hereby vested with all the
powers of the board of directors under the articles of association of the
company under the law delegatable, and he do accordingly exercise the
same."
It
is this resolution the validity whereof has been challenged in this suit. A
glance at the minutes of this meeting dated September 23, 1957, shows that the
plaintiff and defendants Nos. 7 and 8 were on one side supporting the plaintiff
and the other directors being defendants Nos. 2 to 6 were on the other. Even at
the hearing of this suit also the defendants Nos. 7 and 8 have supported the
plaintiff whereas defendants Nos. 1 to 6 have opposed the plaintiff. What
transpired at the said board meeting was circularised by the third defendant as
the chairman of the first defendant company by his circular dated September 23,
1957, (exhibit E), but the same is not relevant for the purpose of this case.
The
only other document exhibited in this case is exhibit 6 which is a copy of the
plaint in the Bombay City Civil Court, Suit No. 2851 of 1951, wherein the
plaintiff and the seventh defendant are plaintiffs and defendants Nos. 1 to 6
and the eights defendant are the defendants. As stated in that plaint (exhibit
6) the subscribed and paid up capital of the first defendant company is Rs.
15,00,000 divided into 15,000 ordinary shares of Rs. 100 each. Out of the said
15,000 shares the seventh defendant owns 50 shares and the remaining 14,950
shares are held by the defendants Nos. 2 to 6 and their relations and nominees,
who form, what may be called, "the Kamani group." Out of the said
14,950 shares 4,500 shares have been pledged as afore-stated to the said Shanta
Brothers Private Ltd., and by reason of the provisions of clause 7(e) of the said
finance agreement the voting rights in respect of 4,500 shares are controlled
by the said Shanta Brothers Private Ltd., of whose board of directors the
plaintiff is the chairman are the eights defendant is a member.
It
is common ground that at all relevant times as also at present the Kamani group
controlled the voting rights in respect of 10,450 shares whereas the group of
the plaintiff and the defendant Nos. 7 and 8 effectively control the voting
rights in respect of 4,550 shares.
At
the hearing of the suit, after the pleadings were read, five issues only were
raised originally, the same being as suggested by Mr. Munshi on behalf of the
first defendant company. The respective counsel appearing for the defendants
Nos. 2 to 6 joined in these issues. A reading of the pleadings shows that the
same contains statements of fact on which the plaintiff wants to rely. But
there are very few submissions of law which would clearly indicate what exactly
is the plaintiff's cause of action. Undoubtedly it was not necessary that the
plaint should contain any submissions of law. The result, however, was that the
contesting defendants did not know that what would be the exact cause of action
which the plaintiff would formulate at the hearing on the basis of this plaint.
Paragraph 17 of the plaint does contain certain submissions of law on behalf of
the plaintiff. From these submissions and the prayers in the plaint at least
one thing is clear, viz., that the plaintiff challenged the said resolution
dated September 23, 1957, passed by the board of directors of the first
defendant company as being ultra vires the board of directors. Now, it should
be remembered that the plaintiff is not a shareholder of the first defendant
company, but was a special director of the first defendant company appointed
because of the provisions of the said clause 7(c) of the said finance
agreement. Not being able to ascertain from the plaint the exact cause of the
action which the plaintiff would make out at the hearing and as the plaintiff
was not a shareholder but still challenged the said resolution dated September
23, 1957, as ultra vires, certain technical defences were taken in paragraphs
1, 2 and 3 of the written statement of the first defendant to the effect that
the suit as framed is not maintainable. That contention is the subject-matter
of issue No. 1. The burden so far as issue No. 1 is concerned being on the
contesting defendants, Mr. Munshi the learned counsel for the first defendant
company argued first, confining his arguments to that issue only. Mr. Munshi
argued that the suit is not maintainable because courts have no jurisdiction to
interfere with the internal management of the company, that if the company acts
ultra vires, i.e., outside the ambit of its memorandum of association or in
defiance of its articles, the shareholder under certain circumstances is
entitled to have the act declared void and seek relief to compel the company to
act within its powers, that no such suit would lie even at the instance of a
shareholder in respect of unauthorised acts of the directors if the company
could ratify the same and that no such suit can lie at the instance of a person
who is not a shareholder as the cause of action of a non-member can only be in
breach of contract or tort, his remedy being in damage. Mr. Munshi further
argued that when a non-member is appointed a managing director the same amounts
only to a contract of employment and in such an event the appointment of the
managing director would be under that contract, but that no such contract,
express or implied, has been mentioned in the plaint. He cited several
authorities in support of his contentions and developed his point as to why the
suit was not maintainable. Thereafter Mr. Bhatt, the learned counsel for the
plaintiff, opened the case of the plaintiff and pointed out what according to
the plaintiff is the cause of action in this suit. According to him this suit
is under section 42 of the Specific Relief Act, that the plaintiff is entitled
to a "legal character" that that legal character of the plaintiff had
been denied and that therefore the plaintiff is entitled to the declaration and
injunction prayed for. He stated that the cause of action as read in the plaint
by Mr. Munshi was not the correct cause of action. Inasmuch as Mr. Munshi had
however advanced the said arguments, Mr. Bhatt advanced an argument to
distinguish the same by stating that the wrong complained of in the plaint was
an individual wrong, that the arguments advanced and the authorities cited by
Mr. Munshi had no application and that therefore the plaintiff was in any event
entitled to maintain the suit. In support of this contention that the wrong
suffered by the plaintiff was an individual wrong and that, therefore the
plaintiff was in any event entitled to maintain the suit Mr. Bhatt cited
another string of authorities. When Mr. Bhatt however stated that the only
cause of action, according to the plaintiff, was under the said section 42 of
the Specific Relief Act, Mr. Munshi pointed out that in view of that contention
of the plaintiff his own earlier contentions were no longer necessary.
Thereupon Mr. Bhatt stated that if Mr. Munshi was not relying upon his said
contentions in support of issue No. 1 it was no longer necessary for the
plaintiff to rely upon the said contention about the suit being maintainable
and the wrong which the plaintiff had suffered being an individual wrong. The
position that emerges is that issue No. 1 is now confined to the only cause of
action stated by Mr. Bhatt as having been made out in the plaint, viz., the one
under the said section 42 of the Specific Relief Act.
No
oral evidence has been led and only certain documentary evidence has been
tendered and admitted. On behalf of the various parties arguments were
addressed by their respective counsel. As arguments developed and proceeded
from time to time it became apparent that the issues as originally framed were
not adequate. As the arguments progressed applications were made on several
occasions for framing additional issues. I have separately noted such
application as and when made and my orders thereon. As a result of these
applications several issues have been added from time to time. What now appear
as issues Nos. 6, 7 and 8 were added first. Thereafter issue No. 9 was added and
thereafter the said issue No. 8 was amended and two more issues were added, the
same being issues Nos. 10 and 11. When issues Nos. 6,7 and 8 were added, it was
contended by some of the parties that the addition of those issues may
necessitate the taking of further evidence. It appeared to me, however, that
the addition of those issues was merely for crystallising the contentions which
emerged from the arguments of counsel and that no further evidence would be
necessary. As some of the parties, however, contended that they may have to
lead further evidence, I specifically gave liberty to all parties to lead
further evidence if the same was relevant and necessary. I should record
however that thereafter none of the parties applied for leading any further evidence,
either oral or documentary, and that as a matter of fact towards the conclusion
of the hearing I had to ask the parties whether any of them desired to lead
evidence in pursuance of the said liberty given by me in that behalf. And it
was at that stage that counsel stated that none of them desired to lead any
further evidence.
The
first point for consideration is whether the plaintiff is entitled to a
"legal character" within the meaning thereof in section 42 of the
Specific Relief Act. The said section 42 provides that any person entitled to
any legal character, or to any right as to any property, may institute a suit
against any person denying, or interested to deny, his title to such character
or right. This section therefore applies when a person is entitled to any legal
character or to any right as to any property. The phrase "legal
character" occurs in two statutes, viz., in section 42 of the Specific
Relief Act and in section 41 of the Indian Evidence Act, but that phrase has
not been defined in either of the said two Acts. There appears to be no decided
case which defines "legal character" or lays down general principles
for determining the same. I will therefore first reproduce the arguments of Mr.
Munshi and Mr. Bhatt as to what is legal character and the proceed to see
whether it is possible to define what is "legal character" or whether
there are any general principles which would help in determining what is
"legal character."
Mr.
Bhatt in his opinion relied upon paragraphs 9 to 14 of the plaint and exhibits
3, B, articles 99 and 100 of the articles of the first defendant company
(exhibit I), and exhibits 4 and C. He pointed out that as stated in paragraph 9
of the plaint and shown by exhibits 3 and B, the plaintiff was appointed
executive director from 14th June, 1956, and acted as such and that as stated
in paragraphs 12 and 13 of the plaint and exhibits 4 and C the plaintiff was
appointed joint managing director on 24th June, 1957, and acted as such. He
also referred to section 2(26) of the Indian Companies Act, 1956, which states
that "managing director" means a director who by virtue of an
agreement with a company or by a resolution passed by the company in general
meeting or by its board of directors or by virtue of its memorandum or articles
of association, is entrusted with any powers of management which would not
otherwise be exercisable by him and includes a director occupying the position
of a managing director, by whatever name called.
He
contended that under the circumstances the plaintiff was appointed and acted as
managing director and was entrusted with certain powers as such managing
director and that therefore the plaintiff was entitled to a "legal
character" within the meaning thereof in the said section 42. By way of an
analogy he said that the position of the plaintiff was exactly like that of a
person who has been appointed as a trustee, who is informed that he has been so
appointed and who accepts office as such trustee. Mr. Bhatt, however, did not
point out in detail how far the position of the plaintiff as the joint managing
director was analogous to that of as trustee under the said circumstances.
Mr.
Munshi in his reply argued that the plaintiff has no right to sue for the
declaration under prayer (a) of the plaint because as the joint managing
director the plaintiff has no legal character within the meaning thereof under
section 42 nor had the plaintiff any interest in property. Now, so far as the
latter is concerned, the same does not at all arise for consideration in this
case. Even Mr. Bhatt has not claimed or argued that the plaintiff has, as joint
managing director, "any right as to any property" and in my opinion
quite rightly so because as joint managing director the plaintiff had certain
rights only to manage the property and the affairs of the first defendant
company, it being the first defendant company and not the plaintiff who owned
the property.
As
regards section 2(26) of the Indian Companies Act, 1956, Mr. Munshi pointed out
that the entrustment of the smallest power, e.g., like signing cheques or being
sent to Indore for buying 100 bales of cotton, to a director of the first
defendant company would make him a managing director within the meaning thereof
under section 2(26). He further argued that the definition of
"officer" under section 2(30) of the Indian Companies Act, 1956,
would not include a managing director and that this shows that the office
fundamentally is that of a director only, that there is no separate office of a
managing direct and that only when certain extra powers are delegated to a
director that the director is for certain purpose termed a "managing
director."
As
regards the meaning of "legal Character" Mr. Munshi relied upon
Ramakrishna Pattar v. Narayana Pattar which is a judgment of a Division Bench
of the Madras High Court. One of the contentions in that suit was that the
plaintiff's suit to declare that he had contractual rights as against the first
defendant did not fall under section 42 of the Specific Relief Act because it
was not a suit to declare a right to a legal character or a right to property.
In respect of this contention, the following passage from the judgment
appearing at page 82 was relied upon by Mr. Munshi :
"We
take it that a man's 'legal character' is the same thing as a man's status. 'A
man's status or "legal character" is constituted by the attributes
which the law attaches to him in his individual and personal capacity, the
distinctive mark or dress, as it were, with which the law clothes him apart from
the attributes which may be said to belong to normal humanity in general.'
According to Holland, the chief varieties of status among natural persons may
be referred to the following causes :- (1) sex, (2) minority, (3) 'patria
potestas'and 'manus', (4) coverture, (5) celibacy, (6) mental defect, (7)
bodily defect, (8) rank, caste and official position (9) slavery, (10)
profession, (11) civil death, (12) illegitimacy, (13) heresy, (14) foreign
nationality, and (15) hostile nationality (see Banerjee's Lectures on Specific
Relief). We think that a declaration that a valid personal contract still
subsists between the plaintiff and the first defendant is not a right to
declare a title to a legal character or a title to right to property."
The
above passage contains a quotation from S. C. Banerjee's Law of Specific Relief
in
Another
case relied upon by Mr. Munshi was that of Madanlal v. State of
Mr.
Munshi also cited two other cases, viz., Deokali Koer v. Kedar Nath and
Sheoparasan Singh v. Ramnandan Prasad Singh. Although the said two cases relate
to section 42 of the Specific Relief Act, the decisions therein are confined to
the facts of the particular case. The judgments do not contain any general
discussion as to the meaning of "legal character" nor do they lay
down any general principles for guidance as to what amount to "legal
character" under the said section 42.
Mr.
Munshi then referred to section 41 of the Indian Evidence Act which provides as
under :
"A
final judgement, order or decree of a competent court, in the exercise of
probate, matrimonial, admiralty or insolvency jurisdiction, which confers upon
or takes away from any person any legal character, or which declares any person
to be entitled to any such character, or to be entitled to any specific things,
not as against any specified person but absolutely, is relevant when the
existence of any such legal character, or the title of any such person to any such
thing, is relevant."
In
this section also the words "legal character" have been used,
although in a different context. The said words "legal character" as
occurring in section 41 have been construed in Punjab National Bank v. Balikram
Kissenchand. In that case SEN J. in his judgement at page 227 of the said
report observes as follows :
"The
words used are 'declares any person to be entitled to a legal character.' A
declaration of a legal right is a different thing from a declaration of legal
character. The word 'character' means status, it is something more than a mere
right. The declaration of a person's right operates as against a particular
person or group of persons against whom the right is claimed, whereas a man's
status is something which defines his position not in relation to any
particular person or group of persons but in relation to the rest of the world;
his status distinguishes him from the rest of the world. To say that a person
is not a partner of a firm is not to declare his status or legal character, it
is merely to declare his position with respect to the particular firm."
This
judgement also says that "character" means status and that it is
something more than a mere right. Mr. Munshi also cited two English cases being
Pulbrook v. Richmond Consolidated Mining Co. and Hayes v. Bristol Plant Hire
Ltd. In neither of these two cases did the words "legal character"
have to be construed and neither is even of any help in construing the said
words. Mr. Munshi concluded his arguments on this point by stating that no
definition of "legal character" was possible but that it could only
be negatively said that the words "legal character" would not include
any interest in property or legal rights under a contract, and that legal
character must be a legal status against the whole world and not against an
individual or a group of individuals only, a status a declaration in respect
whereof would be a judgement in rem under section 41 of the Indian Evidence
Act. He argued that a managing director would be the creature of a contract
between the managing director and the company or a mere agency arising by
reason of the delegation of powers to a director and would not be "legal
character" within the meaning thereof under section 42.
Mr.
Bhatt in his reply to Mr. Munshi agreed with Mr. Munshi that it was difficult
to define "legal character." As regards the said three tests
mentioned by Mr. Munshi, he stated that a regards the test that an interest in
property would not be included in "legal character", he pointed out
that the same was obvious from the said section 42 itself, because that section
provides for a declaration being made for two categories of rights, viz., legal
character and any right as to any property, and, therefore, the said two
categories of rights were obviously meant to be separate and distinct from each
other. As regards the said second negative test suggested by Mr. Munshi, he
pointed out that the same also could not be correct because under most systems
of law marriage is a contract and therefore the status of husband and wife
would be the result of contract and yet, even according to Mr. Munshi, the
status of husband or of wife would be legal character. He argued that therefore
all rights arising under a contract were not in any event excluded from
"legal character." As regards the said test suggested by Mr. Munshi
that legal character would include only such status a declaration whereof would
be a judgement in rem under the said section 41, he pointed out that the same
was not at all a correct test because section 43 of the Specific Relief Act
itself provides that a declaration under Chapter VI of the Act, which chapter
includes section 42, would be binding only on the parties to the suit and
persons claiming under them. Mr. Bhatt also relied upon Sat Narain Gurwala v.
Hanuman Parshad. In that case the right of franchise and the right of being
elected as a Municipal Commissioner were held to be "legal character"
within the meaning of the said section 42 as appears from the following passage
at page 94 of the report from the judgement of MAHAJAN J. (as a puisne Judge of
the Punjab High Court as he then was), viz :
"The
only other matter that I wish to mention before concluding this judgement is
that in my opinion the right conferred on a subject, i.e., a right of vote or a
right to stand as a candidate for being elected as a Municipal Commissioner is
a very valuable right and a suit for a declaration that a person's nomination
paper has been illegally rejected and that the defendant had not been elected
as a member of the Municipal Committee can be entertained by the civil court
even under the provisions of section 42, Specific Relief Act. The words, 'legal
character' are wide enough to include the right of franchise and the right of
being elected as a Municipal Commissioner. The defendant was the person
interested who denied the right of the plaintiff to a such a legal character. A
suit can, therefore, be properly brought under the provisions of section 42,
Specific Relief Act."
It
will be noticed that there are no general tests or reasons mentioned by reason
whereof the said right of franchise was held to be "legal character,"
the only reasons stated being that the same was a very valuable right. Mr.
Bhatt further pointed that "managing director" is not only defined in
section 2(26) of the Companies Act, 1956, but that in section 316(3) of that
Act what a managing director occupies has been referred to as
"office", that managing directorship is an office recognised by law,
that therefore a managing director has by law been clothed with certain
attributes as stated by Banerjee and that therefore managing directorship is a
legal status or legal character. Mr. Bhatt also argued that the distinction
made by Mr. Munshi that in the case of a trustee the legal ownership would vest
in the trustee and that the trustee may, therefore, sue for a declaration under
section 42, because he would be entitled to a right as to property and not
because he was entitled to a legal character was not proper, because courts
have made declarations under the said section 42 even in the case of persons
who did not own any property but were entitled only to a right to management of
property, e.g., a director of policy-holders in a life insurance company in
Subramania Aiyar v. United India Life Insurance Co. Ltd., mutawalli in Mahommad
Jafar Husain v. Mohammad Taqi, and in Ali Shah v. Fateh Mohammad Mutwali, and a
trustee of temple who was entitled only to management, the ownership being in
the deity, in Swaminatha Iyer v. Ramier. Mr. Bhatt also cited Chapsey v.
Jethabhai, where the plaintiff and the defendants were trustees appointed under
a deed of trust executed by members of a caste. The defendants, relying upon a
resolution said to have been passed by the general committee of the caste
purporting to remove the plaintiff from the trusteeship, excluded the plaintiff
from the management of the trust properties. The plaintiff thereupon filed a
suit against the defendants as a co-trustees for a declaration of his
trusteeship and for an injunction to restrain the defendants from interfering
with his rights as a trustee. CHANDAVARKAR J. held that the plaintiff's legal
character being denied, he was entitled, according to section 42 of the
Specific Relief Act, to institute the suit against any person denying such
character. I may state that in this case there is no discussion at all as to
what is the meaning of "legal character" or as to why trusteeship is
"legal character." The judgement assumes that the trustee was
entitled to "legal character."
From
the above arguments and the cases cited on either side, it is clear that there
has yet not been formulated any definition of "legal character" or
any general test for ascertaining what the same is. Section 42 provides for a
declaration being made in respect of a "legal character" and a right
as to any property. These two categories, viz., legal character and a right as
to any property, have been separately mentioned and would therefore prima facie
appear to be distinct, separate and exclusive. Section 42 provides for making a
declaratory decree, i.e., making a decree declaring a man's rights, which would
mean legal rights, and it would therefore appear that the both the said
categories mentioned in section 42 are species of the same genus, viz.,
"legal rights". "Legal character", however, does not appear
to be a phrase common to jurisprudence nor does it appear to have been used in
statutes, except in section 42 of the Specific Relief Act and section 41 of the
Indian Evidence Act. In at least three judgments mentioned above, viz.,
Ramakrishna Pattar v. Narayana Pattar, Madanlal v. State of
Now,
what is a right" ?
According
to Salmond (Salmond on Jurisprudence, 10th Edition, page 229) :
"A
right is an interest recognised and protected by a rule of right. It is any
interest, respect for which is duty, and the disregard of which is a wrong.
All
that is right or wrong, just or unjust, is so by reason of its effects upon the
interests of mankind, that is to say, upon the various elements of human
well-being, such as life, liberty, health, reputation, and the uses of material
objects. If any act is right or just, it is so because and in so far as it
promotes some form of human interest. If any act is wrong or unjust, it is
because the interests of men are prejudicially affected by it. Conduct which
has no influence upon the interests of any one has no significance either in
law or morals.
Every
wrong, therefore, involves some interest attacked by it, and every duty
involves some interest to which it relates, and for whose protection it exists
.....
The
interest which thus receive recognition and protection from the rules of right
are called rights."
According
to Holland (Holland's Elements of Jurisprudence, 12th Edition, page 82) a right
:
"is
one man's capacity of influencing the acts of another, by means, not of his own
strength, but of the opinion or the force of society."
Now,
what is a "legal right" ?
According
to Salmond (page 230) :
"A
legal right is an interest recognised and protected by a rule of legal justice
- an interest the violation of which would be a legal wrong done to him whose
interest it is, and respect for which is a legal duty."
According
to Holland (page 83) :
"(A
legal right) ... is a capacity residing in one man of controlling, with the
assent and assistance of the State, the actions of others."
Therefore,
according to both Salmond and Holland, every interest or right which is
recognised and protected by the State, i.e., by the laws of the State, is a
legal right and every such legal right involves a legal duty or obligation.
Again,
according to both Salmond (page 233) and Holland (page 91), a legal right has
the following four characteristics or elements :
(1)
A person who is the owner of the right. The person in whom the right resides,
or who is clothed with the right. The person who is benefited by its existence.
Salmond calls him the person of inherence.
(2)
A person against whom the right is available. The person whose duty it is to
act or forbear for the benefit of the person who is entitled to the right.
Salmond calls him the person of incidence.
(3)
In many cases, though not in all, an object or subject-matter over which the
right is exercised.
(4)
Acts or forbearances which the person in whom the right resides is entitled to
exact. It obliges the person bound to an act or omission in favour of the
person entitled. Salmond calls it the content of the right.
For
the above four, Salmond uses the word "characteristics" while Holland
uses the word "elements", but the analysis of a legal right of both
Salmond and Holland is identical. According to Salmond, however, there is a
fifth characteristic of a legal right, viz., every legal right has a title,
that is to say, certain facts or events by reason of which the right was become
vested in its owner. It is clear that the title to a right would be a
characteristic of a legal right, but it is not an element of a right.
Salmond
illustrates these five characteristics by the following example :
"Thus
if A buys a piece of land from B, A is the subject or owner of the right so
acquired. The persons bound by the correlative duty are persons is general, for
a right of this kind avails against all the world. The content of the right
consists in non-interference with the purchaser's exclusive use of the land.
The object or the subject-matter of the right is the land. And finally the
title of the right is the conveyance by which it was acquired from its former
owner."
But,
as pointed out by Holland, there are rights, in which the third element, viz.,
object or subject-matter, may be absent. For example, B is A's servant. Here A
is the "person of inherence", reasonable service is the
"act" to which he is entitled, and B is the "person of
incidence" against whom the right is available.
Now,
the possible modes of classifying rights as also legal rights are almost
infinite, but only some are of greater importance. Various modes of classifying
rights would, it should be observed, have nothing to do with one another; they
would be only cross divisions. If a certain type of distinguishing
characteristics is taken as the basis of classification, the rights would
divide themselves into two classes as judged by their distinguishing
characteristics. For example, based on the incidence of correlative duties, a
right may be a right in rem when it corresponds to a duty imposed upon persons
in general or the right may be a right in personam when it corresponds to a
duty imposed upon determinate individuals. It may here be mentioned that as
will appear hereafter this particular classification of legal rights into
rights in rem and rights in Personam is of no relevance for the purpose of
ascertaining "legal character", that is, "legal status."
Another
classification of legal rights is to divide them into proprietary and personal
rights. Salmond (pages 256 to 258) says :
"Another
important distinction is that between proprietary and personal rights. The
aggregate of a man's proprietary rights constitutes his estate, his assets, or
his property in one of the many senses of that most equivocal of legal terms.
The
sum total of a man's personal rights, on the other hand, constitutes his status
or personal condition, as opposed to his estate. If he owns land, or chattels,
or patent rights, or the goodwill of a business, or shares in a company, or if
debts are owing to him, all these rights pertain to his estate. But if he is a
free man and a citizen, a husband and a father, the rights which he has as such
pertain to his status or standing in the law .....
It
makes no difference in this respect whether a right is jus in rem or jus in
Personam. Rights of either sort are proprietary, and make up the estate of the
possessor if they are of economic value. Thus my right to the money in my
pocket is proprietary; but not less so is my right to the money which I have in
bank. Stock in the funds is part of a man's estate, just as much as land and
houses; and a valuable contract, just as much a valuable chattel. On the other
hand, a man's rights of personal liberty, and of reputation, and of freedom
from bodily harm, are personal, not proprietary. They concern his welfare, not
his wealth; they are judicial merely, not also economic. So, also, with the
rights of a husband and father with respect to his wife and children. Rights
such as these constitute his legal status, not his legal estate. If we go
outside the sphere of private into that of public law, we find the list of
personal rights greatly increased. Citizenship, honours, dignities, and
official position in all its innumerable forms, pertain to the law of status,
not to that of property."
From
the above, it is clear that a legal right must be either proprietary, i.e., in
the nature of property, or personal and it is only the latter that creates a
status. For a better understanding of what is meant by "status", and
to find out what is the demarcating line between a right which is a proprietary
right and a right which is a personal right I will now turn to Holland.
A
right, as stated above, has four elements, two of which are "the person of
inherence" and "the person of incidence", i.e., the person in
whom the right resides and the person against whom the right is available.
Holland says (page 94) :
"Persons
are the subjects of duties as well as rights ... Persons, i.e., subjects of
rights or of duties, are in general individual human beings; but, in imitation
of the personality of human beings, the law recognises certain groups, of men
or property, which it is convenient to treat as subjects of rights and duties;
as persons in an artificial sense. A 'natural', as opposed to an 'artificial',
person is such a human being as is regarded by the law as capable of rights or
duties; in the language of Roman law as having a 'status'. As having any such
capacity recognised by the law, he is said to be a person, or, to approach more
nearly to the phraseology of the Roman lawyers, to be clothed with, or to wear
the mask (persona) of legal capacity."
Besides
possessing this general legal capacity, or status, a man may also possess
various special capacities, such as the 'tria capita' of liberty, citizenship,
and family rights. A slave having, as such, neither rights nor liabilities, had
in Roman law, strictly speaking, no 'status', 'caput', or 'persona'."
Holland
(page 135) says that the status of persons concerned is a basis of the division
of rights :
"that
is to say, there are some rights in which the status of the persons concerned
has to be specially taken into consideration, while in others this is not the
case.
This
distinction has led to a division of law into the 'law of persons' and the 'law
of things' ..."
Holland
points out that the said four elements of a right divide themselves into two
classes, the first consisting of the person of inherence and the person of
incidence, giving rise to the law classified as "the law of persons"
and the second consisting of the object and/or the acts or forbearances, giving
rise to the branch of law classified as "the law relating to things."
About the latter, it should be noted that although the word used is
"things", "the law relating to things" would include
'things' proper, meaning thereby corporeal things which can be touched, such as
a farm or slave, and also incorporeal things which can not be touched,
consisting of rights only, such as a right of servitude, a right of action, or
a right arising out a contract.
A
right varies with a variation in any one of the series of its constituent
elements. The law of persons, as a source of variety in rights, is therefore
distinct from and much smaller than the residue of the law, which is generally
called the law of things. If a line is to be drawn between the law of things
and that of persons, where is the line to be drawn ? After discussing various
tests of the characteristics of the law that ought to be treated under the
latter head, Holland says (pages 143-144) :
"The
true test is a surely this. Does the peculiarity of the personality arise from
anything unconnected with the nature of the act itself which the person of
inherence can enforce against the person of incidence ?
In
order to determine, for instance, whether the right of landlords should be
considered under the law of persons, we must ask whether landlords as a class
have any juristic peculiarities unconnected with the acts which they are
entitled to demand from their tenants; such as the payment of rent, the
observance of covenants, etc. They clearly have not. A landlord merely means a
person who is entitled to these acts. On the other hand, suppose the landlord
to be an infant; here at once a whole set of characteristics are present,
modifying the right to rent, etc., and quite unconnected with it. Nor is it
only because the same person sustains the two characters of infant and landlord
that this is the case; a man may be a pawn-broker and landlord, but the rights
as landlord will not be affected by his occupation as pawn-broker. The
personally recognised in the law of persons is such as modifies indefinitely
the legal relations into which the individual clothed with the personality may
enter.
Of
such affections of personality there are two classes :
(1) The person may be 'artificial', i.e.,
may be not a human being.
(2) The
person may be under disability, or may enjoy exemption, on account of age, sex,
mental incapacity, crime, alienage, or public station.
All
of these are abnormal deviations from the ordinary case of both parties
concerned in a right being human beings, under no special and far-reaching
disability or exemption. When the disability or exemption is not of a
far-reaching character, it will not be treated in practice as founding a
special status, although, upon the principles above stated, otherwise capable
of being so treated. Thus, as a rule, soldiers, or blind, or illegitimate,
persons are not held to occupy a status, although in several respects, and in
particular with reference to testamentary powers and rights of succeeding ab
intestato, they may respectively exhibit peculiarities which are not involved
in the statement that they are in military service, blind, or
illegitimate."
Therefore,
to repeat what Holland has said, a legal right can be classified to be a
personal right and would amount to one's status, and is distinct from a
proprietary right, when it involves a peculiarity of the personality arising
from anything unconnected with the nature of the act itself which the person of
inherence can enforce against the person if incidence. The personality
recognised in the law of persons is such as modifies indefinitely the legal
relations into which the individual clothed with the personality may enter.
This then appears to be the test of what is legal status of "legal
character" as mentioned in section 42 of the Specific Relief Act.
Now,
the field of law itself may be divided into private law, i.e., the law which
regulates rights between subject and subject, and public law, i.e., the law
which regulates rights between the State and its subjects omitting for the
purposes of the consideration of the meaning of status, the third branch which
is international law. As already seen, it is the law of persons as contrasted
from the law of things which creates "status". As stated by Holland,
the contrast between the law of persons and of things, or between the law of
"normal" and of "abnormal persons" is sharply defined only
in private law and not in public law. In private law, where all characteristics
of law and not in public law. In private law, where all characteristics of law
are fully present, the law of persons is a statement of the ways in which the
general law is modified by varieties of status; while the law of things is a
description of the various kinds of rights enjoyed in private capacities by
persons as being within the jurisdiction of a State, but not as being in any
way representative of the sovereign power in the State. In public law, however,
which possesses the characteristics of law in a lower degree of development,
the distinction is but faintly traceable. What is analogous to the law of
persons here consists in a description of the State as a whole, of its ruling
body, of bodies of persons enjoying delegated ruling power, and of its
constituent members as such; in short what is usually known as
"constitutional law." On the other hand, the residue of public law
consisting of the administrative law and the criminal law has its analogies to
the law of things.
Legal
status of a subject may, therefore, arise in relation to private law or in
relation to public law. A person's franchise or right to vote or right to a
public office would constitute his status in relation to public law and it was
such status which was the subject-matter of the said case of Sat Narain v.
Hanuman Parshad, and was held to be "legal character" within the
meaning of section 42 of the Specific Relief Act.
As
seen earlier, status arises by reason of some peculiarity of the person of
inherence or the person of incidence. The person may be a natural person, i.e.,
a human being, or an artificial person, i.e., a juristic person, like a company
or what is known in English law as a corporation sole. The personality of an
artificial person is different from that of a normal natural person and it
constitutes his status in law. But amongst the natural persons themselves some
have certain peculiarities about their personality and to illustrate the same,
Holland says (at page 351) :
"The
chief varieties of status among natural persons may be refereed to the
following causes : 1. sex; 2. minority; 3. 'patria potestas' and 'manus'; 4.
coverture; 5. celibacy; 6. mental defect; 7. bodily defect; 8. rank, caste, and
official position; 9. race and colour; 10. slavery; 11. profession; 12. civil
death; 13. illegitimacy; 14. heresy; 15. foreign nationality; 16. hostile nationality.
All of the facts included in this list, which might be extended, have been
held, at one time or another, to differentiate the legal position of persons
affected by them from that of persons of the normal type."
It
is this passage from Holland which has been quoted by Banerjee in his Law of
Specific Relief in British India, and which has been reproduced in the said
case of Ramakrishna pattar v. Narayana Pattar.
As
observed by me earlier "legal character" as used in section 42 is
equivalent to legal status and legal status is legal right when it involves a
peculiarity of the personality arising from anything unconnected with the
nature of the act itself which the person of inherence can enforce against the
person of incidence. The plaintiff claims legal character or legal status by
reason of his managing directorship. Under section 2(26) of the Companies Act,
1956, a director is a managing director when he is entrusted with powers of
management either by virtue of an agreement with the company, or of a
resolution passed by the company in general meeting, or by its board of
directors, or by virtue of memorandum or articles of association. On this
definition of a managing director as given by the Companies Act, it is
necessary to ascertain first who is the person of inherence, which is "the
act" that is the right, and who is the person of incidence. It is the
plaintiff who is the person of inherence. It is the plaintiff who as managing
director claims certain rights. The act, that is the right or rights are the
powers entrusted to the managing director as mentioned in the above definition.
It is the company which is the person of incidence, that is the person against
whom the powers or rights as managing director would be available. It may be
that not only the company, that is, the first defendant company, but even the
plaintiff's co-directors may perhaps fall within the category of persons of
incidence. I do not think it necessary to analyse and ascertain whether the
plaintiff’s four directors would or would not be persons of inherence. I will
assume that they do fall within that category of persons of incidence. But to
my mind it is quite clear that whatever powers or rights the managing director
is entitled to are by reason of the particular entrustment. It is the
particular entrustment, that is, the particular agreement or resolution or
memorandum or articles of association mentioned in the said section 2(26),
which fully determines the nature and extent of that power or right of the
managing director. The personality of a managing director has no peculiarity,
and certainly no peculiarity unconnected with or independent of his said right
or power as a managing director, and, therefore, there can possibly be no legal
right which a managing director can have which would involve such peculiarity
of personality which is dependent of the right or power itself and which the
managing director can enforce against his company and against his co-directors.
The position of a managing director is totally unlike that of a minor or a
wife. A minor by the only reason of his being a minor and the wife by the only
reason of her being a wife has a peculiarity of personality which is
unconnected with any right which the minor or the wife may claim. A landlord
would have certain rights against his tenants as such landlord, but if that
landlord happens to be a minor, the peculiarity of the status of the minor,
which is totally independent of the rights as a landlord, would affect and
modify the otherwise normal rights as a landlord. The personality of a minor as
recognised by the law of persons is such that it modifies indefinitely the
legal relations into which the minor as having been clothed with such
personality may enter. Such is not the case of managing director. Independently
of the powers entrusted to him, he has no peculiarity or legal status which
affects or modifies his powers or rights. A managing director cannot therefore
be said to have any legal status. Now amongst the said 16 varieties of legal
status mentioned by Holland by way of illustration, the 8th variety is
"rank, caste, and official position" and Mr. Bhatt contended that
"official position" would include managing directorship. Now, the
said 16 varieties of status mentioned by Holland are to be understood in the
light of the general principles formulated by Holland, otherwise some of the
said varieties having been mentioned generally are liable to create a
misunderstanding. Fortunately, apart from the said general principles, Holland
himself gives (page 355) illustrations of "office" as used in the
said 8th variety as follows :
"(8)
The king, according to the maxim of English law, can do no wrong. No action can
be brought against him, nor indeed against a foreign sovereign, as such, or his
ambassador. Certain high officials are exempted from responsibility for the
acts of their subordinates, and various public functionaries are relieved from
liability by the Statutes of Limitation at an earlier date than other
people."
The
king or the high officials mentioned in this illustrations have a legal status,
as they have a peculiarity of personality as in the case of a minor which
exists independently of any particular right which they claim and which they
can enforce against the persons of incidence. It is in this sense that
"official position" or "office" has been used in the said
8th variety and as seen earlier, managing directorship cannot fall within it.
On the general test mentioned above, it is clear that when rights were claimed
under a contract the same would not amount to "legal character" under
section 42 as held in some of the cases I have referred to above. Nor is the
question whether the judgement in a particular case would amount to a judgement
in rem a test of "legal character" as argued by Mr. Munshi, because
the division of legal rights into rights in rem and rights in personam is of no
relevance in judging legal status or legal character. Indeed, section 43 of the
Specific Relief Act itself states that the declaration under Chapter VI of that
Act, i.e., under section 42, would be binding only the parties to the suit and
those claiming through them, which means that it is not a judgement in rem. Nor
is the ownership of any property or the absence of any criterion for judging
legal character. It is the peculiarity of the personality of the person of
inherence which is the determining factor of legal character and ownership of
property or the absence of it is of no relevance.
I,
therefore, hold that the plaintiff is not entitled to any legal character
within the meaning thereof in section 42 of the Specific Relief Act. The answer
to issue No. 10 will therefore be in the negative. The plaintiff is therefore
not entitled to the declaration prayed for under prayer (b) of the plaint as
that declaration is prayed for on the basis that the plaintiff is entitled to a
legal character, viz., that of the managing director of the first defendant
company and is to the effect that the plaintiff continues to hold such legal
character.
There
is however another declaration prayed for under prayer (a) of the plaint, the
same being that the resolutions dated 23rd September, 1957, are void, illegal,
inoperative and of no effect whatsoever. Mr. Bhatt had repeatedly stated that
the whole cause of action in the plaint in on the basis of the plaintiff being
entitled to a legal character and the suit being under section 42 of the
Specific Relief Act. As I have held that the plaintiff, as the managing
director of the first defendant company, was not entitled to any legal
character the relief claimed under prayer (a) must therefore also fail. The
plaint is not on the basis that the plaintiff was appointed as the managing
director of the first defendant company by or under any contract, express or
even implied, between the plaintiff and the first defendant company. As a
matter of fact Mr. Bhatt repeatedly stated that the plaintiff's claim was not
under any contract express or implied. But apart from the point raised in this
case as to whether the plaintiff is entitled to a legal character or not, Mr.
Nathwani, the learned counsel for defendants Nos. 2, 4, 5 and 6, had raised
another point for my decision, viz., that in order to obtain relief the
plaintiff must, on the plaint as it stands, place reliance on the articles of
association of the first defendant company, but that the plaintiff is not
entitled to do so as the plaintiff is not even a shareholder of the first
defendant company. Now, it is quite clear that the plaintiff must rely on the
articles of association of the first defendant company in order to challenge
the validity of the resolutions dated 23rd September, 1957. It is the
plaintiff's case, as made out in the plaint, that on a true construction of the
articles of association of the first defendant company and particularly article
100, the board of directors of the first defendant company had no power to pass
the said resolutions and that the said resolutions are invalid because of that
reason. Mr. Bhatt however argued that reliance has to be placed on the articles
of association of the defendant company, not by the plaintiff to complete the
cause of action, but by the defendants to justify the plaintiff's removal from
his managing directorship. He pointed out that it has been stated in the plaint
that the plaintiff was appointed as a joint managing director and it is further
stated in paragraph 17 that "the plaintiff continues to be the joint
managing director of the first defendant having the powers and responsibilities
assigned to him under the said resolution dated 24th June 1957". He argued
that once the plaintiff's appointment is admitted, it is for the defendants,
who allege termination, to prove that there is a valid termination of that
appointment.He argued that the the plaintiff's cause of action is complete so
far as the suit under section 42 is concerned and the plaintiff himself does
not want to rely on any articles of association of the first defendant company,
but it is the defendants who would have to rely on the articles to justify the
termination of the plaintiff's joint managing directorship. In my opinion, this
contention of Mr. Bhatt is not sustainable. The plaintiff's cause of action,
according to the plaintiff himself, is on the basis of a legal character under
section 42. Under section 42 the plaintiff can file a suit for declaration
against persons denying or interested in denying that legal character. What the
plaintiff has to prove is that the plaintiff is entitled to legal character at
the date of the suit. Therefore the plaintiff must prove that the plaintiff was
validly appointed as a managing director (assuming for this purpose that
managing directorship is a legal character) and that the plaintiff continues to
be such managing director at the date of suit. The plaintiff may not have to
prove his appointment because such appointment is admitted. But merely
establishing by such admission that the plaintiff was so appointed is not
sufficient. If such appointment gives to the plaintiff a legal character the
plaintiff must establish the characteristics of such legal character by
establishing the nature of such appointment, which would, amongst the other
factors, include how such appointment was liable to be terminated. Once the
plaintiff establishes his legal character in all its aspects, including the
modes of its termination, it would then be for the defendants to prove that the
plaintiff's appointment has been validity terminated in that mode of
termination as established by the plaintiff. For example, if the plaintiff
establishes that his legal character as joint managing director was such that
it could be terminated only by a special resolution passed by the first
defendant company at a general meeting of its members, then and only then,
would it be necessary for the defendants, if they allege termination, to prove
that there was a valid special resolution passed by the first defendant company
at a proper general meeting of its members. In this case, in order to prove the
plaintiff's alleged legal character as managing director, it would be for the
plaintiff to prove, amongst the other things, whether such appointment of the
plaintiff was capable of being terminated, and if so, in what manner; and in
order to prove the same the plaintiff must rely on the articles of the first
defendant company. Next, it is common ground that the plaintiff at any material
time was not shareholder of the first defendant company. Now, even between a
member and the company, the articles of association constitute a contract only
in respect of his rights and liabilities as a shareholder, but not in respect
of rights and liabilities which he has in a capacity other than that of a
member. But as between the company and outsiders, i.e., persons who are not
shareholders, the articles do not in any circumstances constitute a contract of
which that person can take advantage. This position in law is too clear to
require reference to any authorities or even text books. The plaintiff not
being a member of the first defendant company is therefore not entitled to
place any reliance on the articles of the first defendant company. What is
more, the plaintiff's cause of action is not, as already observed by me
earlier, on the basis even of an implied contract between him and the first
defendant company so that it cannot be said that the articles of the first
defendant company or any of them impliedly form part of any contract between
the plaintiff and the first defendant company. In my opinion, therefore, the
plaintiff is not entitled to place any reliance in this suit as framed on any
of the articles of association of the first defendant company or to claim any
relief placing any reliance on the said articles. But in order to get the
declaration under prayer (a) of the plaint, the plaintiff has to rely on the
articles of association of the first defendant company and particularly article
100, or course, on the construction placed thereon as hereinafter mentioned by
the plaintiff, and without placing such reliance the plaintiff cannot get the
said declaration. The plaintiff is therefore not entitled to the declaration
prayed for under prayer (a) of the plaint. In this connection Mr. Nathwani had
cited the case of Mothey Krishna Rao v. Grandhi Anjanyulu. In that case a
secretary of the company who had been removed by the board of directors from
that post brought a suit for a declaration that he still continued to be the
secretary, on the ground that the board of directors had no power to remove him
under the articles of association. It was held that the plaintiff's appointment
as secretary must be regarded as one de hors the articles and it was incumbent
on him to make out a contract outside and independently of the articles, and he
had no cause of action on the articles. Mr. Bhatt sought to distinguish that
case on its facts. In view of the decision I have already arrived at as above,
I do not think it necessary to analyse the judgement in that case or to
consider the distinction sought to be placed thereon by Mr. Bhatt. But I should
state that as in that case so also in this case it was argued on behalf of the
plaintiff that there is a distinction between the case of a person who has been
removed by an authority incompetent to do so and by a person wrongfully removed
by a competent authority. It was argued by Mr. Bhatt that this suit falls
within the said former category and that the plaintiff could rely upon the
articles of association to show that the plaintiff is sought to be removed by
an authority incompetent to do so and that therefore there is no competent
removal at all of the plaintiff from his managing directorship. In respect of
this argument the following passage from the judgement in the above case
appearing at page 96 is relevant :
"Mr.
Thiruvenkatachari has sought to draw a fine distinction between the case of a
person who has been removed by an authority incompetent to do so and by a
person wrongfully removed by a competent authority. In the present case,
however, the incompetence of the board of directors is sought to be inferred
from the articles of association themselves, which plaintiff cannot, for this
purpose, invoke so as to give him a cause of action."
In
my opinion this passage applies with equal force to the identical arguments
advanced by Mr. Bhatt. I may repeat that in my opinion the plaintiff is not
entitled to place any reliance on the articles of association of the first
defendant company in support of any cause of action in this suit.
Prayer
(c) of the plaint asks for an injunction. The injunction as prayed for therein
really divides itself into two parts. The first part is to restrain the
defendants from acting upon or in pursuance of the said resolutions dated
September 23, 1957; and the second part is to restrain the defendants from
interfering with the plaintiff's rights and powers as joint managing director
under the said resolution dated June 24, 1957.
So
far as the said first part of the said injunction is concerned, the same is so
related to the declaration prayed for under prayer (a) of the plaint. To get
such an injunction the plaintiff must establish that the plaintiff is entitled
to legal character, which I have held that the plaintiff as managing director
is not entitled to, and moreover, the plaintiff must rely on the articles of
association of the first defendant company, which I have held the plaintiff is
not entitled to do. The plaintiff's prayer for that part of the injunction must
therefore fail.
So
far as the said second part of the said injunction is concerned, the same is
co-related to the declaration prayed for under prayer (b) of the plaint. On the
basis that the plaintiff was entitled to legal character as contended by him a
declaration is sought as in prayer (b) and an injunction under the said second
part of prayer (c). I have held that the plaintiff is, as the joint managing
director of the first defendant company, not entitled to any legal character,
the result of which would be that the plaintiff would not be entitled to either
of the said two reliefs. So far however as the said injunction is concerned,
Mr. Bhatt had further argued that even if I were to hold that the plaintiff is
not entitled to a legal character, the plaintiff was any event entitled to the
said injunction. In support of the said contention Mr. Bhatt advanced no
further or other arguments whatsoever save and except relying upon the case of
Kunj Behari v. Keshavlal. That case is not an authority for the proposition
that when the court refuses to grant the plaintiff a declaration under section
42 on the ground that the plaintiff is not entitled to legal character, the
plaintiff is still entitled to an injunction based on the plaintiff's claim to
legal character. On the contrary that case envisages an injunction being
granted to the plaintiff on the basis that the plaintiff would succeed in
establishing the grounds on which the plaintiff claimed the declaration. It is
definitely not a case which says that when the plaintiff fails to establish the
grounds on which he claims the declaration, the plaintiff should be given an
injunction but not the declaration. To my mind at least, this proposition urged
on behalf of the plaintiff is such that it has merely to be stated to be
rejected. The declaration as well as the injunction are both of them reliefs
and both are based on the plaintiff's claim that he is entitled to legal
character.
If
that claim to legal character itself is negatived, how can the plaintiff get
either of the two reliefs ? It must be remembered that the whole claim in suit
is based on the plaintiff's claim to legal character and that only. It is not
the plaintiff's case, nor has it been argued, that the plaintiff has any claim
otherwise than that on the basis of legal character under section 42. That
being so, once it is held that the plaintiff is not entitled to legal
character, the plaintiff would not be entitled not only to the declaration but
also to the injunction prayed for. It is quite likely that because of this
clear position Mr. Bhatt did not develop his argument in this behalf and rested
contact only by citing the said case. But even that case is not an authority in
any way supporting the present contention of Mr. Bhatt. I am inclined to infer
that this argument was not intended to be seriously pressed. But whether
intended to be seriously pressed or not, as I have held that the plaintiff as
the joint managing director is not entitled to any legal character, I hold that
the plaintiff is not entitled to either the declaration under prayer (b) or the
said second part of the injunction under prayer (c) of the plaint.
As
I have held that the plaintiff's is not entitled to any legal character, and I
have negatived the plaintiff's said contention that the plaintiff is in any
event entitled to an injunction even if it be held that the plaintiff is not
entitled to legal character, as a necessary corollary I must hold that the plaint
does not disclose any cause of action. Issue No. 9 will therefore have to be
answered in the negative.
The
result of my above findings is that the plaintiff is not entitled to any relief
in this suit and the suit would have to be dismissed. In view of the said
findings it is not necessary for me either to deal with issues Nos. 2 and 3 or
to deal with the issues Nos. 6, 7 and 8. As however, the contentions covered by
these issues have been argued before me, I will deal with the main arguments
relating to these issues.
I
will first deal with the contentions covered by the issues Nos. 2 and 3. It is
the resolutions dated September 23, 1957, passed by the board of directors of
the first defendant company which are challenged in this case as being ultra
vires the powers of the board. The question for consideration therefore, is did
the board of directors have power to revoke the appointment of the plaintiff as
joint managing director ? If the board had no such power the said resolutions
dated September 23, 1957, would be ultra vires the board.
Now,
under the articles of association of the first defendant company a person may
be a director by reason of his having been elected as such at the general
meeting of the company in the ordinary way, or if he is a nominated director
having been nominated under the provisions of article 93(a), of if he is a
director having been appointed in accordance with the provisions of article
93(b). Thereafter article 99 provides that the directors may from time to time
appoint anyone of their own body, i.e., a person who is already a director, to
be a managing director and may vest in such managing director such powers as
the board of directors itself has under the articles of association of the
first defendant company and such appointment as managing director is to be for
such period and upon such terms as the directors think fit. Article 99 deals
with the appointment of a person who is already a director as managing director
and with vesting of powers in him. So far there is no controversy between the
parties as regards the interpretation of the relevant article. The controversy
is as to how a managing director is to be removed from his office as managing
director and how are the powers vested in him as the managing director to be removed.
A managing director is, as already seen, a director with certain additional
powers vested in him as the managing director and the controversy before me is
confined only to the question of the removal of such additional powers vested
in him as managing director. The question is to be judged on the basis - which
basis is common to both the sides - that upon the removal of the managing
director as managing director, that is, upon the removal of his additional
powers as managing director, he would be relegated to his original position as
a director and would continued to be such director with the same rights and
powers and obligations and liabilities which attached to his directorship
immediately before his appointment as a managing director. To be more specific,
the plaintiff was appointed a joint managing director by the resolution dated
June 24, 1957, but immediately before the passing of that resolution the
plaintiff was a special director appointed under article 93(b) and was entitled
to certain remuneration under the resolution dated June 15, 1956, and it is
common ground that the resolutions dated September 23, 1957, which are
cancelled in this suit do not and do not even purport to adversely affect in
any way the plaintiff's said appointment as special director or his rights to
remuneration under the said resolution dated June 15, 1956. Therefore, as I
said, the only question is which is the authority which is empowered by the
article to remove a managing director, i.e., the additional powers and characteristics
of a managing director, his original directorship with all the original rights,
powers, obligations and liabilities remaining untouched. The plaintiff contends
that the power of removal on a true construction of article 100 is in the
general meeting of the members of the company to be exercised by a special
resolution, whereas the first defendant company contends that it is in the
board of directors themselves. It is therefore necessary to state very briefly
how each party arrives at its said conclusion.
According
to the plaintiff it is article 100 which contains such power of removal.
According to the plaintiff the relevant provision of that article is :
"A
managing director ... shall, subject to the provisions of any contract between
him and the company, be subject to the same provisions as to ... removal as the
other directors of the company."
There
being no contract about the managing directorship between the plaintiff and the
company the said condition "subject to the provisions of any contract
between him and the company" has no application in this case. Therefore,
according to the plaintiff, article 100 provides that a managing director can
and must be removed as the other directors of the company and the provision as
regards the other directors of the company is contained in article 114 of the
articles of association of the first defendant company to the extent that it
provides :
"...
the company may by extraordinary resolution remove any ordinary director before
the expiration of his period of office."
According
to the plaintiff, the said provision of article 114 is to be read as if it was
bodily reproduced and incorporated in article 100. If so read, article 100 is
to be construed as providing that a managing director shall be subject to
removal by the company by an extraordinary resolution. The plaintiff further
contended that since April 1, 1956, when the Companies Act, 1956, came into
force the said words "extra ordinary resolution" have, by reason of
section 651 of that Act, to be read as "special resolution," such
special resolution being defined by section 189 of that Act. The plaintiff
therefore contended that article 100 so construed provides that it is the
company which has the power by a special resolution to remove a managing
director in the said sense of taking away his additional characteristics and
powers as a managing director leaving his original appointment as a director
unaffected and that therefore the said resolutions dated September 23, 1957,
which were passed by the board of directors are of no effect, the board having
no such power to remove a managing director.
On
the other hand, according to the first defendant company, the said construction
placed by the plaintiff on article 100 is incorrect and that on a correct
construction of the same, article 100 merely clarifies the position of the
director as a director when he happens to have been appointed also as a
managing director. According to the first defendant company it is article 99
which authorises the board of delegate its powers, all or some, from time to
time, to one of themselves, and that upon such delegation, the director to whom
such powers are delegated becomes, that is, he is to be styled as, a managing
director and that it is implicit in the provision of article 99 that the body,
namely the board of directors, that is authorised to delegate such powers has
the authority to withdraw such powers, and if the withdrawal be of all such
delegated powers, to remove the director concerned from his managing directorship,
leaving, of course, his directorship untouched. According to the first
defendant company therefore the board of directors of the first defendant
company had the power to remove the plaintiff from his managing directorship
and the said resolutions dated September 23, 1957, were therefore within the
powers of the board and have been validly passed.
I
will now proceed to examine the contentions of each side and find out what is
the true position. Now, as pointed out by me earlier, on September 26, 1956,
the company amended its said articles 99 and 100, the only change thereby made
being the introduction of the words "and/or executive director"
wherever occurring in the said two articles. It was argued on behalf of the
plaintiff that this being only an amendment, it is not as if totally new
articles 99 and 100 are introduced for the first time, but that it is the old
articles 99 and 100, framed before the Companies Act, 1956, came into effect,
which continued, subject however to the said amendment. It was argued that the
said articles 99 and 100 are framed on the basis of regulation 72 of Table A in
the First Schedule to the Indian Companies Act, 1913, and that the regulation
72 divides itself into two parts, the first dealing with the appointment of a managing
director which is dealt with by article 99 and the second dealing with the
determination of managing directorship which is dealt with by article 100. It
was further argued that the last clause of regulation 72 provides that the
appointment of a joint managing director shall be subject to determination if
the company in general meeting resolves that his tenure of office of managing
directorship be determined but that there is no such specific provision
contained in article 100 and that is because the same has been provided for by
providing that a managing director shall be subject to removal as the other
directors of the company and thereby providing for the removal of a managing
director the same mode as is provided by article 114 for the removal of a
director. It was argued that on the parallel of a regulation 72 article 100
must be construed as containing a provision for the removal of a managing
director. This argument is intended to meet the argument on behalf of the first
defendant company that article 100 does not in any way provide for the
determination of managing directorship at all. In my opinion this argument
urged on behalf of the plaintiff is not well founded. Undoubtedly regulation 72
must have been used as a basis or as a precedent for drafting articles 99 and
100. To a certain extent the subject dealt with, the provisions, and even the
wording of regulation 72 and articles 99 and 100 are common. But the wording is
materially altered and what I have to construe is the actual provisions of
articles 99 and 100, on their own phraseology and in their context in the
articles of association of the first defendant company. It would be incorrect
to interpret article 100 on the assumed hypothesis that article 100 was
intended not only to provide for the same subject as is provided for by the
second part of regulation 72 but was also to contain the same or even a greatly
similar provision. I cannot proceed to interpret article 100 on an assumption
that because regulation 72 provides for the determination of the office of
managing directorship, therefore, article 100 must also be assumed to provide
for the determination of the office of managing directorship. I have to take
the language of article 99 and article 100 as used therein, if necessary in its
context with the other articles of the first defendant company, and then
interpret the same to ascertain whether article 100 does or does not contain
any provision in connection with the determination of the powers of a managing
director or for the removal of the managing director from the office of a
managing director. I will, therefore, proceed to consider the provisions of
articles 100 itself on that footing.
Article
100 was amended on September 26, 1956. As amended, that article in its opening
part mentions "A managing director or managing directors and/or executive
director," and at its end states "he shall ipso facto and immediately
cease to be a managing director." It is obvious that in making the said
amendment there has been an oversight, by reason whereof there has been an
omission to add the words "or executive director whichever he may
be," or other words to that effect, at the extreme end of that article.
Article 100 in its present form, if it had to be construed in its application
to an executive director, would create a difficulty, because the material part
of it would read "an executive director ... if he ceases to hold the
office of director he shall ipso facto and immediately cease to be a managing
director." The executive director cannot cease to be a "managing
director". It is, I believe, the lack of proper amendment as aforesaid
that leads to this difficulty. Fortunately for me this case does not require an
interpretation of article 100 in relation to an executive director and in
construing article 100 I will proceed to deal with it, for the purpose of this
case, as if the words "and/or executive director" were absent.
Article
100 divides itself into three parts which, without any change or omission would
read as follows :
"A
managing director or managing directors shall not while he continues to hold
that office be subject to retirement by rotation and he shall not be taken into
account in determining the rotation of retirement of directors,
but
he shall, subject to the provisions of any contract between him and the company
be subject to the same provisions as to recognition and removal as the other
directors of the company,
and
if he ceases to hold the office of directors he shall ipso facto and
immediately cease to be a managing director."
The
said first and third parts clearly provide as to the directorship of a person
who is a director and also a managing director. Articles 107 and 108 provide
for retirement by rotation and, therefore, the first part of the article 100
provides that a managing director while he continued to hold the office as
managing director shall not be subject to retirement by rotation and shall not
be taken into account in determining the rotation of retirement of directors. A
managing director, as already seen, is first a director and then becomes a
managing director, and therefore the third part deals with what is to happen to
the appointment of a person as managing director if that person ceased to hold
his office of director and says that if he ceases to be a director he would
automatically cease to be a managing director. Whether the words "subject
to any contract between him and the company" preceding the second part
would, on a grammatical construction, be taken to be repeated in the third part
also or not appears to be arguable, but it is not necessary for the purposes of
this case to decide it. It is to be noted that both the first and the third
parts relate to the position of a person as director when that person is also a
managing director. Now turning to the second part, it says, "but he (i.e.,
managing director) shall, subject to the provisions of any contract between him
and the company, be subject to the same provisions as to recognition and
removal as the other directors of the company." The use of the word
"recognition" of a director in this part is intriguing. No
submissions were advanced as to its meaning and I confess that its meaning is
not easy for me to comprehend. This part contains the words "recognition
and removal." The use of both these words together in this way furnishes a
clue as to what was intended to be meant by "recognition." Removal of
a director means when the person or body, like the company in general meeting,
having authority to remove a director exercises such authority and removes the
directors. In such a case there is originally a power given for removal and
thereafter there is a voluntary exercise of that power. Such exercise of power
brings about the cessation of the directorship of that director. In the case of
the first defendant company such removal so far as ordinary director is
concerned has been provided for by article 114. But there can be other ways in
which a cessation of the directorship can result, these ways having been
provided for by article 98 of the articles of the first defendant company. All
the ways under article 98 are either the happening of a specified event like
insolvency or unsoundness of mind of the director or some voluntary act of the
director like his tendering his resignation. But what is common to all these
ways under article 98 is that on the happening of the contingency provided for,
the cessation of directorship automatically results without anything else being
required to be done thereafter. Therefore on the happening of such contingency
the director can be said to cease to be capable of being recognized as a
director of the company. It is in this meaning that the word
"recognition" has been used in the second part of article 100, and
recognition of a director would mean the person's continuation in office as a
director. It appears to refer to the stage when a person continues to be in his
office of a director and which stage terminates when he ceases to be a director
under article 98 of the articles of association of the first defendant company.
This appears to be the only possible meaning because both recognition and
removal deal with a common subject, viz., determination of the directorship,
and at the same time the two would not overlap, as "recognition"
would apply in cases where such termination is brought about automatically
without requiring a voluntary act of an outside agency to baring it about,
whereas "removal would require a voluntary act of an outside agency."
"Recognition" of a director refers to the stage when a person
continues to be a director and has not ceased to be a director under article
98; and what happens to his managing directorship when he ceases to be a
director has been provided in the third part. The third part does not contain
any new provision for a bringing about a cessation of his office as managing
director. The third part is really an explanation or clarification as to what
effect the cessation of his office as a director would have on his office as a
managing director, such explanation or clarification being that because he
ceases to be a director, he ipso facto, i.e., automatically without anything
more, will cease to be managing director also and such cessation of managing
directorship being automatic it shall take effect immediately, that is the
cessation of directorship will result in a simultaneous cessation of managing
directorship also.
Now,
what is the meaning of the words "other directors of the company"
occurring in this second part ? The articles of the first defendant company do
contain a reference to "ordinary director." e.g., in articles 107 and
114, although that term "ordinary director" does not appear to have
been defined anywhere in the articles. The meaning however is obvious and it
means a director appointed in the ordinary way by election at a general meeting
of the members of the company. "Ordinary director" is in
contradistinction to a "nominated director" under article 93(a) and a
"special director "under article 93(b). Now, the removal of "the
other directors of the company" can be in the case of an ordinary director
under article 114 where the removing authority is the company; whereas in the
case of a nominated director and a special director it would be under articles
93(a) and 93(b) respectively the removing authority being the persons mentioned
in the said respective articles, who are other than the company. Therefore, the
removing authorities in the case of each of the said three types of directors
are different and the method of removal would also be different. It is in the
light of this analysis that I must test the argument urged on behalf of the
plaintiff, viz., that it is this second part that provides for the removal of a
person from his managing directorship and for that purpose the relevant
provision of article 114 should be read as if it was reproduced, as it were, in
this second part of article 100. As already seen, "the other directors of
the company" would include at least the said three types of directors, and
the agency which can remove and the method of removal are different in the case
of each of them. If so, there is no justification for singling out any that
which is applicable to the removal of an ordinary director only and omit that
which is applicable to the removal of the other two types of directors. Why
read the relevant provisions of only article 114 into article 100 and not those
of article 93(a) or article 93(b) ? And that raises a further question as to
why this second part of article 100 contains such a vague provision when it
mentions "other directors" without specifying "ordinary
director," if it was "ordinary director" which was intended to
be referred to here ? I think this vagueness or confusion results because the
very foundation of the argument of the plaintiff is incorrect. This second part
is not, in my opinion, at all intended to provide for the removal of a person
from his managing directorship. The whole article 100, that is all its three
parts, provides as to what is the position of a person as a director when that
person is a director and also a managing director. As article 100 divides
itself into three parts, it is reasonable to assume or infer that all the three
parts contain provisions relating to the same subject. Of course such an
assumption would not be justified if the language of the second part clearly
indicated to the contrary, but there is no such indication. On the contrary, if
the interpretation canvassed on behalf of the plaintiff were to be accepted the
second part would appear to be vague and confusing. Further, the second part
begins with the word "but" the use whereof indicates that what
follows it and what precedes it both deal with the same idea of topic, namely,
what would happen to a person's directorship when he is also a managing
director, but that the provision which follows that word "but" is the
opposite of the provision contained in that portion of the article which
precedes that word "but". The provision preceding the word
"but" is that when a director is appointed a managing director the
provision about rotation, i.e., retirement by rotation, will not apply to him
so long as he continued to be a managing director but what follows the word
"but" provides the opposite, viz., that when a director is appointed
a managing director even during the subsistence of his managing directorship
his original directorship shall, unlike the termination thereof by retirement
by rotation, be liable to termination on his ceasing to be
"recognised" as a director or by his removal as a director. Moreover
the language of the second part is clearer and more appropriate if the second
part is taken as providing for what is to happen to the person's directorship
when he is appointed also as a managing director. The relevant words are
"he (i.e., the managing director) shall ... be subject to the same provisions
as to recognition and removal as the other directors of the company",
which would mean that a person shall, even if he is appointed as a managing
director be subject to the provisions as to recognition or removal as a
director as the other directors of the company. Mr. Bhatt on behalf of the
plaintiff argued that such interpretation requires the underlined words
"as a director" to be added in the second part. It is true that
normally words should be construed as used without adding any more words therein.
But this is not a case of addition of totally new words. In the first part
itself the words "as a director" are present, but by implication. The
first part says "a managing director shall not while he continued to hold
that office be subject to retirement by rotation". The question arises
"retirement by rotation" as what ? Certainly not as a managing
director. Neither the Companies Act, old or new, nor the articles of the first
defendant company provide for retirement by rotation of a managing director. It
must mean "retirement by rotation" as a director. A retirement by
rotation as a director is provided for both by the Companies Act and even by
articles 107 and 108 of the articles of association of the first defendant
company itself; and even Mr. Bhatt did not dispute that the "retirement by
rotation" in the first part must be as a director. But what is more, the
words, "as a director" are, as I said, present here in the first part
by implication because the subsequent words in the first part itself are
"and he shall not be taken into account in determining the rotation of
retirement of directors". The use of the last word "directors"
makes it clear that the retirement by rotation mentioned in the first part is
retirement by rotation "as a director." There is also a still further
reason why the second part must be taken as a mere clarification as to what is
the effect on a person's directorship when that person is also a managing
director. The possible modes of termination of a person's directorship are of
three categories, viz., by retirement by rotation under article 107, by ceasing
to hold office as mentioned under article 98, and by removal under article 14
or 93(a) or article 93(b) in the case of an ordinary or a nominated or special
director respectively. Unless the second part is construed as explaining what
is to happen to a person's directorship when he is appointed also a managing
director, i.e., whether by reason of his appointment as a managing director his
original directorship would or would not terminate by ceasing to be a director
under article 98 or by being removed as a director under articles 114, 93(a)
and 93(b). Article 100 would have to be taken to deal only with one kind of
termination of directorship, namely, by retirement by rotation and not by
ceasing to her a director or removal as a director. The first part clearly
deals by way of clarification with one class of termination of directorship,
viz., by retirement by rotation and there is, therefore, a greater
justification to construe the second part as dealing by way of clarification
with the remaining classes of termination of directorship viz., by ceasing to
be a director or by removal as a director. I, therefore, reject the argument
urged on behalf of the plaintiff and hold that article 100 does not lay down
any provision for removing a person from his managing directorship.
As
article 100 does not lay down any provision for removing a person from his
managing directorship, the next question to be considered is whether the board
of directors of the first defendant company did have the power to remove the
plaintiff from his managing directorship. Now, in article 99 the words used are
"from time to time" when it says that the directors may from time to
time appoint any one or more of their body to be managing director and may vest
in such managing director all or some of the powers vested in the directors by
the articles of association of the first defendant company. The words
"from time to time "as occurring in an Act of the British Parliament
which authorised the Lord Chancellor from time to time to make an order have
been construed in Lawrie v. Lees by Lord PENZANCE as : "the words 'from
time to time' are words which are constantly introduced where it is intended to
protect a person who is empowered to act from the risk of having completely
discharged his duty when he has once acted, and, therefore, not being able to
act again in the same direction. The meaning of the words "from time to
time" is that after he has made one order he may make a fresh order to add
something to it, or take something form it, or reverse it altogether." The
Act did not specifically authorises the Lord Chancellor to revoke the order but
the words were construed to include the power to "reverse it altogether".
On the same analogy and reasoning the use of the words "from time to
time" in article 99 indicates that the directors have been given the power
not only to appoint a managing director and to vest powers in him as mentioned
in that article, but also to reverse the same, i.e., revoke his appointment or
withdraw all or some of the powers vested in him. Article 99 is merely a
delegation by the company to the directors of its powers to appoint a managing
director. In Foster v. Foster, article 99 of the Company in that case
contained, so far as it is material for this purpose, a provision similar to
the article 99 of the first defendant company and read as follows :
"99.
The directors may, subject to the preceding clauses, from time to time appoint
any one or more of their body to be managing director or directors, for such
period, at such remuneration, and upon such terms as the directors think
fit."
In
connection with that PETERSON J. observed at page 543 as follows :
"In
my view, however, the appointment by the directors of one of their body as
chairman, or the appointment by the directors of one of their number as a
managing director, without more, is not a contract within article 93, but is
merely a deletion of their powers, and is very similar to the power which they
posses to appoint committees of themselves and delegate their powers to those
committees."
I
will deal with this case later on in greater detail, but what is material at
present is that the article in construed as a merely a delegation of powers by
the company to its board of directors to appoint a managing director. If there
is such a delegation it is merely a creation by the company of its board of
directors as its agent for doing what the article empowers the board of
directors to do. Delegation merely creates an agency as held by WILLS J. in
Huth v. Clarke. If, therefore, by this article 99 the first defendant company
has created its board of directors as its agents to appoint a managing
director, the relationship between the three parties is that the company is the
principal, the board of directors are the agents and the managing director is a
sub-agent. In treating this relationship as that of principal and agent, I am
not oblivious to the following remarks of LORD SANKEY occurring in his judgment
in Regal (Hastings) Ltd. v. Gulliver :
"Directors
of a limited company are the creatures of statute and occupy a position
peculiar to themselves. In some respects they resemble trustee, in others they
do not. In some respects they resemble agents, in others they do not. In some
respects they resemble managing partners, in others they do not."
For
the purpose of the point under consideration, inasmuch as there is a delegation
of powers by the company to its board of directors to the extent mentioned in
article 99, I think that it is safe to say that for the purpose of considering
the exercise of powers the relationship is that of principal and agent and
sub-agent as mentioned above. Looked at in that perspective, under section 193
of the Indian Contract Act, the agent, namely the board of directors, stands in
the position of a principal in relation to the sub-agent, namely, the managing
director; and under section 203 of that Act, subject to the exceptions and
conditions mentioned in that section, with which exceptions and conditions we
are not concerned in this case, a principal can revoke the authority given to
the agent and, therefore, the board of directors as the principal of the
managing director can always revoke the authority of its agent, the managing
director. A revocation of all powers is tantamount to removal and, therefore,
even on this position the board of directors of the first defendant company
has, under article 99, a power to remove the managing director, although such a
power of removal has not been expressly given by that article.
I
will now turn to the said case of Foster v. Foster which I have mentioned
earlier. The article of association of the company in that case contained an
article No. 89 which was similar to article 101 of the first defendant company
which empowered the directors to exercise all the powers which the company
itself had subject to the limitations mentioned therein. The company in that
case had also article 99 which I have already reproduced above and which was
similar to the article 99 of the first defendant company. Article 102 of the
company in that case provided that the directors may elect a chairman of their
meetings, and determine the period for which he was to hold office. A general
meeting of the company held on January 25, 1911, appointed the plaintiff in
that case as director and later on the same day a meeting of the board of
directors appointed the plaintiff as the chairman of the board of directors.
Later on August 14, 1911, the board of directors appointed the plaintiff as the
managing director of the company. In connection with the business of the
company certain disputes arose between the plaintiff Foster and the defendant
Mrs. Foster. On July 30, 1913, the board of directors passed two resolutions
whereby Mrs. Foster was appointed the chairman of the board of directors of the
company and was also appointed a joint managing director along with the
plaintiff, the plaintiff becoming a joint managing director in place of his
original position of the sole managing director. Thereafter, on January 19,
1915, the board of directors passed a resolution terminating the plaintiff's
appointment as director and also as a joint managing director with Mrs. Foster.
The plaintiff thereupon filed a suit challenging inter alia the said
resolutions of the board of directors dated July 30, 1913, and 19th January
1915. One of the grounds of challenge, as appearing from the arguments of
Tomlin K. C., the learned counsel for the plaintiff, at page 538 was "the plaintiff
can only be removed by an extraordinary resolution". This would mean that
the point taken by the plaintiff was that the person who had the power to
remove the plaintiff from his chairmanship and also his joint managing
directorship was the company itself in its general meeting and not the board of
directors. The decision as regards this contention of the plaintiff was that
the board of directors did have under the said article 99 the power to remove
the plaintiff from his managing directorship as appears from the following
passage of the judgment at pages 542-543 :
"In
the same way it is argued that the appointment of the plaintiff as sole
managing director was for such time as he should be a director. Here the
question depends on article 99, under which 'The directors may, subject to the
preceding clauses, from time to time to appoint any one or more of their body
to be managing director or directors, for such period, at such remuneration,
and upon such terms as the directors think fit.' In this case, also, it appears
to me that the directors have power from time to time appoint any one or more
of their body to be managing director or directors, and it does not involve as
a consequence that if they are dissatisfied with the person whom they have
appointed managing director, or think that another of their body would fill the
position more adequately, they are unable to substitute a new managing director
in place of the old one."
From
this passage it is clear that when the learned Judge used the words "substituting
a new managing director in place of the old one" it was meant removing the
old managing director and appointing a new one in his place. It is not disputed
even on behalf of the plaintiff before me that the provision of that article
99, so far as it is material for the purpose of this case, were similar to
those of article 99 of the first defendant company and, therefore, as held by
PETERSON J. with which I respectfully agree - the board of directors did have
the power under article 99 to remove the plaintiff from his managing
directorship. In the arguments of the plaintiff's counsel, Tomlin K. C., as
appearing at page 538 it was specifically contended on behalf of the plaintiff
that the plaintiff could only be removed by the company by an extraordinary
resolution. This clearly indicates that it was in that case contended that the
power of removing a managing director was in the company and not in the board
of directors; and, therefore, the decision of PETERSON J. that the board had
the power to remove is unquestionably a decision of a point which directly
arose for his decision in that case. Mr. Bhatt however attempted to water down
the effect of that decision by saying that as appearing at pages 542-543 of the
said report, the learned Judge first considered the position of the plaintiff
in that case as chairman and held that the plaintiff was validly removed as
such chairman. Mr. Bhatt contended that that decision involved only a
construction of article 102 and a decision on the point as to the period of his
office as chairman, but not as to the point as to who had the power, whether
the company or the board of directors, to remove him. Mr. Bhatt argued that in
the very next paragraph of his judgment, the learned Judge proceeds to consider
the point about the determination of the plaintiff's managing directorship,
that the opening words are "in the same way" and that the first
sentence shows that the learned Judge was thinking only in terms of the period
or duration of the plaintiff's managing directorship and that, therefore, the
learned Judge's mind was at that time not focused on the point as to who,
whether the company or the board, had the power to remove the plaintiff from
his managing directorship. I am unable to accept this argument of Mr. Bhatt.
Undoubtedly, the first sentence of the last paragraph at page 542 supports Mr.
Bhatt's contention, but there is no justification to assume that when the
learned Judge says what he has in fact said in the above passage quoted by me
from his judgment the learned Judge was not in terms dealing specifically with
the said point actually argued before him by Tomlin K. C. that it was the
company and not the board who had the power to remove the plaintiff from his
managing directorship. This case is, therefore, a direct authority for the
proposition that on that article, the wording whereof was materially the same
as that of article 99 of the first defendant company, even though there is no
specific power granted to the directors for the removal of the managing director,
such a power has been impliedly granted to them by that article.
Mr.
Bhatt relied upon the case of Nelson v. James Nelson and Sons Ltd. The articles
of association of the company in that case contained article 84 which empowered
the board to exercise all the powers of the company subject to the limitation
mentioned in that article, and article 85 empowered the board to appoint from
time to time any one or more of their number to be managing director and with
such powers and authorities, and for such periods as they deem fit, and to
revoke such appointment. In construing those article LORD READING C.J. says in
his judgment at page 776 as follows :
"One
of those powers is to appoint a managing director - I draw particular attention
to these words - 'for such period as they deem fit.' The directors, therefore,
have under that part of the article power to appoint a managing director for a
term of years, and the words which immediately follow - 'and may revoke such
appointment' - only give the directors powers to take away that which they have
given provided that they have not bound themselves to give it for any period of
time. The directors have the power to appoint and the power to revoke the
appointment, but the article does not mean that they have the power to revoke
at will notwithstanding any agreement into which they may have entered for the
appointment of a managing director for a term of years. I am quite unable to
give the words the construction for which the defendants contend. If those last
words had not been inserted in the article, the result would have been that the
power to appoint a managing director would have been vested in the directors,
but the power to revoke the appointment would have remained with the
company."
It
is the last sentence in the above quotation which was strongly relied upon by
Mr. Bhatt. Mr. Bhatt conceded that that sentence contains a mere obiter of the
learned Judge and was not necessary for the decision of that case. He pointed
out, and with respect to the learned Judge of agree with Mr. Bhatt, that the
obiter of s eminent a judge as LORD READING is entitled to great respect. But
looking at the arguments of counsel as appearing in the above report and also
going through the judgment of the lower court reported in Nelson v. James
Nelson and Sons Ltd.,of find that this obiter though not necessary for the
decision of that case was not even the result of any arguments advanced on that
point. It does not appear to be the result of full consideration having been
applied to the decision contained in those obiter dicta. In my opinion, these
obiter dicta are not sufficient to outweigh the conclusion I have arrived at
earlier as mentioned above. When commenting on the said case of Foster v.
Foster, Mr. Bhatt had commened that these dicta of LORD READING were not even
cited or considered by PETERSON J. in his judgement and that that shows that
the point under consideration was not properly argued before PETERSON J. It is
true that the said obiter dicta of LORD READING do not appear to have been
cited before or to have been considered by PETERSON J. But to my mind it does
not in any way detract from the said judgment of PETERSON J. It is quite
possible that the above remarks of LORD READING being mere obiter dicta and not
being the result of a full argument in the case or a considered opinion of the
learned Judge were not cited in Foster v.Foster.
Therefore,
if it was necessary, I would have held that the board of directors of the first
defendant company did have the power to revoke the appointment of the plaintiff
as joint managing director and that, therefore, the said resolutions dated 23rd
September, 1957, were not ultra vires the powers of the board of directors.
I
may mention that there were certain other points argued both by Mr. Munshi and
by Mr. Bhatt. These were, however, in the nature of further alternative
arguments and in view of my above judgment, I do not think it necessary to
complicate my judgment further by dealing with such further alternative
arguments. One of such further alternative arguments, which was advanced by Mr.
Munshi, was that even if I were to hold that the plaintiff was entitled to a
legal character within the meaning of section 42 of the Specific Relief Act, I
should not exercise my discretion under that section in favour of granting to
the plaintiff the declaration as prayed for. The reason in support of that
argument was that the court will not in its discretion grant a decree by way of
a declaration when the same was capable of being negatived by the company in
its general meeting. It appears from the copy of the plaint exhibit 6 and
indeed it is common ground that the share capital of the first defendant
company is divided into 15,000 shares in all, out of which the Kamani group
holds 10,450 shares and the seventh defendants holds 50 shares and that the
plaintiff in effect controls the voting rights in respect of the remaining
4,500 shares. It was argued by Mr. Munshi that looking to the array of the
parties before me even if I hold that the board of directors did not have the
power to revoke the plaintiff's appointment as managing director and give a
declaration to that effect, the company could call a general meeting of its
members at which the Kamani group would be in a position by ordinary resolution
to ratify the said resolutions dated 23rd September, 1957, of its board of
directors or pass a fresh resolution to the same effect. Mr. Bhatt in his turn
countered this argument by contending that on his submission that article 114
should be read as it were as having been reproduced in article 100 of the first
defendant company, the first defendant company would require a special
resolution and not merely an ordinary resolution to remove the plaintiff as the
managing director of the first defendant company but that the voting strength
being as aforestated the Kamani group would not be able to command the
requisite majority of vote for passing a special resolution. The consideration
of even this argument requires various alternatives to be decided first. I have
already held that the plaintiff is not entitled to a legal character. But if I
had held that he was entitled to a legal character I would have further held
that I ought not to have exercised my discretion in favour of granting the
declaration asked for because I have also held that the provisions of article
114 are not to be deemed to have been incorporated in article 100, the result
being that a mere ordinary resolution would be sufficient, if passed by the
first defendant company to remove the plaintiff from the managing directorship
as contended by Mr. Munshi.
Under
the circumstances my answers to the issue are :
Issue
No. 1 : Not pressed by Mr. Munshi. I may repeat that some time after this issue
was raised Mr. Bhatt made it clear that the cause of action in the plaint was
on the basis of a claim to a legal character under section 42 of the Specific
Relief Act and thereupon Mr. Munshi did not press this issue. Moreover, to
avoid any possible misunderstanding, I may note that this issue was raised immediately
after the pleadings were read and does not cover and was not even intended to
cover the contention that the plaintiff is not entitled to rely upon the
articles of association of the first defendant company for the reliefs claimed
in the suit. This latter contention was urged by Mr. Nathwani at a much later
stage in the case and it was some time thereafter, that a further issue, being
issue No. 11, was raised to cover this contention.
Issue
No. 2 : Unnecessary to decide. See judgment. If necessary I would have answered
this issue in the affirmative.
Issue
No. 3 : Unnecessary to decide. See judgment. If necessary, I would have
answered this issue in the negative.
Issues
Nos. 6, 7 and 8 : Unnecessary to decide. See judgement. If necessary, I would
have answered issues Nos. 6 and 7 in the affirmative and issue No. 8 in the
negative.
Issues
No. 9 : As I have held that the plaintiff is not entitled to any legal
character, I answer this issue in the negative.
Issue
No. 10 : In the negative.
Issue
No. 11 : In the negative.
The
result is that the suit is dismissed.
As
the suit has been dismissed by me normal rule as to costs, namely, that the
costs must follow the event must also be followed in this case. The defendants
Nos. 7 and 8 however have all along supported the plaintiff and so far as their
costs are concerned the position is different. I need not however consider that
position any further because their respective counsel state that they do not
press for their costs. Under the circumstances so far as defendants No. 7 and 8
are concerned there will be no order as to their costs.
So
far as defendants Nos. 1 to 6 are concerned, they have appeared in three
different sets and the question has been argued at very great length before me
as to whether one or two or three sets of costs should be allowed as between
the defendants Nos. 1 to 6. After such arguments were advanced however, the
defendants Nos. 1 to 6 between them, and also between them and the plaintiff,
are now agreed that in view of my above judgment the order for cost against the
plaintiff should be that the plaintiff should pay the costs of the first
defendant company in one set and also a half of one set of costs for the
remaining defendants Nos. 2 to 6. Under the circumstances, with such consent, I
order that the plaintiff do pay the costs of the suit, one set to the first
defendant company and half of one set to the defendants Nos. 2 to 6.
On
behalf of the defendants in whose favour I have made an order for costs as
aforesaid an application was made under rule 601 of the High Court rules on the
Original Side to the effect that I should either allow a fixed sum in excess of
Rs. 2,000 as instructions for brief or that I should direct the Taxing Master
to allow such sum exceeding Rs. 2,000 as he may in his discretion think proper.
The hearing of this case has undoubtedly been a long one. I am told that the
hearing lasted for about 35 hours. But against that, it is also true that this
case did not involve numerous or complicated facts and, moreover, there was no
oral and very little documentary evidence. To enable me to exercise my said
discretion what is being placed before me today are merely general arguments
and rough estimates and, therefore, there is not before me at present
sufficient material to enable me to exercise the discretion vested in me under
the said rule 601. I will be in a much better position to judge this after the
successful defendants in whose favour I have made an order for costs have
prepared and lodged their respective bills of costs. Under the circumstances I
direct that this application under rule 601 should be renewed after such bills
of costs have been prepared and lodged with the Taxing Master.
[1937] 7 Comp. Cas.
123 (PAT.)
High Court of
v.
Ramgulam Singh
Courtney Terrel, C.
J., and James, J.
September 3, 1936
Sultan Ahmad, Rai Guru Saran Prasad and Parasnath for appellant.
Baldeva Sahay, Choudhury Mathura Prasad and K.P. Upad-haya for respondents.
Courtney-Terrel, C.J. —These two
appeals are by the 2nd defendant against the preliminary and final decrees,
respectively, granted by the Subordinate Judge in a suit to enforce a simple
mortgage. A company named the Vishvakarma Mills Ltd., on 7th March 1925
borrowed from the Government under the
In the month of April 1926, the Company borrowed Rs. 10,000 from the Bank of Bihar Ltd. On 26th January 1928 the Bank were demanding repayment of this loan with interest, and on 15th May the Bank brought a money suit in the Patna Civil Court for the recovery of this loan. The plaintiff, Ramgulam Singh, was a shareholder and a Director of the Company. There were two classes of Directors, ' Honorary ' and ' Permanent' and by the Articles of Association the former had merely an advisory function whereas the latter were to conduct the business of the Company. There is no doubt that the plaintiff was a permanent Director although his services, from the point of view of any right to Directors' fees, may have been honorary. The plaintiff was a guarantor of the loan by the Bihar Bank and in the subsequent litigation he was sued in that capacity. The Company fully availed itself of the overdraft guaranteed by the Government and had withdrawn nearly Rs. 60,000. In these circumstances the finances of the Company were in a very parlous condition.
On 4th March 1928 there was a meeting of the Directors of the Company at which five persons are recorded as having been present, one of whom was the Managing Director, Deodhari Singh, one was Saiyid Sultan Husain, a Director, who, from his evidence, would appear to have had little comprehension of the business to be transacted. Mithila Saran Singh and Permeshwar Prasad Varma, two other Directors, were present. Babu Ramgulam Singh was also present, but there is recorded this note: "N.B. —Babu Ram Gulam Singh is present but takes no active part." Babu Permeshwar Prasad Varma, m.a.b.l., was elected President of the meeting and the Managing Director was authorized to execute an agreement with Babu Ramgulam Singh according to which Ramgulam Singh & Sons were to pay the next instalment of Rs. 5,000 to the Imperial Bank which would fall due on 7th March and further would pay off the loan due to the Bank of Bihar, and that the Company through the Managing Director, would execute a mortgage in his favour of the profits and assets of the Company. It appears that it had earlier been contemplated that Babu Ramgulam Singh would take a lease of the whole of the Company's assets, but this proposal was abandoned in favour of a mortgage. On 9th March there was a further Directors' meeting at which the same persons were present, with the exception of Babu Permeshwar Prasad Varma, and Babu Mithila Saran Singh was appointed to the chair. A memorandum of agreement was read, of which we have riot seen a copy, but there is a note that "the second party Babu Ramgulam Singh wants five days time to consult his legal adviser on the point," and 15th March was accordingly appointed for reconsideration, with the further sentence that "it would be executed and registered immediately."
On 26th March there was an emergent general meeting of the Directors, but the only Directors present were Babu Mithila Saran Singh, Babu Ramgulam Singh, and the Managing Director, Babu Deodhari Singh. On this occasion Babu Mithila Saran Singh was unanimously voted to the chair. It was proposed that an extraordinary general meeting should be called to consider:
"(a)That the Company's business be settled at the impending session (sic) if any on the terms as may be agreed upon to conduct the business of the company; (b) that the business of the company be sent to liquidation."
The third resolution is as follows:
"That the second mortgage bond be executed in favour of Babu Ramgulam Singh who paid Rs. 5,000 (five thousand) the said (?) instalment of the Imperial Bank on 5th March 1928 to the amount of Rs. 5,000 aforesaid to be paid within a year with interest at 12 annas per cent. per month and the interest to be paid every six months, i.e., on the 30th of the month; six monthly interest will be incorporated with the principal and interest will run on the aggregate at the rate of 12 annas per cent. per month."
Accordingly on 20th May 1928 the mortgage
bond in question was executed and in it the earlier mortgage bond to the
Government of 7th March 1925 was recited, as were the payment of the two
instalments of 1926 and 1927 and the fact that the third instalment had become
due on 6th March 1928. There was a recital that the Company had no money to pay
the third instalment. No mention was made of any other indebtedness of the
Company and in particular there was no reference to the loan by the Bihar Bank.
The loan by Babu Ramgulam Singh of Rs. 5,000 to pay the said third instalment
was recited and there is no doubt that in fact Babu Ramgulam Singh did find the
necessary sum of Rs. 5,000 and paid it to the Imperial Bank to discharge the
liability of the instalment. The bond also recites the failure of the original
proposal for a lease to Babu Ramgulam Singh. Therefore, the Company agreed to
repay the loan with interest at the rate of 12 annas per cent. per month within
a period of one year from 5th March 1928 (when the instalment to the Government
was paid). If interest should be in arrears for six months then the amount of
arrears was to be incorporated with the principal, that is to say, the loan was
to be with interest to be compounded at six monthly rests if unpaid. The
mortgage was expressly stated to be a second mortgage, the Secretary of State
for
Now at the lime when this document was executed it must have been perfectly clear to the directors that the original mortgage was defective by reason of non-registration, and more-over the promissory note to the Government in respect of the unpaid debt had been executed so that although it was piously recited that from the point of view of priority of mortgages Babu Ramgulam Singh held only a second mortgage, this, on the contention of the plaintiff, had very little significance. On the other hand it may perhaps be said with more credit to Babu Ramgulam Singh that at the time he desired to express that the debt to him was to be considered as secondary to the debt to the Government, mortgage or no mortgage. On 24th September 1928 the Bihar Bank applied to the Court for a compulsory winding up order and this was made on 21st March 1928. The Government being unable to enforce their mortgage took the course of proceeding under the Public Demands Recovery Act and obtained an order of the Court, and on 21st January 1930 sold up the assets of the Company for Rs. 33,000 the 2nd defendant, Thakur Das, being the purchaser.
On 24th September 1932, Babu Ramgulam Singh brought this suit to enforce his mortgage claiming about Rs. 7,500 and making Thakur Das 2nd defendant and the company 1st defendant. In the winding up proceedings an application was made to the High Court to stay the suit as against the Company and this was accordingly done and the suit has proceeded against Thakur Das alone, the Company taking no part. The learned Subordinate Judge dismissed the suit against the Company, but without costs having regard to the order for stay, but he granted a decree against 2nd defendant with costs.
The plaintiff took his stand upon the following contentions: It was pointed out on his behalf that the Government had not sued on their mortgage but had proceeded under the Public Demands Recovery Act and accordingly what had been sold was the right, title and interest of the judgment-debtor at the date of the sale. Therefore, it was argued that no question of priority of mortgages arose. It was conceded that had the Government been able to proceed upon its mortgage, Babu Ramgulam Singh would have been merely a second mortgagee as contemplated by his mortgage bond, and it was suggested that there was nothing in the bond which put the Government debt before the plaintiff's debt otherwise than as a mere matter of priority of mortgages. It was argued that although possibly in the winding up proceedings the liquidator under the provisions of Sec. 231, Companies Act, and Sec. 54, Provincial Insolvency Act, (but for the fact that there was a period of more than three months between the date of the bond and the application for the winding up order) might have had the mortgage bond set aside as fraudulent and void, they had not done so and in any case it was said that only the liquidator or some creditor could have taken this course.
Now it is certainly true that we are not here concerned with either Sec. 231, Companies Act, or Sec. 54, Provincial Insolvency Act. These sections deal with matters of procedure governing the relief to be accorded to a liquidator or to a rival creditor, but in considering the position of 2nd defendant, the auction-purchaser we must remember that he stands in the shoes of the judgment-debtor, that is to say the company, and is entitled to and affected by the same equities and estoppels as those which the company might have laboured under or enjoyed. Therefore the question really resolves itself into whether the plaintiff in any contest with the company would have insisted that his mortgage debt should take precedence of the debt which was due to the Government. In my opinion he certainly could not have done so.
It is true that the sections of the Indian Companies Act and Provincial Insolvency Act furnish the procedure for setting aside a transfer as fraudulent in certain circumstances only, and that the absence of those circumstances will prevent the adoption of the specified procedure, but that does not imply that the transfer was not fraudulent in fact although the judgment of the learned Judge would seem to suggest that this is so. There are several circumstances from which it may be inferred that Babu Ramgulam Singh was not acting in the interests of the company: firstly the position regarding the Government mortgage must have been well within his knowledge, for it is a specific duty imposed upon Directors to see to any necessary registration of documents to which the company is a party ; he must have been aware that the document was not registered. Secondly, that he was uneasy about the position is shown by the note in the minutes of the meeting of the 4th March to the effect that Babu Ramgulam Singh was present but took no active part: also from the note" in the minutes of the 15th March that Babu Ramgulam Singh wanted five days to consult his legal adviser and that the document when completed was to be executed and registered immediately. Thirdly he was well aware that the company was in desperate financial circumstances and that its assets were in jeopardy, and that he knew on the 26th March that a liquidation had actually been decided upon; fourthly, it may be observed that notwithstanding that at the meeting of the 4th March Babu Ramgulam Singh had agreed to pay off the claim to the Bank of Bihar, he had not in fact done so, and fifthly, notwithstanding the entry in the minutes of the 4th March that a mortgage should be executed, it was not in fact executed until very much later, that is' to say the 20th May.
Babu Ramgulam Singh therefore either knew that the Government would be unable to sue on their mortgage in which case the provision in his mortgage bond to the effect that his mortgage was to be considered secondary to the Government mortgage was meaningless, or was intended that the Government debt as such should take priority over the debt to him. This is not a case in which a contract is entered into between two independent persons; it is in the nature of a contract between the trustee and his cestui que trust; the trustee by discharging a small portion of the cestui que trust's indebtedness puts himself in the position of a secured creditor as against the unsecured creditor, the Government, and therefore prevents the company from paying off its creditors equitably. It is true that the mortgage to the plaintiff was executed for good consideration and that he supplied Rs. 5,000 for payment of the Government instalment but in taking security from the company which he knew to be in an insolvent condition he acted inconsistently with his duties as a director. The case in (1871) 10 Eq. 168 The Gaslight Improvement Co. v. Terrell, is an illustration of the principle involved. It was a suit by the company in liquidation to set aside a security given by the company to the defendant directors as being an undue and fraudulent preference over the general creditors. The directors had borrowed money for the sake of the company and quite properly became creditors of the company. It was clear that the directors knew that the company was in a state of insolvency and could not avoid being wound up, and in those circumstances they took security in the shape of an assignment of the assets. Lord Romilly dealing with the facts said:
"The directors of the company think fit to pay themselves. It is to be observed that the directors of every company who are also creditors fill two distinct and antagonistic characters. In the first place, they are trustees for the benefit of the company, and are trustees for the creditors to this extent; that they are bound to apply all the assets for the benefit of the creditors as far as they will extend; they themselves are also creditors, and have an interest to have their own debts paid".
No doubt in this case the defendants had taken an assignment in payment of their debts and not a mortgage, but the difference in this matter between this and the present case is one of degree and not of principle. In my opinion it is of no avail to contend in this case that the Company by merely paying off the plaintiff's mortgage could have freed the assets from the plaintiff's debt. It is not right that the directors of an insolvent company about to go into liquidation should be allowed the privileged position of a secured creditor by merely discharging a small portion of the company's indebtedness. As against an innocent purchaser for value of property sold in execution of a debt due to an unsecured creditor, the plaintiff director should not be allowed to enforce his security. I would therefore allow both the appeals and dismiss the plaintiff's suit with costs throughout.
James, J. —I agree.
[1954]
24 COMP. CAS. 330 (MAD.)
HIGH
COURT OF
v.
Srirangam Janopakara Bank Ltd.
RAJAGOPALA AYYANGAR, J.
CIVIL REVISION
PETITION NO. 515 OF 1954.
APRIL 14, 1954
R. Gopalaswami Iyengar and M.R. Narayanaswami, for the Petitioner.
V.C.
Rajagopala Ayyangar J.—This is a petition to revise the order of the District Munsif of Tiruchirapalli, regarding certain findings on two preliminary issues, which were raised for his decision.
The first defendant is the petitioner in this revision petition. He was the president of the Srirangam Janopakara Bank Ltd., which is a banking company incorporated under the Indian Companies Act. This company was managed by a board of 13 directors, with the first defendant as the president. There appear to have been some differences and disputes in the board of management, which at this stage it is unnecessary to detail, and the directors called for a meeting of the board on November 14, 1953, when they purported to remove the first defendant from the office of presidentship and appointed the second plaintiff in his stead. As the petitioner refused to recognise the validity of his removal and to hand over charge to the person appointed as president, the suit out of which this revision arises was filed by the company by its newly elected president as the first plaintiff, the newly elected president as the second plaintiff, and plaintiffs 3 to 10 being 8 other directors. To this suit were impleaded as defendants, the petitioner as the first defendant, and as defendants 2 to 5 the other four directors stated to be siding with the first defendant and refusing their co-operation to the plaintiffs. The paid secretary of the bank was impleaded as the sixth defendant.
The plaint, after setting out the circumstances which necessitated the proceedings for the removal of the first defendant from his office as president, and, after affirming the validity of the proceedings held therefor, went on to state in paragraph 17:
"In the circumstances stated above it has become necessary for the plaintiffs to sue for a declaration that the first defendant has ceased to be the president and for an injunction against him from functioning as such and from interfering with the second plaintiff functioning as president of the first plaintiff's board of directors."
The plaintiffs valued the relief claimed in the suit in the sum of Rs. 100 for the purpose of court-fee and jurisdiction and paid a court-fee of Rs. 11-3-0 under Section 7(iv)(c) of the Court-fees Act. The reliefs claimed in the plaint were stated in paragraph 21 as follows:
(a) for a declaration that the first defendant's office as president of the board of directors has validly been terminated at the meeting of the board of directors held on November 14, 1953, and that the second plaintiff has duly been appointed president of the board of directors, and consequently,
(b) for an injunction restraining the defendants from interfering with the second plaintiff functioning as president of the board of directors,
(c) for costs of suit, and
(d) for such further or other reliefs as may be deemed fit and proper to grant in the circumstances of the case.
The first defendant filed a written statement, in which several contentions raising questions of law and fact were formulated, but this petition is concerned only with two objections raised by him. The first is contained in paragraphs 3 and 4 of the written statement and they read as follows:
"The plaintiffs are not in possession of the bank or any of its properties. The person in actual possession of the bank, its documents and its properties is the secretary who has been impleaded as the sixth defendant in this suit subject to the control of the first defendant the president. The second plaintiff is not in possession of all or any portion of the bank or its properties and has never functioned as president. The plaintiffs ought therefore to have sued defendants 1 and 6 for possession as they are in actual possession of the bank and its properties. The plaintiffs' suit has to be dismissed as it offends Section 42 of the Specific Relief Act.
The suit has not been properly valued. Even according to the balance sheet of the first plaintiff the properties of the bank are worth many lakhs. If properly valued the suit will be beyond the pecuniary jurisdiction of this court. The court fee paid is also insufficient."
The second objection is contained in paragraph 5 and is stated in these terms:
"The plaintiffs have no right to maintain this suit. Under the articles of association the only persons who can maintain a suit for and on behalf of the bank are the president and the secretary. So far as the second plaintiff is concerned his claim to the office of the president has still to be established. The allegation that the sixth defendant was asked to join as plaintiff and refused to do so is false. In any event the articles do not contemplate a suit being filed on behalf of the bank by anybody other than the president and the secretary. The other plaintiffs have also no right to sue on behalf of the bank."
Issues were framed in the suit, and the points covered by these paragraphs were raised by three issues, which run as follows:
1. Whether the plaintiff is entitled to the declaration and injunction prayed for?
2. Whether the suit as laid is not maintainable? and an additional issue,
3. Whether the suit is beyond the pecuniary jurisdiction of this court?
These there issues were heard as preliminary issues, and the learned District Munsif has held in favour of the plaintiffs on all of them. It is this finding of the District Munsif that is challenged in this revision as erroneous and illegal.
The learned counsel for the petitioners argued before me to points. The first is as regards the valuation of the suit for the purposes of court fee and jurisdiction, and the second whether the suit by the first plaintiff, that is the company, was maintainable, without the secretary also figuring as a co-plaintiff.
The argument upon the
first point is this. This suit in substance is one for the recovery of the
office of the president based upon the resolution of the board of directors
appointing the second plaintiff as the president. Under article 41 of the
articles of association the president has a general control over all the
affairs of the Nidhi. The affairs of the Nidhi include the management of the
properties of the Nidhi. The office of president, it is therefore stated, is
intimately connected with the right to possession of the properties of the
bank, and as the office and the right to manage the property are intimately
connected, it is stated that a suit for the recovery of such an office is
virtually a suit for the possession of the properties, which the holder of such an office has the right to
manag . Reliance is also placed on certain other powers of the president under
the articles. On the basis of this reasoning, it is urged that the suit ought
to be valued under Section 7(iv)(c) of the Court-fees Act, on the basis of the
market value of the properties of the institution of which the second plaintiff
claims to be the president. For this position reliance is placed on the
judgment of this court in Karupanna Nadar v. Karuppa Nadar. The dispute there
related to an educational institution, known as Nadar Kshatria Vidyasala
situated in the
The next question dealt with was as to the valuation of the suit for purposes of jurisdiction. The properties owned by the institution, including the school building were worth at least Rs. 12,000. The learned Judge referred to the decision in Vasireddi Veeramma v. Butchayya, and held that where the subject matter of the suit is wholly unrelated to anything which can be readily stated in definite money terms, the plaintiff, having to put some money value for the purpose of jurisdiction, must put a more or less arbitrary value; but that where the subject matter is so related to things, which have a real money value that the relief asked for will affect these, then the value of the suit for the purpose of jurisdiction is to be taken as the market value of the property affected. Examples of the former class—where the subject matter of the suit is not related to anything which can readily be stated in money value were stated to include a suit for restitution of conjugal right, and a suit for declaration that the plaintiff is a member of a charity committee. "Of the second class we have suits to establish a right to a fishery or a right to a royalty, to set aside an award or to establish or set aside an adoption." The learned Judge then went on to state that the District Munsif was wrong in holding that the suit with which that revision petition was concerned came under the first category. "It cannot be said that the relief of possession of the office of the managership is not related to things which have a definite money value and that the reliefs do not affect those things. The right to the managership certainly affects the right to be in possession of and to manage the institution and its properties. Hence the value for purpose of jurisdiction is the value of the properties affected." It will be seen that in that case the properties belonged to an institution, which was not a corporation, but were vested in the committee and the members of the committee were alone entitled to be in possession of the properties, which were committed to their management.
In the present case, the bank is an incorporated company which owns the properties. Its directors have merely the custody and management of the affairs of the bank, and it is only in such capacity and in such relationship, that they deal with the property of which the company is the owner. There is, therefore, no analogy furnished at all by the decision in Karupanna Nadar v. Karuppa Nadar. Further it will be noticed that the decision in Vasireddi Veeramma v. Butchayya, which is referred to and followed by SOMAYYA J. puts in the category of suits, "whose subject matter is wholly unrelated to anything, which can be stated in definite money terms", suits for a declaration that the plaintiff is a member of a charity committee. The case referred to for this illustration, which is approved in Vasireddi Veeramma v. Butchayya is a decision of BAKE WELL J. in Murza Hyder All v. Husain Rasa. The learned Judge stated there:
"The plaint in this case does not set out the properties of the charity, or their value; nor even alleged that they consist of land. And the declaration sought relates to an office and not to property. On the other hand it has been held in Kunhan v. Sankara, that a suit for the removal of a karnavan is incapable of valuation and within the jurisdiction of a District Munsif and I think that a suit with respect to an office not of profit falls within the principle of that decision."
I respectfully agree with this observation and reasoning. In the present case what is sought for by the plaintiff is merely a declaration to the office and though the holder of such office might enjoy certain powers under the articles of association, the subject matter of the suit is unrelated to anything, which can be stated in definite money terms. The learned District Munsif was perfectly correct in holding that the suit as framed was within the jurisdiction of his court.
The next point relates to the maintainability of the suit by the first plaintiff. The point arises this way. Under article 40 the management of the Nidhi is vested in a board, consisting of not more than 15 directors. Under sub-clause (5) of article 40 after the board of directors is elected by the general body, they are to elect from among themselves certain office bearers, and among them are the president and certain other officers. Under article 48 it is provided that the Nidhi shall sue and shall be sued in the name of the president and the secretary and treasurer. The present suit is filed by the bank, by its president, the second plaintiff. It is stated in the plaint that as the secretary refused to join as plaintiff, he had been made a defendant, and he is the sixth defendant in the case. The objection raised is that the articles of association are binding upon the members of the company, and that the company cannot without an alteration of its articles institute a suit or other proceeding, except through the president and secretary, and that the suit as instituted at present cannot be treated as a suit by the company. One thing might be mentioned before dealing with the legal contention, and that is that it is not denied that the secretary, who has been impleaded as the sixth defendant, refused to join the plaintiffs in filing the present suit. Further a majority of the directors figure as co-plaintiffs, along with the bank, and if the company could sue through its directors, the present suit would certainly be a competent one, as the majority of the directors are desirous of proceeding with the suit. The learned District Munsif has repelled this contention holding that the suit has been properly instituted by the company. I am clearly of the opinion that the District Munsif was right in rejecting the objection raised by the first defendant.
In the first place, the defendants have to admit that the second plaintiff was entitled to the reliefs claimed by him in the plaint, even without impleading the first plaintiff. This is not a case where without the company being on the record, as the plaintiff, the suit must fail, for here we have a case where the second plaintiff, who claims to be validly appointed as president is seeking to assert as against the first defendant, and certain other directors siding with him, his right to the office of president. This would certainly be an individual right in respect of which he can get the declaration and injunction without impleading the company as plaintiff. It is, therefore, only as a matter of abundant caution that the first plaintiff has been impleaded and the relief is prayed for in favour of the company also. I am saying this because as the relief prayed for can be granted to the second plaintiff without reference to the other plaintiffs on record, the objection taken by the first defendant can in no sense be taken as a preliminary objection, which must be one which goes to the root of the suit, and which if decided in favour of the defendant, must result in the dismissal or rejection of the suit.
The next point for consideration is whether the first plaintiff is properly on record through its president, but with the secretary figuring as a defendant. This point may be viewed from more than one angle.
Let us first proceed on the footing that article 48 under which the two functionaries are designated in whose name the company shall sue and be sued were not there and that the articles had merely made the usual provision that the company might sue and be sued in the name of the directors, in whom the management of its affairs is vested. If in such a case, there is a difference of opinion among the directors, if the argument of the learned counsel for the petitioner were sound, the company can never file any suit, since the entire number of the directors would not be willing to sue on behalf of the company, and even the addition of the dissentient directors as defendants would not satisfy the article. An exactly similar situation arose in Satya Charan v. Rameshwar Prasad which came up before the Federal Court. The relevant articles of association of the Lothian Jute Mills Co. Ltd., which was the subject of consideration ran as follows:
"Article 149(6): Without prejudice to the general powers conferred by the last preceding article and to any other power or authorities conferred by these presents on the directors or on the managing agents, it is hereby expressly declared that the directors shall have the following powers, that is to say power subject to the provisions of Section 86-H(b) of the Act, to institute, conduct, defend, compound or abandon any legal proceedings by or against the company or its officers or otherwise concerning the affairs of the company and also to compound and allow time for payment or satisfaction of any debts due and of any claims or demands by or against the company."
In the suit the company was named as a plaintiff with three of the directors also figuring as co-plaintiffs, while 4 other directors whose conduct was impugned in the proceedings were impleaded as defendants. An objection was taken to the form of the action on the ground that it was the directors alone who could file a suit on behalf of the company, in view of the articles of association set out above. This argument is set out at page 42 thus:
"It is contended on behalf of the appellants that, on the basis of the above articles, the directors alone are authorised to use the name of the company in any litigation concerning the Company and if the majority of the ordinary shareholders are dissatisfied with the policy adopted by the directors, the only course open to them is to change the articles of association or remove the directors by a special resolution and to appoint other directors in their place by an ordinary resolution. It is also contended that, by adopting these articles, the shareholders must be taken to have divested themselves of the control and management of the company and, even if they are in a majority, they have no right to conduct any litigation on behalf of the company, nor can a numerical majority of the shareholders, at a general meeting of the company, impose its will upon the directors, who can be deprived of their control and management of the company only by a statutory majority which can alter the articles."
As on the facts of the case it was a matter of admission that plaintiffs would be able by a majority to assure the passage of a resolution in the general body of members empowering them to continue the suit, their Lordships negatived the contention raised by the defence and held that the suit as framed was maintainable.
The argument addressed by the learned counsel for the petitioner in this case is exactly identical with that raised by the appellants before the Federal Court, and I do not see any difference in substance between the scope of the article as contained in the Lothian Jute Mills case, and the present. In the present case, the directors would act on behalf of the company, but for the special provision which names particular officers of the company for the purpose of proceeding with actions in court. But that does not mean that without them, the company cannot be brought into the court. Nor is it necessary that the board of management must dismiss the secretary, and replace him by another of their choice, and institute proceedings in his name as well, which was the argument raised by the learned counsel for the petitioner in answer to an objection that if the secretary was colluding with a minority of the directors, there must be some way for the company to assert its rights in a court of law. This answer further shows that there is really no substance in the objection raised to the procedure now followed for impleading the company as plaintiff.
The usual manner in which an objection is taken to a suit in the name of a company by a defendant, who contests the fact that the company is properly brought as a plaintiff, is by an application for striking off the plaint on the ground that the plaintiffs have no right to use the name of the company, as they are not in a majority in the company. If such an objection were raised, and the facts are disputed, the court would determine the question, after ascertaining the wishes of the majority of the shareholders. In the present case, there can be no doubt at all that the majority of the directors are supporting or are in favour of the company's name appearing in the record as the plaintiff. In such circumstances, I do not see any point in the objection that the company is not entitled to be a co-plaintiff in this action.
Holding as I do that the decision of the learned District Munsif of Tiruchirapalli on the preliminary issues is correct, the civil revision petition fails and is dismissed with costs. One set.
[1995] 4 SCL 145 (
v.
P.K. BAHARI, J.
MAY 12, 1994
Section
290 of the Companies Act, 1956 - Directors - Validity of acts -Respondent,
company's business, inter alia, was colonisation which involved purchasing and
selling land and immovable properties - Articles of association authorised
managing director to carry on management of affairs of company -Managing
director sold land in question but there was no specific resolution of board to
that effect - Whether managing director could be said to be competent to sell
land in absence of any specific resolution authorising him to sell it -Held,
yes
FACTS
The managing
director of the respondent-company, which was under winding up, sold certain
land to the applicant herein much before the presentation of the application
for winding up. This application was filed by the applicant for a declaration
that the land in question was owned by him and was not one of the assets of the
company in liquidation. The official liquidator contested the application
contending that the sale deed executed by the managing director was not valid,
in the sale deed there was no reference to any power given to the managing
director on the basis of any resolution passed by the board of directors of the
company.
HELD
According to
the memorandum of association of the company one of the objects of the company
was business of colonisation. The business of colonisation obviously requires
purchasing and selling of land and other immovable properties. A certified copy
of the articles of association had also been placed on the record. Article 13
of the memorandum of association laid down that the management of affairs of
the company would vest in the board of directors and the managing director
would carry on the management of affairs of the company on behalf of the board
subject to the control, supervision and direction of the board of directors. A
perusal of this article made it evident that the managing director had been
authorised to carry on the management of and the affairs of the company on
behalf of the board. Unless and until the board of directors had restrained the
managing director from performing any particular act or function in the
management of the business of the company, the vast powers given to the
managing director to manage the affairs of the company would include disposing
of and selling properties of the company. One of the business of the company
being colonisation, the managing director had the power to sell the land
belonging to the company to any one for consideration. So it was not necessary
that any specific resolution ought to have been passed by the board of
directors to give power to the managing director for carrying on the business
of the company.
The
transaction in question took place much before the winding up petition was
presented but even if such a transaction in the normal course of the business
of the company had taken place after the filing of the winding up petition,
such a transaction had to be held to be valid. Thus, the asset in question was
an asset of the company.
Thus, the Act
of managing director was valid in law.
CASES REFERRED TO
Burton &
Deakin Ltd., In re[1977] 1 All ER 631 (Ch.D.) and Kamani Metallic Oxides Ltd.
v. Kamani Tubes Ltd. [1984] 56 Comp. Cas. 19 (Bom.).
P.R.
Aggarwal for the petitioner.
Ms. Zubeda Begum for the Respondent.
JUDGMENT
1. This application ha^i been moved seeking an
order of tins court that the land measuring five bighas, nineteen biswas and
three biswasi comprised in khasra Nos. 420, 421 and 464 is owned by the
petitioners and is not one of the assets of the company in liquidation, namely,
Shinghal Land & Finance (P.) Ltd.
2. The case set up by the petitioners in brief
is that they have purchased the aforesaid land, vide registered sale deed
executed on 25-10-1980, and registered on 30-10-1980, for a total consideration
of Rs. 22,000 from the said company and Shri Roop Singh, the managing director
of the said company had executed and got registered the sale deed in favour of
the petitioners on receiving the consideration before the Sub-Registrar.
3. The official liquidator has filed a reply
contesting this petition. It has been pleaded that no valid sale deed has been
executed on behalf of the company in favour of the petitioners and thus the
petitioners have not become the owners of the property in question.
4. It appears that in the English translation of
the sale deed which was in Hindi language the name of the managing director was
mentioned as 'Mr. Saroop Singh Singhal' while in fact in the sale deed the name
of the managing director mentioned is Mr. Roop Singh Singhal and in the reply the
official liquidator has taken the plea that there was no Mr. Saroop Singh
working as managing director of the company at any time. Now, it is not in
dispute before me that Mr. Roop Singh Singhal has been the managing director of
the company at the relevant time. The correction was allowed to be made in the
English translation regarding the name of the managing director vide my order
dated 3-5-1994.
5. The official liquidator was appointed as provisional liquidator in Company Petition No. 27 of 1982. The winding up order was made in respect of the company petition quoted above on 8-8-1983. Obviously, it relates back to the date 18-2-1982, the presentation of the winding up petition. The evidence has been taken by way of affidavits to decide the question whether the petitioners are the owners of the land in question or not. It is indeed no dispute that a sale deed had been executed on behalf of the company by its managing director Mr. Roop Singh Singhal for selling the land in question in favour of the petitioners for a sale consideration of Rs. 22,000 although it is the case of the official liquidator that the sale consideration received by Mr. Roop Singh Singhal is not reflected in the account books of the company.
6. Be that as it may, in case the managing director of the company was legally entitled to sell the land of the company on behalf of the company then the sale made in favour of the petitioners has to be given effect to. It is true that in the sale deed there is no reference to any power given to the managing director on the basis of any resolution passed by the board of directors of the company. The minutes book of the company is not available with the official liquidator and there is no evidence brought on the record by the petitioners to prove that in fact any such resolution had been passed confering any powers on the managing director to sell or dispose of the immovable property, ie., the land, in question belonging to the company.
7. The learned counsel for the official liquidator has drawn my attention to section 537 of the Companies Act, 1956 ('the Act') which lays down that where any company is being wound up by or subject to the supervision of the court any sale held, without the leave of the court, of any of. the properties or effects of the company after such commencement, shall be void.
8. This section would not apply to the facts of the present case because the sale deed in question had been executed and registered much before the presentation of the winding up petition. At any rate, in order to obtain any relief on the basis of the registered sale deed, the petitioners have to establish that the managing director, Mr. Roop Singh Singhal was legally authorised to sell the immovable property belonging to the company.
9. The petitioners have placed on record the certified copy
of the memo randum of association of the said company, which records the
objects of the company, one of which is to carry on in
10. It is mentioned in the affidavit of the official liquidator that it was not any business of the company to acquire and sell the land. There is no merit in this contention. In view of the specific object written down in the memorandum of association that the company is also to carry on the business of colonisation, it is not necessary that the company ought to have indulged in any vast business of colonisation before the managing director could get the power to carry on such business on behalf of the company. The petitioners, who are strangers to the company, could only see the memorandum of association and articles of association of the company in order to see whether a particular managing director has the power to transfer the land belonging to the company. A bare perusal of the relevant provisions quoted above culled out from the memorandum of association and articles of association makes it clear that it was one of the objects of the company to carry on the business of colonisation and the managing director was fully empowered to transact such business of the company. If that is so, while transacting such business the managing director had the power to sell and dispose of the immovable property of the company.
11. In the present case, the transaction in question took place
much before the winding up petition was presented but even if such a
transaction in the normal course of the business of the company had taken place
after the filing of the winding up petition, such a transaction could be held
to be valid. In Burton & Deakin Ltd., In re [1977] 1 All ER 631 (Ch. D), it
was held that if a particular disposition falling within the powers was
necessary or expedient in the interests
of the company, and if the court considered that the reasons given were such as
an intelligent and honest man could reasonably hold, the court would normally
sanction the disposition. The court would not, except in the case of proven bad
faith or other exceptional circumstances, interfere with the discretion
conferred on the directors by a company's articles of association even if a
winding up petition had been presented.
12. In Kamani Metallic Oxides Ltd. v. Kamani
Tubes Ltd. [1984] 56 Comp. Cas. 19, the Bombay High Court, while construing the
provisions of section 536 of the Act, held that the interpretation of the
provisions of section 536(2) would not leave bona fide dispositions of assets
of the company open to challenge at the hands of the liquidator, in the event
of the winding up order being passed. Sometimes dispositions would be necessary
in the interest of the company and thus in the ultimate interest of the
creditors of the company during the pendency of the application for winding up.
The company court must have jurisdiction to protect such transactions.
13. Be that as it may, in view of the fact that
the sale deed in question was executed and registered much before the
presentation of the winding up petition, there does not arise any question of
this court exercising any discretion in the matter.
14. Having come to the conclusion that the
managing director, Mr. Roop Singh Singhal, was competent to sell the land of
the company, I allow this application and declare that the land in question has
been validly sold to the petitioners and was not the asset of the company at
the time of the presentation of the winding up petition. The application is,
thus, disposed of.
v.
MOHTA FINANCE AND LEASING CO. LTD.
DR. M.K. SHARMA J.
OCTOBER 30,
1996.
Rajiv Shakdhar for the Petitioner.
Dr. Shankar Ghosh, Ms. Mukti Choudhary and Ms. Sandhya Kohli for the
Respondent.
Dr. M.K. Sharma J.—This is a petition under section 33 of the
Arbitration Act filed by the petitioner challenging the existence and validity
of the arbitration clause forming part of the lease agreements entered into
between respondent No. 1 and the petitioner-company.
The petitioner-company was
incorporated under the Companies Act in the year 1972. On February 1, 1978, the
name of Mohta Alloys and Steel Works Limited was changed to Mohta Industries
Limited. Both the petitioner company and Mohta Industries Limited at that point
of time we part of the Mohta group of industries. The Mohta group also floated
respondent No. 1 which was incorporated on September 21, 1982. During the years
1983-86 lease agreements were executed between respondent No. 1 and the
petitioner, namely, Mohta Industries Limited. The said lea agreements were
executed by Mr. M.C. Aggarwal signing on behalf of both the companies as their
director except two lease agreements wherein one of the signatories was Mr.
A.B. Chaugh and in the other it was Mr. M.R. Bhoomla. The rents were paid to
respondent No. 1 in terms of the aforesaid lease agreements by the petitioner.
Subsequently, the financial position of Mohta Industries Limited became
precarious and consequently, the petitioner was declared a sick industrial
company under the provisions of the Sick Industrial Companies (Special
Provisions) Act, 1985. In 1986, the nominees of Mahavir Spinning Mills Limited
who is the present management of the petitioner were co-opted as directors. On
November 28, 1988, the Board for Industrial and Financial Reconstruction
sanctioned a scheme for rehabilitation of Mohta Industries Limited.
The scheme for rehabilitation
envisaged amalgamation of Mohta Industries Limited with another public limited
company, namely, Mahavir Spinning Mills Limited. In terms of the aforesaid
amalgamation the petitioner came to be owned by Mahavir Spinning Mills Limited.
The petitioner started committing defaults in the payment of monthly rental to
respondent No. 1 from August, 1987. In view of the aforesaid default committed
by the petitioner respondent No. 1 terminated the lease agree-ment by its
letter dated September 2, 1989, and called upon the respondent No. 1 to clear
the outstanding amounts along with the interest. The petitioner, in spite of
the aforesaid notice issued by respondent No. 1, failed to clear the dues and
accordingly on January 18, 1990, respondent No. 1 wrote a letter to the
The petitioner in the written
statement filed before the arbitrator took up a plea in respect of the
jurisdiction of the arbitrator to entertain and adjudicate upon the said
dispute. Since the arbitrator, instead of deciding the question of jurisdiction
raised by the petitioner in the arbitration proceedings, proceeded with the
arbitration, the petitioner preferred the present petition before this court
under section 33 of the Arbitration Act. After completion of the pleadings of
the parties this court by order dated March 21, 1995, framed six issues as
follows :
1. Is
it proved that the arbitration agreement is legal, enforceable and binding ?
2. Is
it proved that the arbitration agreement has the basis of legal and valid
agreement ?
3. Whether the claim of the petitioner and the
petition under section 33 of the Arbitration Act is barred by limitation ?
4. Whether the petition under section 33 of the Arbitration
Act is not maintainable, as contended by defendant No. 1 ?
5. Whether the petitioner is entitled to the
reliefs in view of the objections raised by respondent No. 1 ?
6. To
what relief, if any. is the petitioner entitled ?
I have heard learned counsel for
the parties and have given my thoughtful consideration to the matter involved.
Since issue No. 4 relates to the
maintainability of the present petition and issue No. 3 relates to the issue of
the present petition being barred by limitation, it would be appropriate that
those two issues are taken up first one after the other and thereafter to deal
with and give my findings on the remaining issues.
Issue No. 4 :
Dr. Ghosh, learned counsel for
the respondents, submitted that in an application filed by the petitioner under
section 33 of the Arbitration Act
a contract cannot be declared to be invalid or set aside. According to learned
counsel a reference to the prayer clause of the petition would show that the
petitioner had challenged the entire contract and not the arbitration clause
alone. He drew my attention to the prayer clause (a) of the petition wherein
the petitioner has prayed for a declaration that the lease agreements were
fraudulent, fabricated and antedated documents and that in prayer (b), the
petitioner has sought for a declaration that the lease agreements are void as
Shri M.C. Aggarwal had no authority to enter into the aforesaid lease
agreements whereas in prayer clause (e) declaration has been sought for
declaring the lease agreements to be void in law as there was no pre-consent,
whereas in prayer (d) the declaration is sought for cancellation of the lease
agreements. According to learned counsel only in prayer (d) there is a prayer
that the arbitration clause be declared as not binding on the petitioner. In
support of his submission, learned counsel also relied upon the decision of the
Calcutta High Court in State of Bombay v. Adamjee Hajee Dawood and Co., AIR
1951 Cal 147. It was submitted that the ratio of the aforesaid Calcutta High
Court decision was approved by the decision of the Supreme Court in Orient
Transport Co. v. Jaya Bharat Credit and Investment Co. Ltd., AIR 1987 SC 2289,
wherein it had been held that under section 33 of the Arbitration Act only the
arbitration agreement and not the contract could be challenged. Learned counsel
further submitted that except for prayer (d) wherein arbitration clause had
been referred to all other clauses in the prayer portion of the petition
revolve around the contract agreement as a whole and that even in prayer (d)
there is no challenge to the validity of the arbitration agreement but only to
the effect that it was not binding on the petitioner.
Mr. Shakdhar, counsel appearing
for the petitioner on the other hand, in reply to the aforesaid objection taken
in respect of the maintainability of the petition, took me through the
provisions of sections 31, 32 and 33 of the Arbitration Act and submitted that
a civil suit would not lie where a person seeks to challenge the existence
and/or validity of an arbitration agreement. It is submitted that the
petitioner could not have sought for invalidation
of the arbitration agreement without seeking invalidation of the parent
agreement and, therefore, the present application is maintain-able. In support of his submission, learned counsel
relied upon the decision in Khardah Company Ltd. v. Raymon and Co. (India) Pvt.
Ltd. [1963] 3 SCR 183, Waverly Jute Mills Co. Ltd. v. Raymon and Co. (India)
Pvt. Ltd. [1963] 3 SCR 209, U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd.
[1996] 2 JT 322 and Renusagar Power Co. v. General Electric Co. [1986] 1 SCR
432.
In Orient Transport Co. v. Jaya
Bharat Credit and Investment Co. Ltd., AIR 1987 SC 2289, it has been held in
paragraph 3 that sections 32 and 33 of the Arbitration Act on a true
construction do not purport to deal with suits for declaration that there was
never any contract or that contract is void. This principle is well settled.
Referring to the decision of the Calcutta High Court in the case of State of Bombay
v. Adamjee Hajee Dawood and Co., AIR 1951 Cal 147, the Supreme Court approved
the conclusion of the Calcutta High Court that section 32 of the Act does not
contemplate the case of a suit challenging the validity of a contract merely
because it contains an arbitration clause. The submission of learned counsel
for the petitioner that unless he seeks to challenge the parent agreement he
could not have challenged the arbitration agreement, in my considered opinion
is without any merit. The existence and validity of an arbitration agreement
could be challenged independently without there being any challenge made to the
parent agreement namely, the contract agreement itself. The main thrust of
learned counsel for the petitioner during the course of his arguments was all
along that the entire contract agreement is invalid in view of the fact that
the same was not entered into by a person
authorised in accordance with law and that the same has been entered into on behalf of both the
companies by the same person, which is not permissible in law. Therefore, there is no independent challenge
to the arbitration agreement in the present suit, but the entire agreement as a
whole has been challenged mainly on the aforesaid two counts. In Khardah
Company Ltd. v. Raymon and Co. (India) Pvt. Ltd. [1963] 3 SCR 183, on which
counsel for the petitioner placed heavy reliance in support of his submission,
the Supreme Court has held that when an agreement is invalid every part of it
including the clause as to arbitration contained therein must be held to be invalid. If we
glance through the prayer clause of the petition it would also be apparent that except for prayer (d) all
the other prayers in the
petition related to seeking for a declaration that the said agreements are void
and that they should be declared to be cancelled. It is only in prayer (d) that
the petitioner has referred to the arbitration clause and has sought for a
declaration that the said arbitration clause is not binding on it on
consideration of the reason that the contract itself is invalid having been executed by a person not
authorised and that the some person executed the contract on behalf of both the
companies. In my considered opinion, the petitioner has challenged the validity
of the contract as a whole which
contained an arbitration clause. On consideration of the aforesaid decisions
relied upon by the counsel for the parties, I find that the decision of the Supreme Court in Orien Transport Co.
v. Jaya Bharat Credit and Investment Co. Ltd., AIR 1987 SC 2289, is applicable
to the facts of the present case. However, since the petitioner has sought for
a decision of this court on the issue of applicability of the arbitration
agreement to it vide relief (d) of the plaint and since lengthy arguments have
been advanced by the parties relating to the validity of the agreements
themselves containing arbitration agreement, I consider it to be appropriate to
decide the said issue raised herein. This issue stands answered accordingly.
Now, I propose to discuss hereunder
the next issue raised by the respondents that the present petition is barred by
limitation since the same also relates to the root of the matter.
Issue No. 3 :
The lease agreements as against
which declarations have been sought for in the present suit were entered into
in the years 1983, 1984 and 1986.The present application under sections 32 and
33 of the Arbitration Act has been filed in the month of March, 1993. The
limitation prescribed for filing an application under section 33 of the
Arbitration Act is admittedly three years as the residuary article 137 of the
Limitation Act would be applicable for filing such an application. As has been
held by the Supreme Court in the case of Kerala State Electricity Board v. T.P.
Kunhaliumma, AIR 1977 SC 282, article 137 of the Limitation Act applies not
only to applications under the Code of Civil Procedure but to all the
applications including applications under special laws. It was held in the said
decisions that the words "any other application" under article 137
cannot be said on the principle of ejusdem generis to be applications under the
Civil Procedure Code other than those mentioned in Part I of third division and
that any other application under article 137 would be petition or any
application under any Act. A legal notice claiming the outstanding lease dues
was issued by the respondent and was served on the petitioner in the year,
1991. Learned counsel for the respondent submitted that accordingly, the
present application of the petitioner filed in March, 1993, is beyond the
period of three years contemplated under the provisions of article 137 of the
Limitation Act if the date of knowledge is construed from the date of service
of the said legal notice. Besides, according to him, the reference to arbitration
was made by the respondent in January, 1990, whereas the present petition was
filed in the month of March, 1993, which is apparently more than three years
after the reference to arbitration was made. Therefore, immediately on the
knowledge of filing of the said arbitration application for reference filed by
the respondents in the month of January,
1990, the petitioner had full knowledge about the existence of the lease
agreements which also contain the arbitration agreement.
Counsel for the petitioner in
reply submitted that the petitioner in the present petition is challenging the
jurisdiction of the arbitrators on the ground that the arbitration agreement
from which they seek to derive jurisdiction is not in existence and/or is
invalid. According to him, the petition under section 33 of the Arbitration Act
instituted to challenge the jurisdiction of the arbitrators could not be
equated to a civil suit to challenge the transaction. He further submitted that
during the period from July, 1982, to January, 1986, when the disputed lease
agreements were said to have been executed the petitioner concern and the
respondent company were under the same management and, therefore, the knowledge
of the present management of the petitioner concern could not be attributed
prior to November 11, 1990, when the petitioner got a notice from the
arbitrators informing that an arbitrator has been appointed and that it should
file its defence to the respondent's statement of claims. According to him, the
action of the arbitrators in proceeding with the arbitration despite objection
raised by the petitioner in assuming jurisdiction in respect of the lease agreement in question had given
rise to a fresh cause of action and, therefore, the present petition is not
barred by limitation.
In the rejoinder affidavit filed
on behalf of the petitioner, it is stated the present management and its
officers attained full control over the
affairs of the petitioner concern only after November 28, 1988, and that
the payments towards lease rentals which were made before November 28, 1988,
were made inadvertently and under mistake of law, which cannot bind the present
management of the petitioner-company. The petitioner did not immediately write
to the respondent claiming refund of the lease rentals nor did it repudiate the
lease agreements. The lease agreements entered into in 1983, 1984 and 1986 were
all acted upon by both the petitioner and the respondents even after the
representatives of the present management were appointed as directors of the
petitioner-company. The lease rentals were also paid. The petitioner is a legal
entity and because there was a change in the management the petitioner cannot
claim that the knowledge of the petitioner about existence of the aforesaid
lease agreements during the aforesaid period of 1983,. 1984 and 1986, would
commence only when the arbitrator continued with the arbitration proceeding in
spite of objection raised by the petitioner. The representatives of the present
management were also included in the board of management prior to
November, 1988, and, thereafter, also lease rentals were paid to the
respondents. The respondents served a legal notice on the petitioner claiming
outstanding lease rent on April 28, 1989 After service of the aforesaid notice
the petitioner at least had definite knowledge about the existence of lease
agreements as admittedly the management of the petitioner vested with the
present management with effect from November 28, 1988. The present petition has
been filed in the month of March, 1993 which is apparently beyond the period of
three years from the aforesaid dates also. In the facts and circumstances of
the present case, therefore, I have no hesitation in my mind to hold that the
present petition is barred by limitation.
Issues Nos. 1 and 2 :
As these issues involve the same facts and are similar in nature, they
are taken up together for consideration.
Learned counsel appearing for the petitioner submitted that the
arbitration agreement contained in the lease deeds are not binding on the
petitioner mainly on two grounds-(i) that the lease agreement in question were
not executed by a person duly authorised by the petitioner, and (ii) the same
person having executed the lease deeds on behalf of both the companies the
aforesaid agreements had no legal validity and accordingly, the arbitration
agreements mentioned therein which are part of the aforesaid agreements could
not be enforced nor are valid. According to learned counsel for the petitioner
there was no resolution passed by the board of directors of the petitioner
authorising Shri M.C. Aggarwal to execute the alleged agreements with the
respondent company and there being no such resolution by the board of directors
authorising Shri M.C. Aggarwal, he was neither competent nor had any power to
enter into the aforesaid lease agreements on behalf of the petitioner. Learned
counsel submitted that an authority can only be vested in a person for the
purpose of entering into contracts on behalf of the company either by the board
of directors or by the memorandum or articles of association. In support of his
submission learned counsel relied upon a few passages from Pennington's Company
Law, 5th edition, page 125 and Gower's Principles of Modern Company Law,
Student's Edition, 5th edition, pages 159 to 161.
Dr. Ghosh, learned counsel for the respondent on the other hand drew my
attention to a letter of the chairman of the petitioner dated August 1, 1984.
The contents of the said letter, according to counsel, clearly empower Shri M.C. Aggarwal, to enter into and/or to
execute the lease agreements with
the respondent company. He also drew my attention to the provisions of the articles of association of the
petitioner-company particularly the
provisions of article 121A which provide that without prejudice to the general
powers conferred by the last preceding article and to any other powers or
authority conferred by these presents on the directors or on the managing director, the directors shall have
certain powers. Sub-clause (18)
therein provides that the directors shall have power to enter into all such negotiations and contracts and rescind and
vary all such contracts and
execute and do all such acts, deeds and things in the name and on behalf of the
company as they may consider expedient for or in relation to any of the matters aforesaid or otherwise for
the purposes of the company.
Sub-clause (22) of the aforesaid article further provides that subject to the provisions of the
Act, to delegate all or any of the powers
hereby conferred upon them to the managing director or to any other director or employees of the
company as they may from time to time
think fit, other than a power to issue debentures.
Relying
on the aforesaid provisions,
learned counsel submitted that a
director is empowered under the aforesaid provisions of the articles of association to enter into a contract
in the nature of the lease agreements involved
in the present case. He further submitted that there was also ratification by the petitioner of the
actions of Shri M.C. Aggarwal in entering
into the said lease agreements from the year 1982 onwards inasmuch as payments towards rental had
been made by the petitioner to respondent
No. 1 in terms of the aforesaid lease agreements as would be apparent from the statement annexed to
the affidavit of Mr. V. Ganesh and even
from the rejoinder affidavit of the petitioner that the petitioner had acted upon the said lease agreements.
According to him, even if there be any irregularity
in the execution of the lease agreements there could be waiver of the irregularity by affirming
the transaction by the petitioner. According
to him, as and when there is such a waiver of the irregularity the said lease would be deemed to
be valid and affirmed and acted upon.
In support of his submission he relied upon the decision of the Supreme Court in Narayandas Shreeram
Somani v. Sangli Bank Ltd. [1965] 35 Comp Cas 596 (SC) ; AIR 1966 SC 170. He
further submitted that so far as the execution
of the lease agreements is concerned the same is a matter relating to the doctrine of indoor
management and if the transaction is not
inconsistent it would be assumed that all actions have been done regularly. Learned counsel also submitted
that there was also waiver and acquiescence
on the part of the petitioner, by the conduct of the petitioner by
making payment of the rents in pursuance of the aforesaid lease agreements. The
lease agreements were valid as they were acted upon and their objection to the
validity, if any, of the lease agreements having been waived in the lease
agreement the lease agreements cannot be challenged.
I have considered the submissions
made by counsel for the parties. Article 121A of the articles of association, a
copy of which was produced before me, specifically lays down that the directors
and the managing director have been vested with certain powers, one of which is
to enter into negotiations and contracts and rescind and vary all such
contracts and execute and do all such acts, deeds and things in the name and on
behalf of the company as they may consider expedient. Therefore, in view of the
aforesaid provisions the directors of the petitioner-company are empowered
under the articles of association to enter into contracts like the lease deeds
executed in the present case. The extracts relied upon by the counsel for the
petitioner from Pennington's Company Law and Gower's Principles of Modern
Company Law, Student's Edition, also laid
down that validity could be vested in a person for the purpose of
entering into contracts on behalf of the company either by the board of
directors collectively or by the memorandum and articles of association. Mr.
Shakdhar, learned counsel for the petitioner however, submitted that the provisions of article 121A clearly
indicate that the powers referred to in
article 121A (1 to 21) are those which are available to the board of
directors and that no single director has the authority to exercise any of the
powers stipulated in article 121A (1 to 21) till they are delegated to such
director or employee by the board of directors. Accordingly, in his sub-missions the word
"directors" appearing in article 121A (1-21) relates to board of
directors and not to individual director. The aforesaid submission of learned
counsel appears to be without force. On a reading of the aforesaid provisions
it appears that the word "directors" as is used in the aforesaid
provision relates also to an individual and single director who is empowered to
enter into negotiations, contracts and execute all such acts, deeds and things
in the name of and on behalf of the company as he may consider expedient. This
view gets support from the definition clause
of the articles of association wherein the word directors has been defined as
directors for the time being of the company and shall include managing director
or whole-time director but shall not include any employee designated as
executive director or works director or by any other word prefixed or suffixed
to the word director. The expression
"board of directors" is also defined as the board of directors
for the time being in force. So far as article 121A (1-21) is concerned it uses
the expression "directors" and not "board of directors"
and, therefore, the expression "directors" appearing in article 121A
envisages even an individual and single director.
Even otherwise the chairman of
the petitioner-company has issued a letter on August 1, 1984, authorising Shri
M.C. Aggarwal specifically to execute any agreement with the respondent
company. Even after the execution of the aforesaid lease agreements by Shri
M.C. Aggarwal on behalf of the petitioner-company effect was given to the terms
and conditions of the said agreements by the petitioner and also payments were
made by the petitioner to respondent No. 1, after the execution of the
agreements till the petitioner defaulted in making the payments of the lease
rentals from October, 1987. Even subsequently when representatives of the
present management, namely, Mahavir Spinning Mills Limited were co-opted on the
board of directors of the petitioner Mohta Industries Limited, thereafter also
rents were paid by the petitioner to the respondent and, therefore, there was
apparent ratification of the lease agreements executed on behalf of the
petitioner by Shri M.C. Aggarwal and there was also waiver and acquiescence in
respect of the said lease agreements on the part of the petitioner. In this
connection reference may be made to the decision of the Supreme Court in
Narayandas Shreeram Somani v. Sangli Bank Ltd. [1965] 35 Comp Cas 596 (SC) ;
AIR 1966 SC 170. It is held in that decision that even in case of irregularity
of a decision/resolution of the company, the same could be avoided by the
company, but instead of avoiding it if the company waives the irregularity and
affirms the contract, the same would be valid and binding. Counsel for the
petitioner referred to the provisions of sections 10 and 11 of the Indian
contract Act and submitted that on a harmonious reading of sections 10 and 11
of the Indian Contract Act and section 46 of the Companies Act, it is clear that
no agreement is enforceable in law against a company which is entered into on
its behalf by an agent, i.e., the director, who does not have any authority. As
has been held above a director has the company's authority to enter into and
execute a contract like the lease agreements and also in view of the
ratification and waiver on the part of the petitioner no challenge could be
made to the action of Shri M.C. Aggarwal in executing the lease agreements on
behalf of the petitioner company.
Section 46 of the Companies Act
provides that if a contract is "by law required to be in writing signed by
the parties, then the same may be signed for the company" by any person
acting under its authority, express
or implied. Reference was also made to sections 10 and 11 of the Contract Act
to emphasise that a contract would be valid when it is entered into by persons
competent to contract. In the present case, express authority to enter into
contracts like the lease agreements has been given to a director and, therefore,
Shri M.C. Aggarwal was competent and properly and validly authorised to enter
into the lease agreements. Even otherwise the chairman authorised Shri Aggarwal
to enter into the aforesaid contracts by specific order, as has been noticed
above.
The petitioner is a legal entity
and because there was a change of management the petitioner cannot claim that
the effect of acting upon the lease agreements during the years from 1982 to
1987 is not binding on it. Even according to the petitioner by November, 1988,
the petitioner came to know that lease rentals were paid by the petitioner to
respondent No. 1. Even thereafter the petitioner did not claim refund of the
lease rentals prior to February, 1991.
In view of the fact that various
powers could be delegated to the managing director or directors and also
because the director had the authority to enter into contracts the respondent
could validly rely on the doctrine of indoor management. In this connection
reference may be made to a passage from Ramaiya's Guide to the Companies Act,
13th edition, at page 363, wherein it is stated thus :
"In many cases express
authority will be found in the articles, as for instance, authority given to
the board of directors ; but the articles may further empower the delegation of
the director's powers to committees, managers, managing director, or other
persons and such delegation may be made either express or by implication."
In Pennington's Company Law, 5th
edition, at page 141, it is stated thus :
"In practice the articles of
companies contain the widest powers of delegation, both to individual directors
and to other agents chosen by the board."
Now coming to the other issue
raised by counsel for the petitioner about the lease agreements being signed by
Shri M.C. Aggarwal on behalf of both the parties, it is already noticed that
the said lease agreements were entered into by two different legal entities
through Shri M.C. Aggarwal. It is well settled that one person can enter into
an agreement with himself. Section 5 of the Transfer of Property Act envisages
transfer of property by a "person to one or more living persons or to
himself and or more other living persons." In LIC v. India Automobiles and
Co. [1990] 4 SCC 286 it was held by the Supreme Court that a contract between a
person with himself and others is valid. On the aforesaid analogy the lease
agreements entered into by two separate and distinct legal entities cannot be
held to be invalid merely because the said documents were signed by one person
who was the director of both the legal entities.
On a consideration of all the
aforesaid provisions it appears that Shri M.C. Aggarwal was authorised to enter
into and execute all contracts of the nature of lease agreements and there
being also ratification of the said agreements by the petitioner-company and
there being also waiver and acquiescence on the part of the petitioner in
respect of the aforesaid lease agreements and also taking into consideration
the fact that execution of a contract is a managerial act relating to indoor management
and functioning of the petitioner, I hold that the lease agreements coupled
with the arbitration agreements cannot be said to be invalid on that count and
cannot be declared to be not binding on the petitioner.
In view of the aforesaid findings
arrived at by me on appreciation of the evidence on record and the submissions
of learned counsel for the parties, the petitioner is entitled to no relief
and, therefore, issues Nos. 5 and 6 are answered accordingly. The petition
stands dismissed with costs.
v.
MOHTA FINANCE AND LEASING CO. LTD.
DR. M.K. SHARMA J.
O.M.P. NO. 41 OF 1993
OCTOBER 30,
1996.
Rajiv Shakdhar for the Petitioner.
Dr. Shankar Ghosh, Ms. Mukti Choudhary and Ms. Sandhya Kohli for the
Respondent.
Dr. M.K. Sharma J.—This is a petition under section 33 of the
Arbitration Act filed by the petitioner challenging the existence and validity
of the arbitration clause forming part of the lease agreements entered into
between respondent No. 1 and the petitioner-company.
The petitioner-company was
incorporated under the Companies Act in the year 1972. On February 1, 1978, the
name of Mohta Alloys and Steel Works Limited was changed to Mohta Industries
Limited. Both the petitioner company and Mohta Industries Limited at that point
of time we part of the Mohta group of industries. The Mohta group also floated
respondent No. 1 which was incorporated on September 21, 1982. During the years
1983-86 lease agreements were executed between respondent No. 1 and the
petitioner, namely, Mohta Industries Limited. The said lea agreements were
executed by Mr. M.C. Aggarwal signing on behalf of both the companies as their
director except two lease agreements wherein one of the signatories was Mr.
A.B. Chaugh and in the other it was Mr. M.R. Bhoomla. The rents were paid to
respondent No. 1 in terms of the aforesaid lease agreements by the petitioner.
Subsequently, the financial position of Mohta Industries Limited became precarious
and consequently, the petitioner was declared a sick industrial company under
the provisions of the Sick Industrial Companies (Special Provisions) Act, 1985.
In 1986, the nominees of Mahavir Spinning Mills Limited who is the present
management of the petitioner were co-opted as directors. On November 28, 1988,
the Board for Industrial and Financial Reconstruction sanctioned a scheme for
rehabilitation of Mohta Industries Limited.
The scheme for rehabilitation
envisaged amalgamation of Mohta Industries Limited with another public limited
company, namely, Mahavir Spinning Mills Limited. In terms of the aforesaid
amalgamation the petitioner came to be owned by Mahavir Spinning Mills Limited.
The petitioner started committing defaults in the payment of monthly rental to
respondent No. 1 from August, 1987. In view of the aforesaid default committed
by the petitioner respondent No. 1 terminated the lease agree-ment by its
letter dated September 2, 1989, and called upon the respondent No. 1 to clear
the outstanding amounts along with the interest. The petitioner, in spite of
the aforesaid notice issued by respondent No. 1, failed to clear the dues and
accordingly on January 18, 1990, respondent No. 1 wrote a letter to the
The petitioner in the written
statement filed before the arbitrator took up a plea in respect of the
jurisdiction of the arbitrator to entertain and adjudicate upon the said
dispute. Since the arbitrator, instead of deciding the question of jurisdiction
raised by the petitioner in the arbitration proceedings, proceeded with the
arbitration, the petitioner preferred the present petition before this court
under section 33 of the Arbitration Act. After completion of the pleadings of
the parties this court by order dated March 21, 1995, framed six issues as
follows :
1. Is
it proved that the arbitration agreement is legal, enforceable and binding ?
2. Is
it proved that the arbitration agreement has the basis of legal and valid
agreement ?
3. Whether the claim of the petitioner and the
petition under section 33 of the Arbitration Act is barred by limitation ?
4. Whether the petition under section 33 of the
Arbitration Act is not maintainable, as contended by defendant No. 1 ?
5. Whether the petitioner is entitled to the
reliefs in view of the objections raised by respondent No. 1 ?
6. To
what relief, if any. is the petitioner entitled ?
I have heard learned counsel for
the parties and have given my thoughtful consideration to the matter involved.
Since issue No. 4 relates to the
maintainability of the present petition and issue No. 3 relates to the issue of
the present petition being barred by limitation, it would be appropriate that
those two issues are taken up first one after the other and thereafter to deal
with and give my findings on the remaining issues.
Issue No. 4 :
Dr. Ghosh, learned counsel for
the respondents, submitted that in an application filed by the petitioner under
section 33 of the Arbitration Act
a contract cannot be declared to be invalid or set aside. According to learned
counsel a reference to the prayer clause of the petition would show that the
petitioner had challenged the entire contract and not the arbitration clause
alone. He drew my attention to the prayer clause (a) of the petition wherein
the petitioner has prayed for a declaration that the lease agreements were
fraudulent, fabricated and antedated documents and that in prayer (b), the
petitioner has sought for a declaration that the lease agreements are void as
Shri M.C. Aggarwal had no authority to enter into the aforesaid lease
agreements whereas in prayer clause (e) declaration has been sought for
declaring the lease agreements to be void in law as there was no pre-consent,
whereas in prayer (d) the declaration is sought for cancellation of the lease
agreements. According to learned counsel only in prayer (d) there is a prayer
that the arbitration clause be declared as not binding on the petitioner. In
support of his submission, learned counsel also relied upon the decision of the
Calcutta High Court in State of Bombay v. Adamjee Hajee Dawood and Co., AIR
1951 Cal 147. It was submitted that the ratio of the aforesaid Calcutta High
Court decision was approved by the decision of the Supreme Court in Orient
Transport Co. v. Jaya Bharat Credit and Investment Co. Ltd., AIR 1987 SC 2289,
wherein it had been held that under section 33 of the Arbitration Act only the
arbitration agreement and not the contract could be challenged. Learned counsel
further submitted that except for prayer (d) wherein arbitration clause had
been referred to all other clauses in the prayer portion of the petition
revolve around the contract agreement as a whole and that even in prayer (d)
there is no challenge to the validity of the arbitration agreement but only to
the effect that it was not binding on the petitioner.
Mr. Shakdhar, counsel appearing
for the petitioner on the other hand, in reply to the aforesaid objection taken
in respect of the maintainability of the petition, took me through the
provisions of sections 31, 32 and 33 of the Arbitration Act and submitted that
a civil suit would not lie where a person seeks to challenge the existence
and/or validity of an arbitration agreement. It is submitted that the
petitioner could not have sought for invalidation
of the arbitration agreement without seeking invalidation of the parent
agreement and, therefore, the present application is maintain-able. In support of his submission, learned counsel
relied upon the decision in Khardah Company Ltd. v. Raymon and Co. (India) Pvt.
Ltd. [1963] 3 SCR 183, Waverly Jute Mills Co. Ltd. v. Raymon and Co. (India)
Pvt. Ltd. [1963] 3 SCR 209, U.P. Rajkiya Nirman Nigam Ltd. v. Indure Pvt. Ltd.
[1996] 2 JT 322 and Renusagar Power Co. v. General Electric Co. [1986] 1 SCR
432.
In Orient Transport Co. v. Jaya
Bharat Credit and Investment Co. Ltd., AIR 1987 SC 2289, it has been held in
paragraph 3 that sections 32 and 33 of the Arbitration Act on a true
construction do not purport to deal with suits for declaration that there was
never any contract or that contract is void. This principle is well settled.
Referring to the decision of the Calcutta High Court in the case of State of
Bombay v. Adamjee Hajee Dawood and Co., AIR 1951 Cal 147, the Supreme Court
approved the conclusion of the Calcutta High Court that section 32 of the Act
does not contemplate the case of a suit challenging the validity of a contract
merely because it contains an arbitration clause. The submission of learned
counsel for the petitioner that unless he seeks to challenge the parent
agreement he could not have challenged the arbitration agreement, in my
considered opinion is without any merit. The existence and validity of an
arbitration agreement could be challenged independently without there being any
challenge made to the parent agreement namely, the contract agreement itself.
The main thrust of learned counsel for the petitioner during the course of his
arguments was all along that the entire contract agreement is invalid in view
of the fact that the same was not entered into by a person authorised in accordance with law and that the same has been
entered into on behalf of both
the companies by the same person, which is not permissible in law. Therefore, there is no independent challenge
to the arbitration agreement in the present suit, but the entire agreement as a
whole has been challenged mainly on the aforesaid two counts. In Khardah
Company Ltd. v. Raymon and Co. (India) Pvt. Ltd. [1963] 3 SCR 183, on which
counsel for the petitioner placed heavy reliance in support of his submission,
the Supreme Court has held that when an agreement is invalid every part of it
including the clause as to arbitration contained therein must be held to be invalid. If we
glance through the prayer clause of the petition it would also be apparent that except for prayer (d) all
the other prayers in the
petition related to seeking for a declaration that the said agreements are void
and that they should be declared to be cancelled. It is only in prayer (d) that
the petitioner has referred to the arbitration clause and has sought for a
declaration that the said arbitration clause is not binding on it on
consideration of the reason that the contract itself is invalid having been executed by a person not
authorised and that the some person executed the contract on behalf of both the
companies. In my considered opinion, the petitioner has challenged the validity
of the contract as a whole which
contained an arbitration clause. On consideration of the aforesaid decisions
relied upon by the counsel for the parties, I find that the decision of the Supreme Court in Orien Transport Co.
v. Jaya Bharat Credit and Investment Co. Ltd., AIR 1987 SC 2289, is applicable
to the facts of the present case. However, since the petitioner has sought for
a decision of this court on the issue of applicability of the arbitration
agreement to it vide relief (d) of the plaint and since lengthy arguments have
been advanced by the parties relating to the validity of the agreements
themselves containing arbitration agreement, I consider it to be appropriate to
decide the said issue raised herein. This issue stands answered accordingly.
Now, I propose to discuss
hereunder the next issue raised by the respondents that the present petition is
barred by limitation since the same also relates to the root of the matter.
Issue No. 3 :
The lease agreements as against
which declarations have been sought for in the present suit were entered into
in the years 1983, 1984 and 1986.The present application under sections 32 and
33 of the Arbitration Act has been filed in the month of March, 1993. The
limitation prescribed for filing an application under section 33 of the
Arbitration Act is admittedly three years as the residuary article 137 of the
Limitation Act would be applicable for filing such an application. As has been
held by the Supreme Court in the case of Kerala State Electricity Board v. T.P.
Kunhaliumma, AIR 1977 SC 282, article 137 of the Limitation Act applies not
only to applications under the Code of Civil Procedure but to all the
applications including applications under special laws. It was held in the said
decisions that the words "any other application" under article 137
cannot be said on the principle of ejusdem generis to be applications under the
Civil Procedure Code other than those mentioned in Part I of third division and
that any other application under article 137 would be petition or any
application under any Act. A legal notice claiming the outstanding lease dues
was issued by the respondent and was served on the petitioner in the year,
1991. Learned counsel for the respondent submitted that accordingly, the
present application of the petitioner filed in March, 1993, is beyond the
period of three years contemplated under the provisions of article 137 of the
Limitation Act if the date of knowledge is construed from the date of service
of the said legal notice. Besides, according to him, the reference to
arbitration was made by the respondent in January, 1990, whereas the present
petition was filed in the month of March, 1993, which is apparently more than
three years after the reference to arbitration was made. Therefore, immediately
on the knowledge of filing of the said arbitration application for reference
filed by the respondents in the month of January, 1990, the petitioner had full knowledge about the existence of
the lease agreements which also contain the arbitration agreement.
Counsel for the petitioner in
reply submitted that the petitioner in the present petition is challenging the
jurisdiction of the arbitrators on the ground that the arbitration agreement
from which they seek to derive jurisdiction is not in existence and/or is
invalid. According to him, the petition under section 33 of the Arbitration Act
instituted to challenge the jurisdiction of the arbitrators could not be
equated to a civil suit to challenge the transaction. He further submitted that
during the period from July, 1982, to January, 1986, when the disputed lease
agreements were said to have been executed the petitioner concern and the
respondent company were under the same management and, therefore, the knowledge
of the present management of the petitioner concern could not be attributed
prior to November 11, 1990, when the petitioner got a notice from the
arbitrators informing that an arbitrator has been appointed and that it should
file its defence to the respondent's statement of claims. According to him, the
action of the arbitrators in proceeding with the arbitration despite objection
raised by the petitioner in assuming jurisdiction in respect of the lease agreement in question had given
rise to a fresh cause of action and, therefore, the present petition is not
barred by limitation.
In the rejoinder affidavit filed
on behalf of the petitioner, it is stated the present management and its
officers attained full control over the
affairs of the petitioner concern only after November 28, 1988, and that
the payments towards lease rentals which were made before November 28, 1988,
were made inadvertently and under mistake of law, which cannot bind the present
management of the petitioner-company. The petitioner did not immediately write
to the respondent claiming refund of the lease rentals nor did it repudiate the
lease agreements. The lease agreements entered into in 1983, 1984 and 1986 were
all acted upon by both the petitioner and the respondents even after the
representatives of the present management were appointed as directors of the
petitioner-company. The lease rentals were also paid. The petitioner is a legal
entity and because there was a change in the management the petitioner cannot
claim that the knowledge of the petitioner about existence of the aforesaid
lease agreements during the aforesaid period of 1983,. 1984 and 1986, would
commence only when the arbitrator continued with the arbitration proceeding in
spite of objection raised by the petitioner. The representatives of the present
management were also included in the board of management prior to
November, 1988, and, thereafter, also lease rentals were paid to the
respondents. The respondents served a legal notice on the petitioner claiming
outstanding lease rent on April 28, 1989 After service of the aforesaid notice
the petitioner at least had definite knowledge about the existence of lease
agreements as admittedly the management of the petitioner vested with the
present management with effect from November 28, 1988. The present petition has
been filed in the month of March, 1993 which is apparently beyond the period of
three years from the aforesaid dates also. In the facts and circumstances of
the present case, therefore, I have no hesitation in my mind to hold that the
present petition is barred by limitation.
Issues Nos. 1 and 2 :
As these issues involve the same facts and are similar in nature, they
are taken up together for consideration.
Learned counsel appearing for the petitioner submitted that the
arbitration agreement contained in the lease deeds are not binding on the
petitioner mainly on two grounds-(i) that the lease agreement in question were
not executed by a person duly authorised by the petitioner, and (ii) the same
person having executed the lease deeds on behalf of both the companies the
aforesaid agreements had no legal validity and accordingly, the arbitration
agreements mentioned therein which are part of the aforesaid agreements could
not be enforced nor are valid. According to learned counsel for the petitioner
there was no resolution passed by the board of directors of the petitioner authorising
Shri M.C. Aggarwal to execute the alleged agreements with the respondent
company and there being no such resolution by the board of directors
authorising Shri M.C. Aggarwal, he was neither competent nor had any power to
enter into the aforesaid lease agreements on behalf of the petitioner. Learned
counsel submitted that an authority can only be vested in a person for the
purpose of entering into contracts on behalf of the company either by the board
of directors or by the memorandum or articles of association. In support of his
submission learned counsel relied upon a few passages from Pennington's Company
Law, 5th edition, page 125 and Gower's Principles of Modern Company Law,
Student's Edition, 5th edition, pages 159 to 161.
Dr. Ghosh, learned counsel for the respondent on the other hand drew my
attention to a letter of the chairman of the petitioner dated August 1, 1984.
The contents of the said letter, according to counsel, clearly empower Shri M.C. Aggarwal, to enter into and/or to
execute the lease agreements with
the respondent company. He also drew my attention to the provisions of the articles of association of the
petitioner-company particularly the
provisions of article 121A which provide that without prejudice to the general
powers conferred by the last preceding article and to any other powers or
authority conferred by these presents on the directors or on the managing director, the directors shall have
certain powers. Sub-clause (18)
therein provides that the directors shall have power to enter into all such negotiations and contracts and rescind and
vary all such contracts and
execute and do all such acts, deeds and things in the name and on behalf of the
company as they may consider expedient for or in relation to any of the matters aforesaid or otherwise for
the purposes of the company.
Sub-clause (22) of the aforesaid article further provides that subject to the provisions of the
Act, to delegate all or any of the powers
hereby conferred upon them to the managing director or to any other director or employees of the
company as they may from time to time
think fit, other than a power to issue debentures.
Relying
on the aforesaid provisions,
learned counsel submitted that a
director is empowered under the aforesaid provisions of the articles of association to enter into a contract
in the nature of the lease agreements involved
in the present case. He further submitted that there was also ratification by the petitioner of the
actions of Shri M.C. Aggarwal in entering
into the said lease agreements from the year 1982 onwards inasmuch as payments towards rental had
been made by the petitioner to respondent
No. 1 in terms of the aforesaid lease agreements as would be apparent from the statement annexed to
the affidavit of Mr. V. Ganesh and even
from the rejoinder affidavit of the petitioner that the petitioner had acted upon the said lease agreements.
According to him, even if there be any irregularity
in the execution of the lease agreements there could be waiver of the irregularity by affirming
the transaction by the petitioner. According
to him, as and when there is such a waiver of the irregularity the said lease would be deemed to
be valid and affirmed and acted upon.
In support of his submission he relied upon the decision of the Supreme Court in Narayandas Shreeram
Somani v. Sangli Bank Ltd. [1965] 35 Comp Cas 596 (SC) ; AIR 1966 SC 170. He
further submitted that so far as the execution
of the lease agreements is concerned the same is a matter relating to the doctrine of indoor
management and if the transaction is not
inconsistent it would be assumed that all actions have been done regularly. Learned counsel also submitted
that there was also waiver and acquiescence
on the part of the petitioner, by the conduct of the petitioner by
making payment of the rents in pursuance of the aforesaid lease agreements. The
lease agreements were valid as they were acted upon and their objection to the
validity, if any, of the lease agreements having been waived in the lease
agreement the lease agreements cannot be challenged.
I have considered the submissions
made by counsel for the parties. Article 121A of the articles of association, a
copy of which was produced before me, specifically lays down that the directors
and the managing director have been vested with certain powers, one of which is
to enter into negotiations and contracts and rescind and vary all such
contracts and execute and do all such acts, deeds and things in the name and on
behalf of the company as they may consider expedient. Therefore, in view of the
aforesaid provisions the directors of the petitioner-company are empowered
under the articles of association to enter into contracts like the lease deeds
executed in the present case. The extracts relied upon by the counsel for the
petitioner from Pennington's Company Law and Gower's Principles of Modern
Company Law, Student's Edition, also laid
down that validity could be vested in a person for the purpose of
entering into contracts on behalf of the company either by the board of
directors collectively or by the memorandum and articles of association. Mr.
Shakdhar, learned counsel for the petitioner however, submitted that the provisions of article 121A clearly
indicate that the powers referred to in
article 121A (1 to 21) are those which are available to the board of
directors and that no single director has the authority to exercise any of the
powers stipulated in article 121A (1 to 21) till they are delegated to such
director or employee by the board of directors. Accordingly, in his sub-missions the word
"directors" appearing in article 121A (1-21) relates to board of
directors and not to individual director. The aforesaid submission of learned
counsel appears to be without force. On a reading of the aforesaid provisions
it appears that the word "directors" as is used in the aforesaid
provision relates also to an individual and single director who is empowered to
enter into negotiations, contracts and execute all such acts, deeds and things
in the name of and on behalf of the company as he may consider expedient. This
view gets support from the definition clause
of the articles of association wherein the word directors has been defined as
directors for the time being of the company and shall include managing director
or whole-time director but shall not include any employee designated as
executive director or works director or by any other word prefixed or suffixed
to the word director. The expression
"board of directors" is also defined as the board of directors
for the time being in force. So far as article 121A (1-21) is concerned it uses
the expression "directors" and not "board of directors"
and, therefore, the expression "directors" appearing in article 121A
envisages even an individual and single director.
Even otherwise the chairman of the
petitioner-company has issued a letter on August 1, 1984, authorising Shri M.C.
Aggarwal specifically to execute any agreement with the respondent company.
Even after the execution of the aforesaid lease agreements by Shri M.C.
Aggarwal on behalf of the petitioner-company effect was given to the terms and
conditions of the said agreements by the petitioner and also payments were made
by the petitioner to respondent No. 1, after the execution of the agreements
till the petitioner defaulted in making the payments of the lease rentals from
October, 1987. Even subsequently when representatives of the present
management, namely, Mahavir Spinning Mills Limited were co-opted on the board
of directors of the petitioner Mohta Industries Limited, thereafter also rents
were paid by the petitioner to the respondent and, therefore, there was
apparent ratification of the lease agreements executed on behalf of the
petitioner by Shri M.C. Aggarwal and there was also waiver and acquiescence in
respect of the said lease agreements on the part of the petitioner. In this
connection reference may be made to the decision of the Supreme Court in
Narayandas Shreeram Somani v. Sangli Bank Ltd. [1965] 35 Comp Cas 596 (SC) ;
AIR 1966 SC 170. It is held in that decision that even in case of irregularity
of a decision/resolution of the company, the same could be avoided by the
company, but instead of avoiding it if the company waives the irregularity and
affirms the contract, the same would be valid and binding. Counsel for the
petitioner referred to the provisions of sections 10 and 11 of the Indian
contract Act and submitted that on a harmonious reading of sections 10 and 11
of the Indian Contract Act and section 46 of the Companies Act, it is clear
that no agreement is enforceable in law against a company which is entered into
on its behalf by an agent, i.e., the director, who does not have any authority.
As has been held above a director has the company's authority to enter into and
execute a contract like the lease agreements and also in view of the
ratification and waiver on the part of the petitioner no challenge could be
made to the action of Shri M.C. Aggarwal in executing the lease agreements on
behalf of the petitioner company.
Section 46 of the Companies Act
provides that if a contract is "by law required to be in writing signed by
the parties, then the same may be signed for the company" by any person
acting under its authority, express
or implied. Reference was also made to sections 10 and 11 of the Contract Act
to emphasise that a contract would be valid when it is entered into by persons
competent to contract. In the present case, express authority to enter into
contracts like the lease agreements has been given to a director and,
therefore, Shri M.C. Aggarwal was competent and properly and validly authorised
to enter into the lease agreements. Even otherwise the chairman authorised Shri
Aggarwal to enter into the aforesaid contracts by specific order, as has been
noticed above.
The petitioner is a legal entity
and because there was a change of management the petitioner cannot claim that
the effect of acting upon the lease agreements during the years from 1982 to
1987 is not binding on it. Even according to the petitioner by November, 1988,
the petitioner came to know that lease rentals were paid by the petitioner to
respondent No. 1. Even thereafter the petitioner did not claim refund of the
lease rentals prior to February, 1991.
In view of the fact that various
powers could be delegated to the managing director or directors and also
because the director had the authority to enter into contracts the respondent
could validly rely on the doctrine of indoor management. In this connection
reference may be made to a passage from Ramaiya's Guide to the Companies Act,
13th edition, at page 363, wherein it is stated thus :
"In many cases express
authority will be found in the articles, as for instance, authority given to
the board of directors ; but the articles may further empower the delegation of
the director's powers to committees, managers, managing director, or other
persons and such delegation may be made either express or by implication."
In Pennington's Company Law, 5th
edition, at page 141, it is stated thus :
"In practice the articles of
companies contain the widest powers of delegation, both to individual directors
and to other agents chosen by the board."
Now coming to the other issue
raised by counsel for the petitioner about the lease agreements being signed by
Shri M.C. Aggarwal on behalf of both the parties, it is already noticed that
the said lease agreements were entered into by two different legal entities
through Shri M.C. Aggarwal. It is well settled that one person can enter into
an agreement with himself. Section 5 of the Transfer of Property Act envisages
transfer of property by a "person to one or more living persons or to
himself and or more other living persons." In LIC v. India Automobiles and
Co. [1990] 4 SCC 286 it was held by the Supreme Court that a contract between a
person with himself and others is valid. On the aforesaid analogy the lease
agreements entered into by two separate and distinct legal entities cannot be
held to be invalid merely because the said documents were signed by one person
who was the director of both the legal entities.
On a consideration of all the
aforesaid provisions it appears that Shri M.C. Aggarwal was authorised to enter
into and execute all contracts of the nature of lease agreements and there
being also ratification of the said agreements by the petitioner-company and
there being also waiver and acquiescence on the part of the petitioner in
respect of the aforesaid lease agreements and also taking into consideration
the fact that execution of a contract is a managerial act relating to indoor
management and functioning of the petitioner, I hold that the lease agreements
coupled with the arbitration agreements cannot be said to be invalid on that
count and cannot be declared to be not binding on the petitioner.
In view of the aforesaid findings
arrived at by me on appreciation of the evidence on record and the submissions
of learned counsel for the parties, the petitioner is entitled to no relief
and, therefore, issues Nos. 5 and 6 are answered accordingly. The petition
stands dismissed with costs.
[1996] 85 COMP CAS 325 (BOM)
B.D.A. Breweries and Distilleries Ltd.
v.
Cruickshank and Co. Ltd.
M.F.
Saldanha J.
APPEAL FROM ORDER NO.
303 OF 1993.
(TRANSFERRED MISC. CIVIL APPEAL NO. 128 OF 1992.)
APRIL 27/JULY 30, 1993
V.R. Manohar,
T.N. Subramaniam, Ajit Kapadia, Ms. Usha Purohit, Mahesh Jethmalani, Arif
Bookwala, Pankaj Sawant and Craigie Blunt for the Appellants.
K.K.
Venugopal, M.G. Ramachandran, Parag Tripathi, Dwarhadas, S.A Divan and V.Z.
Kankaria for the Respondents.
M.F.
Saldanha J.—I need to prefix
this judgment with the observation that learned counsel appearing on both sides
have done a truly excellent job of presenting every conceivable aspect of the
dispute that is the subject-matter of this litigation with their characteristic
skill and ability, both of which are of a very high order. While deciding on
interim application, normally, this court would have circumscribed itself to
the minimum and, consequently, refrained from an elaborate adjudication of the
manifold facets, both factual and legal, that have been canvassed. It .was,
however, pointed out to me by both sides that there are something like three
dozen interconnected litigations effectively between the same parties,
including an identical suit pending before the Calcutta High Court, in all of
which proceedings the subject-matter of this litigation is in issue. All those
litigations are in a manner of speaking dependant on the outcome of this
proceeding which explains why the parties have virtually treated this one as
the "mother of all battles"—to borrow an expression that has now
become current, judicial time is precious and it is equally necessary that in
order to curtail repetitive hearings and litigations in different parts of the
country, the High Court which hears the proceedings, first, must set at rest
all the points that are canvassed in view of the principles of res judicata.
That, in other words, explains the length of this judgment which inevitably
involved an elaborate factual and legal exercise of some magnitude. I need to
also observe here that the courts which are groaning under the load of arrears
can ill-afford multiple litigations and the immediate fall-out of these
skirmishes is the disastrous effect on the companies and units that are being
fought over which should not be driven to ruination. A total, final resolution
of the entire matter is obviously in the interests of all concerned. Shri
Manohar, on behalf of the appellants, was almost driven to summarise the plight
of his clients as being best expressed by the phrase "to be or not to
be" and, to my mind, it is imperative that legal process, to be just, must
afford relief where it is deserved and in cases of injury—provide the
much-needed healing touch.
The present
appeal is directed against an order dated May 5, 1992, passed by the learned
Second Joint Civil Judge, Junior Division,
As indicated
earlier, the starting point of this litigation was the institution of the civil
suit in question and it is very necessary in the context of this appeal for me
to summarise as to what precisely was the case made out by the plaintiffs
before the trial court. I consider this crucial because this is a vigorously
contested litigation in which the pleadings are voluminous, but the greater
part of this material has seen the light of day at a subsequent point of time.
The plaintiffs are necessarily circumscribed to the case made out by them
before the trial court and no amount of padding and grafting on at later stages
in the litigation is really permissible because this appeal is essentially a
review of an ad interim order passed by the trial court and then confirmed on
the basis of certain material before it and of a specific case made out. It is,
therefore, necessary to assess, in the first instance, as to what was the cause
of action pleaded at that point of time.
The plaintiffs
are a wholly owned subsidiary of Shaw Wallace and Co. Ltd. (hereinafter
referred to as "Shaw Wallace"), which company, in turn, is engaged,
inter alia, in the business of manufacture and sale of Indian made foreign
liquor and beer for the past about one hundred years. The plaintiffs contend
that Shaw Wallace and Co. Ltd. conceived, developed and promoted various brands
of liquors, which were well-received and which are virtual market-leaders. The
plaintiffs go on to aver that during 1987-88, Shaw Wallace and the
plaintiff-company decided to promote new brands of liquors in the
plaintiff-company and that this was done to provide internal competition to the
sale of such products amongst Shaw Wallace and the plaintiff-company.
Consequently, the plaintiff-company conceived, developed and promoted, among
others, three brands, namely, Officer's Choice, 1000-Guiness and Calypso Rum.
In respect of these three products, the plaintiffs filed an application for
registration of the brands with the Registrar of Trade Marks on April 21, 1988,
which applications are pending. It is contended that these three brands were
marketed by the plaintiffs from the end of 1988 onwards, that they virtually
rocketed to the top of the market and that they were virtual money spinners.
The plaintiff-company, however, did not establish or maintain any manufacturing
unit and arranges to get these products manufactured from different units.
The first
defendant-company, B.D.A. Breweries and Distilleries Ltd. (hereinafter referred
to as "BDA"), is a company incorporated under the provisions of the
Companies Act, 1956, and its registered office was situated at Udyog Bhavan,
29, Walchand Hirachand Marg, Ballard Estate, Bombay. The premises in question
are taken on lease by Shaw Wallace. The manufacturing unit of the first
defendant-company is at Plot No. 6, MIDC Industrial Area, Chikalthana,
Next, it is
contended that the plaintiff-company "faced certain difficulty" in
some of the northern states on account of the Central Excise Regulations
because the authorities in those States permitted only those brand owners who
manufactured IMFL products to import the same into those States. It is pleaded
that because of this difficulty, the plaintiff-company decided to assign the
aforesaid three brands to BDA. Since, it had manufacturing facilities, BDA was
in a position to obtain excise licences for import of IMFL products in the
States mentioned above. I need to observe, at this stage, that this is the
solitary ground set out in justification for the assignment of the three brands
in question to BDA though it was sought to be argued at a subsequent stage that
the difficulty was, in fact, a genuine one, nothing has been produced in
support of this crucial averment. As I shall presently point out, that does not
make much difference because the assignment in question did take place which is
a matter of record and the reasons that prompted it, genuine or weak, are not
of consequence because it is a case of documents vs. statements in the air.
The
plaintiffs further contended that they continued to control the manufacture of
the products of the above brands at the factory of BDA and that Shaw Wallace
had provided various types of equipment for use in the factory on lease basis.
The technical and other personnel of the plaintiff-company are supposed to have
been deputed/assigned from time to time to undertake the supervision of the
manufacture of these products and the plaintiffs contend that they have been
looking after the marketing, sale and distribution of the products in question
through its offices and representatives. The plaintiffs have also pointed out
that they have provided a corporate guarantee from the Central Bank of
In paragraph
(10) of the plaint, a bald statement has been made that BDA and the plaintiffs
have been "part of the Shaw Wallace group for all intents and
purposes" and in the latter part of that paragraph, there is a reference
to an "arrangement" whereby the officers of the plaintiff-company
from the corporate head office at Delhi have been supervising and controlling
the operations of the first defendant-company's factory and offices which, the
plaintiff contends, is continuing as on the date of the filing of the suit. I
need to only observe here that we are concerned with two separate public
limited companies and a so-called working arrangement has been pleaded, but I
do not find the requisite resolutions, documents or anything in support of what
is contended therein.
In paragraph
(12), the plaintiffs point out that the third respondent, K.R. Chhabria, has been
the managing director of Shaw Wallace since 1987. The fourth defendant, U.K.
Ganguly, was one of the vice-presidents of Shaw Wallace until April, 1992, when
he submitted his, resignation. The fifth defendant, S.S. Sanyal, was appointed
as a chief executive officer of BDA and it is alleged that he had been
reporting to the officers' of the plaintiff-company in
Paragraph
(13) of the plaint sets out the incident that has given rise to the litigation.
The third defendant, K.R. Chhabria, in his capacity as the chairman of BDA
issued a circular dated April 10, 1992, to the effect that the fourth defendant
has been appointed as the managing director of BDA with effect from April 9,
1992, and that all functions of the company shall be under supervision and
control of the fourth defendant and that he will be assisted in his functions
by the fifth defendant. The circular specifically states that all sanctions and
approvals in regard to BDA are to be obtained from the fourth defendant only
and these documents have been issued to the executives of BDA. In other words,
what is pleaded is that by virtue of this act on the part of defendant No. 3,
BDA was to function independently of the supervision and control of the
plaintiffs which, according to them, was being exercised pursuant to an
arrangement. I repeat that the plaintiffs have neither produced the agreement,
resolution or any other document under which the so-called agreement was
arrived at nor have they spelt out in the plaint as to how an agreement of that
type is to be considered as enforceable in a court of law.
The
plaintiffs proceed to state in paragraph (14) that the issuance of the circular
dated April 10, 1992, is contrary to the "arrangement" existing for
the supervision and control of the affairs of the BDA. They contend that the
appointment of the third defendant as the chairman and the fourth defendant as
the managing director of BDA are without the consent or knowledge of the
plaintiff-company and the Shaw Wallace group and contrary to the existing
arrangements made between the parties and further that it has been issued in an
attempt to get control of BDA and take it out of the Shaw Wallace group. It is
further alleged that defendants Nos. 3 to 7 and certain other persons who are
not named but who are alleged to have been supporting them are making efforts
to illegally appropriate BDA, its assets and property to the personal benefit,
and to the exclusion of the Shaw Wallace group.
In paragraph
(15), the plaintiffs have set out their case with regard to the shareholding of
BDA. It is necessary for me to reproduce this because learned counsel for the
appellants devoted considerable time to these transactions and learned counsel
for the appellants has seriously contested the validity of what transpired and,
in the plaint itself, there is a submission that the transaction is illegal and
void. The total issued and subscribed capital of BDA was Rs. 2,50,000
consisting of 25,000 equity shares of Rs. 10 each as on March 31, 1990. The
entire lot of equity shares was held by Arunava Investments Ltd. Another
company by the name of Paraganas Investments Ltd. in turn held the entire
shareholding of Arunava Investments Ltd. The plaintiff-company, in turn, holds
110 equity shares out of the total 130 equity shares in Paraganas Investments
Ltd. and, consequently, the plaintiff-company was in total control of the
equity shares of BDA. It is contended that any change in the shareholdings of
the various companies was required to be done within the group and it is alleged
that defendant No. 3 by utilising his position as the managing director of Shaw
Wallace, which post he then held, arranged for Arunava Investments Ltd. to
transfer the entire lot of shares in BDA to another company. This transfer, it
is contended, is illegal and void. The first ground urged in support of this
contention is that the transfer of the shares by Arunava Investments Ltd. was
without the approval of the shareholders of the company and it is contended
that these shares constituted a substantial asset and a substratum of the
company and that this disinvestment could not have been done without the
shareholders' approval. Secondly, what is pointed out is that at the time of
the transfer of these shares, the price paid was inadequate. The plaint is silent
with regard to the all important details such as dates, consideration, the
manner in which the transfer took place, etc.
A scheme for
amalgamation of Arunava Investments Ltd. and Shaw Wallace was pending before
the High Court of Judicature at
Another
serious accusation made by the plaintiffs, and which has been very strongly
agitated by Shri Venugopal, learned counsel on behalf of the respondents before
me, is that the third defendant, who at the relevant time was the managing director
of the Shaw Wallace group, has acted in breach of his fiduciary capacity and
has acted contrary to the interest of the Shaw Wallace group of companies and
their shareholders.
Lastly, under
this head, it is the generalised averment that the transfer of shares is
contrary to the provisions of law and the regulations of the company. This
statement again is vague and nebulous because neither the provisions of law nor
the regulations of the company have been set out.
The next
grievance of the plaintiffs is that the name of the first defendant-company,
which was BDA Breweries and Distilleries Ltd., has been changed to BDA Limited
without the sanction or approval of the plaintiffs or of Shaw Wallace. I assume
that the plaintiffs ought to have indicated the legal justification in support
of this charge by pointing out the provisions of law under which such sanction
or approval is condition precedent, but there is not even a whisper in this
regard.
It is
thereafter contended that defendant No. 3 to defendant No. 7 and certain other
persons who are not named and who are alleged to have been supporting them are
making attempts to snatch BDA, its factory premises and property of the company
out of the reach of the Shaw Wallace group and out of the arrangement made
between the parties since 1988. I have earlier observed that what is pleaded is
an arrangement, obviously not an agreement and there is nothing in support
thereof. The grievance that is projected is regarding the acts of defendant No.
3 and others and it appears to indicate that if with effect from April 10,
1992, BDA proposed to manage itself and function independently that it
constitutes a breach which gives rise to a cause of action in the present suit.
The difficulty in comprehending what exactly the plaintiffs are alleging arises
from the fact that the term "out of the reach of the Shaw Wallace
group" appears to signify that BDA was required to function under the
dominion and control of the Shaw Wallace group and any attempt to function independently
can be stopped by order of the court.
In ground
(d), a vague allegation is made to the effect that defendants Nos. 3 to 7
"and certain other persons supporting them" are threatening and
pressurising employees of BDA and at other offices which again are unnamed, to
the effect that they will suffer if they do not submit to their dictates. It is
also alleged that defendants Nos. 4 to 7 have been in the city of Aurangabad
since April 13, although ordinarily their presence is not required, and that
they have been meeting the employees working in the factory and asking for
records and papers, access to various departments and the general control over
the premises, and that they are adopting coercive and intimidative attitudes
towards the above employees. April 14th and 15th were public holidays and the
plaintiffs contended that after the factory reopened, defendants Nos. 4 to 7
and other persons supporting them will cause interference in the working of the
factory. A general averment thereafter follows, which is as nebulous and vague
as could be, that the defendants will interfere with the working of the factory
and the manufacturing activities and cause serious damage and disruption. All
these and with the sentence "If the
defendants are allowed to interfere with the working of the factory premises,
there will be industrial unrest." It is on the basis of these averments
that the plaintiffs approached the trial court on April 16, 1992, and I
consider it equally necessary to reproduce the four prayers which are as follows
:
"(a) A decree in favour of the plaintiffs and
against the defendants restraining the defendants from giving effect to the
circular issued to the executives of the first defendant-company and attached
hereto as annexure "A" or from issuing any other or further
circular/s or directions.
(b) A decree in favour of the plaintiffs and
against the defendants restraining the defendants from interfering with the
working of the first defendant-company and/or its factory premises and assets.
(c) A decree be passed in favour of the
plaintiffs and against the defendants restraining the defendants from making
any change in the manufacturing, distribution, selling, marketing and working
arrangements including and in particular the operation of bank accounts, appointment
or removal of executives and employees of the company, appointment of
director/s.
(d) A decree in favour of the plaintiffs and
against the defendants directing that the first defendant-company shall
continue to be managed as a part of the Shaw Wallace group and all arrangements
prevalent in regard to the functioning of the first defendant-company since
1988, shall continue to be in full force and effect."
Normally, it
would have been totally unnecessary for me to recount in detail the contents of
the plaint, but on the special facts of the present case, there is a specific
reason for doing so, even at the expense of burdening this judgment. It is
necessary to examine as to what was the case and cause of action pleaded before
the trial court and the material produced in support thereof. At a subsequent
stage, a pointed reference would also be necessary to the other aspect as it
would be equally imperative to note as to how much of the material was
suppressed from the trial court at this point of time. For this purpose, it
would be worthwhile to also summarise the annexures to the plaint which are as
follows :
(i) The circular dated April 9, 1992,
appointing defendant No. 4 as the managing director of BDA.
(ii) Letter dated April 24, 1989, from
the plaintiffs to BDA confirming that the plaintiffs will continue to market
all the products of BDA and that they will provide the managerial inputs
necessary to sustain the operation of the unit and that certain representatives
would be posted there for running the day to day operations the cost of which
would be to the account of BDA.
(iii) Letter dated May 20, 1991, from BDA
to Central Bank of
(iv) Scheme for the amalgamation and
merger of various companies, including Arunava Investments Ltd. and Paraganas
Investments Ltd. with Shaw Wallace Co. Ltd., which is pending before the
Calcutta High Court.
Then follows
the interim application for the grant of the injunction prayed for supported by
an affidavit of Shovan Roy, who is a vice-president and duly constituted
attorney of the plaintiff-company. On the basis of this material, the learned
trial judge passed an ex parte order wherein he has reproduced the submissions
canvassed by the plaintiff's learned counsel which have gone way beyond
anything contained in the plaint or the documents in support thereof and it
would be interesting to reproduce the reasoning and the ultimate order that
came to be passed, which are as follows :
"I am
satisfied that to protect the interest of the plaintiffs' company and its
affairs and to protect the name and dignity of the Shaw Wallace group and to
avoid any unrest in the industrial area, it is necessary to pass emergent
orders. Therefore, I am satisfied that the plaintiffs have shown to this court
at this stage that there is a prima facie material on record to pass ex parte
orders dispensing mandatory notice. On the other hand, as stated earlier, if
till appearance of the parties and particularly till the appearance of
defendants Nos. 5 to 7 if such ex parte orders remains in force, no prejudice
will be caused to them, if really they intend to maintain the dignity and name
of the Shaw Wallace group. Therefore, dispensing the mandatory notice, I pass
the following order.
1. The defendants/non-applicants Nos.
3 to 7 are restrained by this ex parte injunction order from interfering with
the working of plaintiff No. 2 as factory manager and to interfere in his
affair or affairs of plaintiff No. 1 in the premises at plot No. 6, MIDC,
Industrial Area, Chikalthana, or making any interference or change in the
existing manufacturing, distribution, selling, marketing, working arrangement
and operation of the bank accounts, etc., till the appearance of these
defendants either by themselves or with the help of any other persons acting
under them. As far as circular in dispute is concerned I order that status quo
as on today existing be maintained and effect to that circular should not be
given till the appearance of these defendants and till their filing of say and
hearing.
2. The plaintiffs to comply with the
provisions of Order 39, rule 3(a) of the Civil Procedure Code, 1908, as to
supply of copies of plaint and documents to these defendants and should swear
affidavit in this behalf on April 13, 1992, as tomorrow is holiday. E. Allowed.
3. Issue emergent notice to these
defendants asking them why such ad interim ex parte injunction should not be
made absolute."
At this
stage, the only observation that needs to be made is that there was little
justification for dispensing with the notice and the subsequent order that was
passed by the learned judge which can never be condoned having regard to the
type of plaint that had been filed and the material placed before him. A court
is obliged to weigh the consequences of judicial orders and to act with a
degree of utmost restraint and caution when they are passed ex parte. The
material before the court does not justify an order that virtually had the
effect of handing over the management and control of a public limited company,
namely, the first defendants, to the plaintiffs and at the same time
restraining all those who were lawfully entitled to the management and control
of that company from performing their functions. The defendants filed their
reply and the matter was argued in detail after which the learned judge passed
an order dated May 5, 1992, not only confirming the initial order but virtually
expanding its scope. It is this order that is the subject-matter of the present
appeal. Though the order runs into as many as fifty pages, I intend summarising
the contents of that order because, in my considered view and as indicated in my
earlier order dated April 27, 1993, both the ex parte order and the subsequent
one dated May 5, 1992, confirming the initial order are thoroughly unjustified,
they are unwarranted and, if I may say so, ought not to have been passed.
Learned counsel for the appellants had much to say about these orders and in
particular about how they came to be passed, but I would prefer to avoid
dealing with that unpleasant subject. Suffice it to say, however, that one is
reminded of Hamlet's "all is not well in the
After
summarising the pleadings in paragraph (5), the learned judge deals with the
contention that defendant No. 3 was the managing director of Shaw Wallace since
1987, and that defendant No. 4 was the vice-president of Shaw Wallace until April,
1992. He deals with the contention of the plaintiffs to the effect that the
transfer of shares by Arunava Investments Ltd. is a questionable transaction
and that defendant No. 3 is alleged to have acted fraudulently and dishonestly
in manipulating this transaction which he ought not to have done when he was
legally and morally required to safeguard and look after the affairs of Shaw
Wallace Ltd. I shall deal with the grounds on the basis of which the
transaction is challenged subsequently. The learned judge proceeds to reproduce
the allegations which are to the effect that pursuant to the aforesaid
transaction or transfer of shares an all-out effort was made by the third
defendant to take over complete control of BDA, which was for all intents and
purposes under the virtual dominion of Shaw Wallace Ltd.
I need to
specifically record that the learned judge was conscious of the fact that the
defendants had, among other things, specifically pleaded that no cause of
action exists, that the transfer of the shares in question that was sought to
be debated had taken place in 1990 virtually two years earlier, that the
transaction in question is not challenged and, consequently, that no relief can
be claimed unless that is done.
With regard
to this crucial aspect of the matter, the learned judge has reproduced the
stand of the defendants, which was to the effect that on May 4, 1990, a meeting
of the board of directors of Arunava Investments was held and a resolution was
passed to the effect that the 25,000 equity shares of defendant No. 1 be sold
at face value and that an application be made to the Central Government in
terms of section 30(c) of the Monopolies and Restrictive Trade Practices Act,
1969, and that any director of the company be authorised to make the said
application and to complete the transaction relating to transfer of the shares.
Relying on the minutes of the meeting dated May 4, 1990, the defendants
contended that the shares were then held by Intrust Securities Pvt. Ltd. The
transfer of such shares was notified to the Department of Company Affairs,
which department by letter dated July 18, 1990, authorised the company to
transfer the shares of defendant No. 1 to Intrust Securities Pvt. Ltd. They
pointed out that Shri S. Roy, signatory to the plaint, was present in the
meeting of May 4, 1990, and has confirmed the resolution. They pointed out that
in the said meeting,
In a serious
case like this, where the survival of a public limited company, i.e., BDA, as
also its shareholders, employees and all those who are dependant on its
business is concerned, it is my view that any court dealing with the matter
regardless of the angles and contentions, worthwhile or frivolous, that may be
evident in the litigation, must act with a sense of total responsibility, in
the first instance, by deciding as to whether at all the litigation is worthy
of being entertained at all, continued and, if so, the consequences of any
order passed. There are very important and far-reaching overtones in litigation
of the present type and a court must, therefore, be doubly careful by assessing
as to what would happen to the company, to those who manage it, to those whose
livelihood depends on it, to those who have invested in it and, in other words,
to the overall public interest and, to my mind, should be slow in granting
reliefs where the consequences will inevitably be disastrous. Equally, it is
necessary to sift the material placed before the court, read between the lines
wherever necessary and in an instance where the litigation is obviously
motivated, to desist from permitting such mala fide objectives to be carried
forward. I think in the present context it is equally necessary for a court at
the initial juncture to guard against permitting unworthy litigation to be
commenced, for as has here happened, some three dozen proceedings followed the
present one. It is of equal responsibility that litigation of this character be
snuffed out at the inception. The learned trial judge would have been fully
justified in not only refusing any reliefs, but in dismissing the suit itself.
Having
summarised, in detail, the complexities of the case, the learned judge
formulated the following points which completely and totally bypassed
everything that is in contention before the court and it is, therefore, useful
to reproduce the points in question :
|
Points |
Findings |
|
"(i) Can it be said that this court has Yes. jurisdiction to
entertain the civil suit and decide this interim application ? |
Yes. |
|
(ii) Do
plaintiffs prove that there is a Proved. . legal injury and do they further
prove that there is a strong prima facie case for grant of ad interim
injunction pending disposal of the suit to protect their interest and interest
of the Shaw Wallace group and the interest of others who are interested in
this litigation, but are absent ? |
Proved. |
|
(iii) In
whose favour does the balance of convenience lie and to whom will irreparable
injury not compensated in terms of money and comparative hardships and
mischief be caused ? |
In favour
of plaintiff irreparable injury and comparative hardship will be caused to
plaintiffs, |
|
(iv) What
order? |
As per
final order". |
The first
issue regarding jurisdiction is hardly of any consequence and the learned judge
disposed of it by holding that since the factory is located within the
territorial jurisdiction of the court that jurisdiction can be exercised. This
issue was not even argued before me and, to my mind, rightly so and does not
require any further consideration. While deciding issues Nos. 2 and 3, the
learned judge first deals with the contentions which were very forcefully
projected on behalf of the defendants that no. case has been made out on the
facts in respect of the grave allegations concerning clandestine transfer of
shares, etc., and learned counsel had relied on certain English and Indian
authorities in support of the elementary proposition that the law of pleadings
requires a definite and specific case, both on facts and in law, to be spelt
out. It is unfortunate that this substantial plea, which virtually proceeds on
the basis of the first principles, was brushed aside due to a misreading of the
ratio of the decision in the case of Ram Sarup Gupta v. Bishun Narain
Inter College, AIR 1987 SC 1242,
wherein the Supreme Court had observed that the law of pleadings is to be
applied with some degree of liberty. That does not, however, justify a plaint
which is vague, devoid of particulars where even the requisite prayer clauses
are absent and the party seeks to cover it all up by advancing detailed
submissions at a later point of time without having made out any case in the
first instance.
The learned
judge thereafter takes up for discussion the issue regarding the hotly
contested issue with regard to the circumstances under which BDA ceased to be a
subsidiary of Shaw Wallace. He records the fact that the defendants have
pointed out that contrary to the allegations of the plaintiffs that it was
defendant No. 3 in his capacity as a managing director of Shaw Wallace who it
is alleged manipulated the transfer of BDA shares so that the ownership of the
same vests outside the Shaw Wallace group ; that in actual fact it was a
well-considered decision of the parent company which action was decided upon
for very cogent reasons. Strong reliance was placed on the minutes of the
meeting of the group executive council of Shaw Wallace where the issue was
discussed. The note in question is prepared by Shri J. Bhargav and it was only
addressed to the third defendant in his capacity as managing director. In the
office-note dated March 24, 1989, and the subsequent office-note dated March
26, 1990, of K. Srini-vasan, whereby the delinking of BDA from Shaw Wallace is
recommended, reasons have been set out from the business and tax strategy angle
as to why this ought to be done and it is significant that a perusal of the
documents will indicate that it was a collective corporate decision and not
something underhand or an action that was clandestinely manipulated or pushed through by defendant No. 3. Apart
from the various technicalities that were involved in this operation, which are
referred to by the learned judge, there is a specific reference to the minutes
of the second meeting of the group management committee of Shaw Wallace which
was presided over by the chairman of the company, M.R. Chhabria, wherein the
aspect of desubsidiarisation of BDA was virtually finalised. The plaintiffs had
contended before the learned judge that in the case of another company, namely,
Nagarjuna Fertilizers, which was a public limited company in which Shaw Wallace
held merely some shares, the decision was to dispose of that investment, but,
as far as BDA was concerned, that the mechanics was to make it a tie-up unit.
Undoubtedly, the learned trial judge was taken in by the contentions advanced
on behalf of the plaintiffs that even if the shares were transferred, the links
continued under the so-called "tie-up arrangement", but I fail to see
how in a court of law such a position could either be pleaded or for that
matter be upheld.
Support was
sought to be drawn by the plaintiffs by attacking the validity of the
transaction from various angles, the first one being that the permission of the
Government of India, Ministry of Industries, which approval was necessary, was
obtained by suppressing material facts. Though the learned judge has not
recorded any conclusions with regard to this charge, I fail to see how and
under what circumstances, in the light of a transaction that has been concluded
and that has become final and, in any event, that has not been specifically
challenged before the court at an interim stage, the plaintiffs can be
permitted to question and go behind the transactions that have assumed finality
two years back. The whole approach of the learned judge is downright faulty.
The learned
judge then come to the crucial meeting dated May 4, 1990, which is the meeting
of the board of Arunava Investments Ltd., wherein the resolution regarding
transfer of 25,000 equity shares of BDA at face value was passed. The
defendants have pointed out that
The learned
judge thereafter deals with the circumstances under which defendant No. 3 came
to be elected as chairman of BDA in the board meeting held on April 9, 1992.
The plaintiffs placed reliance on the affidavit of one Shri Ramani, who states
that he was a director of BDA and that he never received notice of the meeting
of the board dated April 9, 1992. In view of this position, the defendants
produced a copy of the minutes of the board meeting which the learned judge has
viewed with suspicion and held that there is doubt whether it is a reliable
document or whether it is fabricated in order to mislead the court. As regards
this last aspect of the matter, the entire controversy over which much heat has
been generated is virtually trifling and is wholly insignificant. I did examine
the respective contentions carefully in order to ascertain as to whether there
was anything of significance, but I found virtually nothing worthy of mention
nor are the suspicions expressed of any basis. Normally, the learned judge
should have refused to go into the unnecessary details. The reason for it is
because this entire controversy again has germinated at a subsequent point of
time and was never pleaded when the plaint was originally presented to the
court. It is necessary for me to record that the status of defendant No. 3, who
had acted in his capacity as chairman of the company, had not been questioned,
nor is there even the remotest suggestion
that he had not assumed office lawfully and that, therefore, his actions are
required to be struck down. It is a matter of regret that with the passage of
time this case has grown in dimensions in all sorts of unwieldy directions and
the points of fact and law that were never part of the original proceedings
have been pleaded, seriously argued and adjudicated upon. Since, all this
material has, in fact, formed the basis of the order under appeal, learned
counsel for the appellants was required to seriously deal with it. Shri
Venugopal, learned counsel appearing on behalf of the respondents, i.e., the
original plaintiffs, has sought to justify it and it is, therefore, inevitable
that I am required to assess it at this stage. I do not propose to enter into
any detailed analysis in respect of the manifold issues that were canvassed,
but it is necessary to record as to whether the points were valid and whether
the order is sustainable on that basis.
This
controversy was, however, completely and conclusively set at rest because the
original minutes of the meeting dated April 9, 1992, have been produced before
me. I have scrutinised them and, to my mind, I find nothing suspicious with
regard to the documents, nor is there any ground on which they can be called
into question. Before parting with this head, however, I need to deal with two
aspects of the matter concerning this crucial meeting which has been dealt with
by the learned trial judge. The first of them is the contention put forward by
Mr. Ramani that neither he nor Mr. A.K. Jain nor for that matter Mr. R.L. Jain,
three of the directors of BDA whose resignations were accepted in the board
meeting, received notice of the meeting. It is quite amazing as to how Mr.
Ramani can depose about the non-receipt of the notice by the two Jains. A weak
excuse has been made that the gentleman concerned were "far away" and
that, therefore, their affidavit could not be filed. The implications of Mr.
Ramani's charge are far-reaching in so far as it is contended that even if the
meeting is supposed to have been held it is not a valid meeting as notice of
the same was n6t served on three of the directors. The defendants have pointed
out that these three persons had expressed their desire to leave the board and
their resignations were only to be formally accepted in the meeting and that in
these circumstances since they ceased to be directors that there is no
obligation in law to serve notice on them. Learned counsel for the respondents
has refuted this position and contended that the meeting can never be saved and
that everything that is alleged to have taken place at that meeting is of no
consequence. The law on the point is very clear that it is perfectly
permissible for a resignation to be expressed orally. There is no bar to this
and as I shall subsequently illustrate
from the conduct of the three venerable gentleman, this is what actually
transpired.
There is not
even a whisper in the plaint with regard to any of these facts and a curious
procedure is followed in this proceeding of grafting on all sorts of
contentions and that too at a stage when the injunction is sought to be
defended, but apart from that serious infirmity, what is of greater consequence
is the fact that at this important meeting three persons, namely, Mr. Ramani,
Mr. R.L. Jain and Mr. A.K. Jain, ceased to be the directors of the company. If
it is the plaintiffs' contention as is sought to be made out before the court
that these persons had never resigned, I cannot conceive of a situation whereby
they would have remained quiet if the removal was against their wishes. There
is no letter of protest from any of them and, more importantly, the trio has
not taken any legal steps with regard to such a serious matter. I need to take
cognizance of one crucial fact, namely, that the board meeting in question is
not challenged either by any director or shareholder of the company. The
plaintiffs, in any event, have no locus standi to challenge this meeting. I
have no doubt whatsoever that the meeting was validly held and that the entire
plea put forward before the court is not only an afterthought at the
instigation of the plaintiffs, but that it is downright false.
The learned
judge, while dealing with this meeting, refers to one other aspect which he
considers to be of great importance. He has held that the meeting could not
have taken place because a resolution was passed with regard to change of the
registered office and that necessary steps for getting permission from the
Registrar of Companies should be taken. The learned judge notes that no such
document is forthcoming and he relies on the affidavit of Mr. S.S. Sanyal,
defendant No. 5, who points out that after January 27, 1992, the registered
office of the company is at
Coming to the
most crucial aspect of the judgment, namely, the justification for the grant of
reliefs, the order of the learned judge proceeds on the basis of weird reasoning that I find it not only impossible to
sustain but even difficult to comprehend the line of thought even after
repeated reading. To start with, the entire approach is wrong. The learned
judge proceeds to state that the meetings referred to above had not taken place
and if this be so, the defendants cannot justify their stand and in these
circumstances the plaintiffs are entitled to the reliefs asked for by them. Through
this process of reasoning, the learned judge holds that regardless of the
transfer of shares and regardless of the assignment of the three brands, the
status quo ante continues in so far as those transactions will have to be
ignored and BDA will have to be treated as continuing to be a subsidiary of
Shaw Wallace. The basic flaw in this process of reasoning is that the aforesaid
two transactions have admittedly reached a stage of finality such as for
instance the Central Government having accorded its approval for the transfer
of BDA shares and the assignment of the three brands having vested the virtual
right, title and interest in BDA; which means that, to put it simply, unless
these transactions are declared to be void by a competent court and set aside,
it could be wholly impermissible to attempt to overcome them. The defendants
had made out an unanswerable case and it is queer and perverted logic to argue
that because their defence is unacceptable the reliefs asked for by the other
side be granted wholly overlooking the fact that it is the plaintiffs who have
made out no case.
Digressing
here a little, I have had to repeat ad nauseam that the plaintiffs had
virtually pleaded nothing and that the cause of action which has been made out
for the first time in the affidavit-in-rejoinder ought not to have been
considered by the trial court. It is quite elementary that no party is
permitted to drastically alter its case or for that matter to make out an
entirely new case. The law is well-settled even with regard to the principles
applicable in cases of amendments, that it is impermissible to make any
substantial departures from the original cause of action. I find in this case
that after the defendants filed their reply, the plaintiffs have come out with
everything that has been used by the learned trial judge as signifying the case
of the plaintiffs. This is an approach which the law does not permit. It would
be impossible to deal with a litigation if fluidity of this type were to be
permitted, where a plaintiff approaches the court with a zero case, thereafter
gets wise to various contentions, files an affidavit along with annexures
running into over 150 pages and then seeks to sustain a relief that was
obtained on the basis of non-existent material, it is almost a situation of all
accepted canons of law being thrown to the winds, The trend of this litigation,
and in particular the plaintiffs' case,
reminds me of the troublesome tapeworm that is said to have no head or tail and
still keeps multiplying from the smallest bit.
The main
thrust of the attack of the plaintiffs is directed against defendant No. 3, who
is the younger brother of the chairman of Shaw Wallace and as appears from the
record has thereafter parted company. The learned judge, in passing , observes
that it was contended before him that defendant No. 3 has misused his position
as managing director of Shaw Wallace, that he has been guilty of misconduct in
his official and fiduciary capacity, that he has acted in furtherance of his
personal benefit. The learned trial judge suddenly flies off at a tangent and
disapproves of the conduct and behaviour of Mr. Raju Dharmani, company
secretary of Shaw Wallace, who is alleged to have locked his office room, never
handed over the record and tendered the resignation and who is alleged to have
come over to the defendants' side. This gentleman is not a party to the
litigation, but the learned judge holds that the court will have to take note
of the conduct of the parties. The frame of thought in paragraph (15) is
unfortunately very confused. There is no direction to it, there is no
justification for the observations made which take on the complexion of
findings and what is most distressing is that a host of issues have been
virtually picked up at random and decided in an off-the-cuff manner. The
process of decision making is illustrated by the fact that the learned judge
records the argument that the attempt of the defendants was to capture BDA
shares at a cost of Rs. 2,50,000 only, meaning thereby that the consideration
was inadequate. On behalf of the defendants, the affidavit has been filed by
Shri Sanyal, who has comprehensively dealt with the case and produced all the
relevant records, but the learned judge holds that it was necessary for the
"star fellow", i.e., defendant No. 3, to have sworn the affidavit and
satisfied the court that the actions in question were legal and that defendant
No. 3 had never committed breach of trust in his position as managing director
of the Shaw Wallace group. It is unfortunate that this inverted reasoning is
consistently the approach right through the order.
The learned
judge in the same paragraph suddenly adverts to the case made out by the
plaintiffs that they have provided all the technical know-how and personnel to
BDA and that they have provided a corporate guarantee to the UCO Bank for over
Rs. 5,00,00,000.1 shall deal with these aspects of the matter subsequently
because the defendants have pointed out that this charge is factually
incorrect. The defendants have also contended that there is no basis for the
contention advanced by the plaintiffs that they have invested large amounts of
their money either in BDA or, for
that matter, in the three brands that are in dispute. The merits and the facts
apart, assuming that this is the case of the plaintiffs as far as the bank
guarantee is concerned, it is always open to them to have the guarantee revoked
or to take such other steps for purposes of securing their financial interest.
Assuming that they are right about their financial stake in BDA, it is at the
highest a monetary claim which, to my mind, may be enforceable through a suit,
but this could never justify an application of the present type to the court
that on these grounds the management and control of an independent limited
company be handed over to the plaintiffs on; a platter. The position is far
worse in law as far as the three brands are concerned because even if
everything pleaded by the plaintiffs is true, it will have to be held that the
plaintiffs have quantified their investments in the brands and on the basis of
this assessment the consideration of Rs. 15,00,000 was paid to plaintiff No. 1
at the time of the agreement. The payment having been accepted, and the
transaction having assumed all aspects of finality, the plaintiffs just cannot
be heard and that too so late in the day, on a vague complaint that they had
invested crores of rupees in these brands and that, therefore, they should be
permitted to retain control of the manufacturing unit. Such a conclusion would
be downright perverse. I must, at this stage, mention the submission canvassed
by Shri Manohar on behalf of the appellants who pointed out that the policy of
the plaintiffs was to get the products manufactured by BDA at the lowest
possible cost and to thereafter market these products and swallow the cream of
the whole transaction which, in monetary terms, runs into crores of rupees. He
advanced a powerful contention that BDA has been exploited and bled, that the
attempt is to continue that process and not to permit it to stand on its own
feet and enjoy the profits which it is entitled to receive from its own
products. This aspect is more with regard to the business economics, but that
issue is not at all foreign to a court while adjudicating a case of the present
type.
In the
concluding part of the order, which is repetitive and again, though the process
weaves its way from transaction to transaction, the learned judge holds that
BDA, which was originally a subsidiary of Shaw Wallace and which according to
him was being completely looked after by the plaintiffs, ought to continue to
be administered and controlled in that manner. The time-frame appears to have
been totally overlooked. Years have passed since the shares have been
transferred and the three brands were assigned and the defendants have
seriously contested the position that BDA was under the dominion and control of
the plaintiffs when the dispute came to court in April, 1992. In this view of
the matter, therefore, it is not
the circular dated April 9, 1992, which the plaintiffs have styled as a
declaration of independence, i.e., the material date, but the position in law
and in fact, as it obtained when the aforesaid developments had taken the garb
of finality. It may be that defendant No. 3 in his capacity as chairman of BDA
found it necessary to assert in April, 1992, that the company would invest the
overall control of the day-to-day management in the hands of persons who were
not under the sway of the plaintiffs or of Shaw Wallace, but this cannot
justify the sweeping conclusion arrived at by the learned judge to the effect
that BDA is still a subsidiary of Shaw Wallace and that it is being effectively
managed and controlled by the plaintiffs on the date of the filing of the suit.
Not only is the record to the contrary, but there is documentary evidence to
completely shatter this conclusion, BDA was an independent entity in fact and
on paper on that day. It was the lawful and legal owner of the three brands in
respect of which there was not even a challenge to their right and title and in
these circumstances his premise that BDA was a subsidiary, that it is being
looked after by the plaintiffs and that there is no harm if the arrangements
were to continue was totally and completely unjustified. The learned judge
concludes his order with the statement that the balance of convenience is in
favour of the plaintiffs and that no prejudice would be caused to the
defendants if the relief prayed for were to be granted. Accordingly, the
learned judge passed the following order :
"1. Exhibits
is allowed.
2. Defendants Nos. 3 to 7 are hereby
restrained from interfering with the existing working and day to day affairs of
defendants Nos. 1 and 2 which are managed by plaintiffs Nos. 1 and 2 as regards
manufacturing, distribution, sale, marketing, working arrangements and
operations of the bank accounts by any manner either by themselves or with any
person acting under them in any manner except due process of law till further
orders of the court. Even they1 are restrained from giving effect to the
alleged circular issued by defendant No. 3 styling as a chairman, dated April
9, 1992, till further orders of the court.
3. Costs
of this petition will be costs in the cause."
I need to
only record at this stage that regardless of whether the contentions canvassed
before the learned judge had been pleaded before the court in the original
plaint or not, irrespective of the stage at which the plaintiffs had come out
with this case and regardless of the fact that they would be disqualified in
arguing on the basis of this material, since it formed the basis of the order
of the learned judge, I heard learned counsel at length on all the points dealt with in the order under
appeal, both on facts and in law. After a protracted hearing, which continued
day to day for over three weeks and a re-reading of all the material placed
before me and a threadbare consideration of the matter, the only conclusion
that was permissible was that the interim order was completely and thoroughly unjustified.
The damage done to the defendants since May 5, 1992, for almost one year during
which this order was in force, to my mind, could not be allowed to continue for
a single minute longer and it was for this reason that in my earlier order
dated April 27, 1993, I had briefly recorded the grounds on which the appeal
was allowed and the interim orders vacated. I had rejected the application from
the respondents, i.e., the original plaintiffs for stay of the order dated
April 27, 1993, principally, because the court had already recorded the fact
that the interim relief ought never to have been granted and it would have,
therefore, been a miscarriage of justice in the face of that finding to grant
stay and to permit the earlier order to run for several weeks or months until
the detailed judgment was ready.
It is
essential that the reasons be recorded for the conclusions set down in the
earlier order dated April 27, 1993. A curious situation has arisen because I
have already recorded that the three principal heads in respect of which
effective reliefs have been sought, namely, the transfer of BDA shares, the
assignment of the three brands of liquor and the status of BDA after
desubsidiarisation was completed, not having been specifically challenged in
the main suit, the plaintiffs would be disqualified from either asking for or
claiming any reliefs under these heads. Shri Venugopal on behalf of the
respondents before me, in the course of his arguments, indicated that a
composite suit has been filed before the Calcutta High Court in which there is
a specific challenge to the validity and consequent legal effect of the
aforesaid actions. He stated that certain ad interim orders and interim orders
have been passed in that matter and that subsequently the same has been 'argued
in detail and that the judgment is awaited. The fact that a challenge has been
presented in some other proceeding is of limited relevance except to the extent
that if a court of competent jurisdiction had passed orders in the matter on
the merits, it would be an order of which this court would have to take
cognizance since it is a decision on the merits on the same issues and between
the same parties. The position that now emerges would be the reverse in so far
as this court is called upon to decide the issues in question on the merits in
the first instance which may inevitably have a bearing on the other
proceedings.
I categorise
the situation as being curious because the plaintiffs in their
affidavit-in-rejoinder have made out and built up a detailed case which they
had never done in the first instance. The effect of doing this at a subsequent
point of time on the question of bona fides and credibility apart, since it
goes to the very root of the matter, the defendants, in turn, have met their case
in defence squarely, both in the pleadings on facts and in law. Effectively,
therefore, the respective parties have produced all the material that they
could possibly have wanted to rely on and the learned trial judge has proceeded
to evaluate this record and based his order on all of it. In appeal, while
reviewing that order, it is, therefore, inevitable that the same procedure will
have to be followed of having to evaluate everything that is before the court
and adjudicate on it. I am conscious of the fact that the order in question is
at an interim stage and that the decision will only hold good till the hearing
of the suit. The reliefs granted by the trial court, however, are so sweeping
that, to my mind, nothing would virtually survive in the suit thereafter. It
was for this reason that the parties have produced all their evidence before
the court while applying for the vacation of that order and it is in these
premises that this court will have to adjudicate on the basis of that record.
That such, an exercise may have the effect of virtually disposing of the suit
is possible, but that, to my mind, can be no ground on which the bulk of the
record before me can be disregarded.
The order
having been passed against the defendants, it is the appellants' learned
counsel who has addressed this court at considerable length. He started by
submitting that the order in question is not only wrong, that it is downright
perverse and that, consequently, the injunction should be vacated forthwith.
The principal purpose for my following the very unusual practice of burdening
the judgment with a summary of the plaint, prayers, pleadings, etc., was in
order to illustrate how totally and completely unjustified the passing of the
ad interim order was and even if one were to assume that the trial court was
misled while passing the initial order, once the defendants had appeared and
agitated the matter in the manner in which they have done, the ad interim order
could and should never have been confirmed. It is true that Shri Venugopal on
behalf of the respondents has contended that this court must take a broad and
an overall view of the case and should not strictly circumscribe itself to the
matter of the record, that the court should appreciate the fact that the
plaintiffs had pointed out that one of the most valuable companies from the
Shaw Wallace group was virtually being "stolen away" and that
emergency measures were required to stop this from happening. He also contended that the problem was an unusual one
in so far as it had never been expected that defendant No. 3, who is the real
brother of the chairman of Shaw Wallace and who was holding the position of
managing director of the group, would suddenly decide to declare war on Shaw
Wallace and to spirit away its valuable assets. These arguments may be relevant
to some extent while going into the question of the charge against defendant
No. 3 with regard to breach of trust or breach of fiduciary obligations. They
still do not answer the question as to how in this proceeding on the present
record a composite relief of virtually handing over the administration and
control of BDA could have been granted. To my mind, the irresistible conclusion
is that the question is unanswerable and indefensible. Shri Manohar, learned
counsel appearing on behalf of the appellants, alleged that the passing of the
orders constituted a fraud on the court because the learned judge was led to
believe that such orders were essential for a variety of reasons, including the
welfare of the company, but that, more importantly, the plaintiffs owed a
fundamental duty to the court to place all the relevant material in respect of
the transactions concerned before the court and not to project half-truths and
suppress all the remaining material. Everything that has been subsequently
disclosed either by the defendants or by the plaintiffs in respect of
transactions that are in dispute are matters of record. Most of them are
documents. These were available to the plaintiffs and were within their
knowledge and to my mind the suppression of this material from the trial court
at the initial stages was not accidental.
Having dealt
with the case of the plaintiffs rather extensively and the shortcomings or
infirmities that abound therein for a valid decision on merits which, to my
mind, is essential in order to curtail further and unnecessary litigation at
different levels and in different parts of the country, since learned counsel
informed me that there are something like three dozen proceedings which are an
offshoot to the present main dispute; it is equally worthwhile that I summarise
the case of the defendants. The pleadings in this case and the documents are
literally voluminous, but I shall record the salient features of what the
defendants have sought to establish. This is because the defendants have not
chosen to merely deny the allegations made against them or the averments in the
pleadings, but they have proceeded very responsibly in their task by contending
that the action of defendant No. 3 on April 9, 1992, in exercising his powers
as chairman of BDA was an act that is valid and justified, that the independent
status that has been claimed by BDA is, in fact, a correct one and that the
rights in respect of the three brands have vested completely in the company, which is entitled to exploit
them without interference from any third parties. There is no dispute about the
fact that the plaintiffs are a limited company belonging to the Shaw Wallace
group or, for that matter, that BDA occupied a similar status prior to the year
1990. What is emphasised by Shri Manohar, and this argument is not merely in
the air but is substantiated from the records before me, is that Shaw Wallace
is a composite and relatively large commercial organisation with full time
directors and senior executives like president, vice-president and as a group
executive council to take and finalise policy decisions. He emphasised this
last aspect of the matter because he contends that in this unfortunate dispute,
defendant No. 3 is the main target with the charge being levelled against him
that he single-handedly manipulated the transfer of the shares of BDA. Shri
Manohar pointed out that one needs to look to the status of persons who formed
the board of directors, the group executive council, etc., for purposes of
establishing as to whether it is at all possible for one individual, even if he
so desired, to have subjugated the collective intellects and to have got all
these senior experienced knowledgeable people to act in a fraudulent and
dishonest fashion. The second argument proceeds on the footing that there is a
chain of actions spread over a period of time, all of which are documented and
from which it unmistakably emerges that there is no justification for the
charge against defendant No. 3. Towards this end, he points out from the record
that a meeting of the group executive council of Shaw Wallace was held on
August 27, 1989, which was about a year after BDA was acquired by Arunava
Investments Ltd. This meeting was attended by 15 senior executives of Shaw
Wallace, some of whom were A.S. Malik, T.S. Venkateswaran, J. Bhargava, K.
Srinivasan, S.G. Mazumdar (company secretary), the first four who are at
present directors of Shaw Wallace. It was in this meeting that the move was
initiated to desubsidiarise the first defendant-company and T.S. Venkateswaran
was directed to examine and record the pros and cons of the decision which was
sought to be taken fora specified purpose which I have referred to earlier.
Neither the resolution nor for that matter the plaint so much as ascribes any
role to the third defendant. Thereafter, there were meetings of the group
executive council in September and November, 1989, and we have on record a note
dated March 21, 1990, addressed by J. Bhargava recommending the initiation of
steps to desubsidiarise BDA. What is significant is that there is no reference
in this note that BDA was to continue within the group after it was delinked or
even that it was to continue as a tie-up unit. The third defendant put an
endorsement on this note that K. Srinivasan and T.S. Venkateswaran should
comment on it. On March 26,
1990, K. Srinivasan addressed a note to the third defendant in which he stated
that Shaw Wallace did not achieve any positive advantage as a result of BDA
being a subsidiary, but, on the contrary, that Shaw Wallace had a number of
negative factors and that, therefore, there was a strong case for the unit to
be outside the Shaw Wallace group and that it should be done fairly soon. Next
we have on record the minutes of the meeting of the group managing committee
dated April 3, 1990, and the most significant aspect of the matter is that the
meeting was presided over by M.R. Chhabria, chairman of Shaw Wallace. The third
defendant was present at the meeting, but the aforesaid five persons had also
attended. It was in this crucial meeting that the final decision was taken to
desubsidiarise BDA and Mr. J. Bhargava was authorised to initiate proper action
and implement the decision by the end of June, 1990.
On the basis
of this material, Shri Manohar contended that it was absolutely false to allege
that the decision was clandestine or sudden because it is shown to have been
taken in the normal course of business, that the reasons for the decision are
set out in the notes and documents and that it is equally wrong to allege the
second charge, namely, that it was put through at the instance of defendant No.
3. He stressed the fact that the final meeting on April 3, 1990, was presided
over by M.R. Chhabria and not defendant No. 3 and concluded by submitting that
the learned trial judge has unfortunately mixed up the reference of Nagarjuna
Fertilizers with the present transaction.
To my mind,
the sequence of events clearly discloses that for business economic and tax
reasons, a collective decision was taken to sell out the interests that the
Shaw Wallace group had in BDA. I would have thought it more appropriate to
consciously use the word "sever" because nothing in the resolutions,
minutes or notes would justify the conclusion that this was a "paper
transaction" in order to overcome the Central excise difficulties and to
get the liquor manufactured at a unit where the production costs' were very low
or for that matter that it was decided to retain the umbilical cord of control
and communication between the two. Had this intention been there, nothing would
have prevented the records from indicating it. The omission is not an act of
negligence but, on the other hand, is eloquent of the true complexion of the
transaction, namely, that BDA, which was a small unit and in any event not
doing well, was to be amputated completely. No other conclusion is permissible
on this record. The transaction is completely documented and, to my mind,
neither affidavits nor oral
evidence to the contrary can, at any time, get away from what is there in black
and white.
The
defendants have then pointed out that the plaintiff-company for commercial
reasons in the meeting of its board of directors dated April 24, 1990, resolved
to assign the three brands in favour of BDA for a total consideration of Rs.
15,00,000, at Rs. 5,00,000 per brand. The minutes of this meeting amplify one
important point, namely, that even though defendant No. 3 was a member of the
board he was not a party to this resolution. This meeting was chaired by A.S.
Malik who was present in all the meetings of the group managing committee of
Shaw Wallace.
There is
another development that took place even before the aforesaid resolution was
acted upon in so far as the board of directors of Arunava Investments Co. Ltd.
met on May 4, 1990, and resolved to transfer the 25,000 equity shares of Rs. 10
each of BDA at their face value and that an application be made to the Central
Government in terms of section 30(c) of the Monopolies and Restrictive Trade Practices
Act, 1969. It is a matter of record that Arunava Investments Co. Ltd. still
continues to be a subsidiary of the plaintiff-company and Shaw Wallace who not
only have control and access to its records but who are required to annex the
audited balance-sheet to the annual balance-sheet of Shaw Wallace, under the
provisions of the Companies Act. One of the directors present at this meeting
is
There is
another angle from which the defendants' case may be tested and which
ultimately lends credibility to it. Pursuant to the resolution dated May 4,
1990, of Arunava Investments Co. Ltd. an application dated May 8, 1990, was
drawn up addressed to the Central Government seeking permission for the
transfer of the 25,000 equity shares of the first defendant-company and this
application is signed by one Sadashivan, who admittedly was a director of
Arunava Investments Co. Ltd. and was present in the meeting of May 4, 1990. It
is too much to assume that Sadashivan would sign such an application unless the
meeting was, in fact, held and the resolution authorised him to do so. The
application was actually presented on May 24, 1990, and the proposed transferee
is one Intrust Securities and Investments Pvt. Ltd., the shareholders and
directors of which are one Mr. and Mrs. Khairulla. One needs to take stock of
the fact that Arunava was an investment company and the board had decided to
disinvest the aforesaid shareholding in order to release the liquidity for
reinvestment with a prospect for faster return of investments. Much has been
said with regard to the value of the share, the sale price of which was of the
face value of Rs. 10 each. To the application, an explanatory statement was
attached determining the break-up value of the share on the basis of the latest
balance-sheet of defendant No. 1-company as on March 31, 1989, and which lists
the value of the shares at Rs.3. This valuation was done by Arunava's chartered
accountants and one has every reason to presume that they were not only
qualified and experienced professionals but that they went about their job
correctly. This was obvious from the fact that as a corporate unit, BDA was not
doing at all well, nor did it possess any appreciable assets and it is,
therefore, not surprising that similar to the decision of the appellant-company
Shaw Wallace which had decided to sever it from the group Arunava, in its turn,
had decided to get rid of the shares. I do not need to consider this matter in
any depth because the validity of the transaction has not been disputed in the
plaint nor is a declaration asked for striking it down. It would be of some
significance, however, because Shri Venugopal on behalf of the respondents
argued at considerable length that BDA is a virtual gold mine, that a simple
arithmetical calculation would indicate that the value of the share cannot be
less than Rs. 90 and that, in these circumstances, if it was sold for a
ridiculously low price, it is liable to be looked upon with suspicion by the
court and, in any event, the transfer cannot be approved. The principal hurdle
in Mr. Venugopal's way is the fact that it is not the subsequent appraisal of BDA by virtue of its
performance and improved conditions that matters but the fact that Shaw Wallace
on its own calculations and records have listed the share price as Rs. 3. The
plaintiffs at least would be totally estopped from contending anything to the
contrary and in the background of that record, the price of Rs. 10 per share
can, under no circumstances, be regarded either as inadequate or improper.
In relation
to this transfer, apart from the charge that defendant No. 3 is alleged to have
been instrumental, which conclusion does not emerge from the record, it needs
to be pointed out that he was in no way concerned with the management and
affairs of Arunava Investments Co. Ltd. except that it was on paper a
subsidiary of Shaw Wallace. The record does not indicate that defendant No. 3
was a party to the important resolution dated May 4, 1990, nor is there
anything on record to connect him with the application moved to the Central
Government under section 30(c) of the Monopolies and Restrictive Trade
Practices Act, 1969. Admittedly, he is not a director of this company. A vague
allegation has been levelled against defendant No. 3, which was one of the
principal planks of Shri Venugopal's argument, that at all stages he has acted
in breach of his fiduciary responsibilities as he was at the relevant time
managing director of Shaw Wallace. On this record, I need to point out that the
plaintiffs appear to have overlooked the fact that defendant No. 3 was not a
director of Arunava Investments Co. Ltd. and that in his capacity as director
of the principal company, it is well-settled law that he holds no fiduciary
relationship vis-a-vis its subsidiary. This last aspect is condition precedent.
The charge must be supported by positive averments and specific evidence in
support thereof, and it is only in these circumstances that the burden of proof
may shift to the director against whom such charges have been levelled. I see
no justification in this allegation, even after examining the case from every angle
adduced by Shri Venugopal.
The
defendants have placed reliance on the fact that the Central Government upon
receipt of the application and after examining the particulars therein by its
communication dated July18, 1990, accorded approval to the transfer of the
shares of BDA and it is only upon this approval that further steps for the
transfer of the shares came to be taken. Certain consequences flow from this
action in so far as the Central Government is presumed to have examined the
contents of the application and the accord of approval is virtually the
imprimatur of the designated authority to the transfer. This is not to be
treated as routine because, to my mind, where the transfer is challenged in a
court of law, it would be the duty of
the court to examine every facet of the matter and where it is demonstrated
that the transfer has been approved by no less an authority than the Central
Government, it would be virtually impossible to question that transfer on the
basis of some belated allegations that are virtually floating in the air.
On behalf of
the defendants, Shri Manohar has relied heavily on a note dated July23, 1990,
signed by the company secretary of Shaw Wallace, Shri S.C. Majumdar, which
unfortunately has been completely overlooked by the learned trial judge.
Whereas it is the case of the plaintiffs that the transfer was clandestine and
that the plaintiffs and Shaw Wallace were unaware of it, this note states that
unless a demand draft of Rs. 2,50,000 was obtained from Intrust Securities and
Investments Pvt. Ltd. the share certificates and the transfer deeds must not be
handed over to them. The note states that the matter is urgent and it further
goes on to state that upon completion of the transaction, the necessary
application would be made to the Department of Company Affairs for its
deregistration under the Monopolies and Restrictive Trade Practices Act, and,
more importantly, that BDA will cease to be a subsidiary of the group effective
from the date of payment of the aforesaid shares is received by Arunava
Investments Co. Ltd. This last recital demolishes the plaintiffs' case that the
transfer regardless, BDA was to continue for all times within the Shaw Wallace
group. The record indicates that the share money was received by Arunava on August
3, 1990, the date on which the shares were transferred to Intrust Securities
and Investments Pvt. Ltd. and the legal effect of this transaction would be
that on and from August 3, 1990, BDA stood desubsidiarised from Shaw Wallace.
Unusual as it may seem, normally one expects the plaintiffs to establish their
case in support of the relief claimed. Ironically, we have a situation whereby
the plaintiffs have established nothing, the defendants have established their
defence to the hilt and the tragedy of the situation is that the plaintiffs
leave the court with almost a decree against the defendants. Obviously,
something was seriously wrong somewhere.
As far as the
chronology goes, the next major head of dispute centres around the right, title
and interest that is claimed by BDA in respect of the three brands of liquors.
The record as far as this transaction is concerned starts with the document
dated August30, 1990, which is an agreement between the plaintiff-company and
BDA for assigning the three brand names for a consideration of Rs. 15,00,000 in
terms of the board resolution of the plaintiff-company dated April 24, 1990. It
is of some significance to note that the agreement was preceded by a regular
board resolution, and I refer to
this at the initial stage because Shri Venugopal had occasion to contend that
this was a virtual paper transaction of no significance, but only for purposes
of the bare record and, more importantly, that there was a complete
understanding on both the sides that the assignment was not to be acted upon.
Shri Venugopal's client, namely, Shaw Wallace, happens to be a large corporate
outfit and a very old and established one. Under these circumstances, it is a
little disturbing when a body of this stature puts forward a plea before a
court of law that board meetings, minutes of such meetings, validly drawn-up
and executed agreements, deeds of assignments and such other legal documents
executed for lawful consideration must all be brushed aside under the cover of
an agreement that this was an arrangement of convenience for economic reasons
and that, therefore, a court should ignore all of them. I shall presently
examine the question as to whether at all, with this mass of unimpeachable and
conclusive evidence, any legal forum would be justified in taking such a view
and, more importantly, whether at all it is permissible.
Pursuant to
the agreement between the two companies dated April 24, 1990, a deed of
assignment in respect of the three brand names came to be executed and was duly
registered with the Sub-registrar on February 26, 1991. The consideration of
Rs. 15,00,000 that was agreed upon was paid by a bank draft duly acknowledged
by the plaintiff-company which factor is one of consequence because the
argument canvassed on behalf of the plaintiffs was that it was an internal and
a sham arrangement arrived at in order to throw dust in the eyes of the excise
authorities and something very domestic within the members of the corporate
group. If that were so, and if it were a mere paper transaction or a camouflage
for a working arrangement within the group, there would not have been the
physical transfer of Rs. 15,00,000, which is a relatively large amount of
money. What really clinches the issue is something else, namely, the wording of
clause (7) of the deed of assignment, which contains a negative covenant to the
effect that as and from that date the plaintiffs shall not use the trade marks
in question. Quite apart from the time factor, namely, that the transaction was
completed a good two years prior to the plaintiffs' raising the issue
challenging the assignment for the first time before the court, one needs to
necessarily examine the question as I shall presently do from a slightly
different angle. The documentary evidence before me fully, completely and
conclusively establishes that the assignment had taken place in February, 1991,
that it was accompanied by the requisite sanctions such as board resolutions,
etc., that it was duly registered and that it was for a lawful consideration and
in these circumstances, there can be no going back from the finality of that
transfer.
The real clue
to the dispute can be gauged from the elaborate arguments advanced by Shri
Venugopal in respect of these brands, which started with the contention that the
brands in question had been propagated and built up in the market by the
plaintiffs-company essentially with the backing reputation and marketing
expertise and status of the Shaw Wallace group and that the investments under
these heads as far as the brands in question are concerned was nothing less
than Rs. 10,00,00,000 to Rs. 11,00,00,000. Shri Venugopal drew my attention to
various figures in the annual report and the balance-sheet of the Shaw Wallace
group of companies as also to some other material on record to indicate that
this amount of money had, in fact, been spent. The defendants have seriously
contested this position. On the contrary, it was their case that BDA itself was
not doing well which was why it was axed and that it was not more than a
gesture of charity to let it go with the three brands which at that point of
time were also anything but market leaders. With regard to this last aspect of
the matter, I do not find on record any reliable material on the basis of which
it can be concluded that the three brands were, in fact, at the top of the
market or that they could be equated with a veritable gold mine as Shri
Venugopal described them. The few figures which I had occasion to look at for
the earlier period prior to the assignment, such as the year 1989, do not
support the view that these three brands were, in fact, real money-spinners. On
the contrary, they appeared to be just another set of run of the mill products
and it was for this reason that the consideration for the assignment was fixed
at Rs. 15,00,000 which, to my mind, having regard to the 1989 situation, was
not at all a modest figure. In fact, it was quite fair and reasonable. The
position did alter to a considerable extent in the next two years during which
period these brands which belong to BDA did, in fact, do very well in the
market and that was obviously the point of time at which the plaintiffs
obviously regretted having parted with these brands and resorted to the present
litigation in a desperate attempt to get hold of them again. This, in fact,
throws up the case of the plaintiffs in very poor light and lends the real key
to the present dispute. Whereas an effort was made all through to argue that
the defendants have grabbed a company and the best of the brands that belonged
to the Shaw Wallace group, I find that what has been attempted is exactly the
opposite. Defendant No. 3, who has been attacked by the plaintiffs as being the
villain of the piece, does not appear to have figured prominently anywhere in
these transactions, nor do I find anything devious or improper that can be
attributed to him. The complexion of these transactions unmistakably indicates
that they are pure, simple,
commercial transaction and that one cannot read in anything underhand in these
matters. What literally sets the matter at rest, apart from the conduct of the
plaintiffs who accepted the transaction for two long years before they woke up
from their slumber is that there is unimpeachable, conclusive documentary
evidence which establishes the correctness of the defendants' case on the one
hand against an unsustainable, inconsistent and wholly oral challenge on the
other. Obviously, the former will have to be upheld.
We then come
to the next set of transactions entered into between the plaintiffs and the
first defendant which are dated April 1, 1991, the first being a marketing
agreement between the plaintiffs and defendant No. 1 and the second is an
agreement under which the plaintiffs agreed to make available the personnel and
facilities for effectively implementing the marketing agreement. Shri Manohar
has advanced the submission that BDA had just about been launched on its own
and that, under these circumstances, it necessarily welcomed whatever
assistance was forthcoming at that point of time from the plaintiffs who were
hitherto almost in the position of a parent company. The plaintiffs, however,
had their own interest to secure and it was not out of any sense of goodness or
helpfulness that they entered into this agreement. Shri Manohar contended that
in the initial stages, it is true that BDA welcomed the assistance by way of
personnel from the plaintiff-company, but that it is absolutely wrong on their
part to create the impression that through such an arrangement that the
management and control of BDA was with the plaintiffs. Shri Manohar submits
that BDA was essentially a manufacturing unit and that some persons well-versed
in the day-to-day operations were undisputedly provided by the plaintiffs, but
that the court must take serious note of the fact that all these persons,
namely, the entire staff deputed by the plaintiff-company was officially taken
on the pay-rolls of defendant No.1-company from April 1, 1991, itself and that
their salaries and expenses were to the account of BDA as per the provisions in
the agreement dated April 1, 1991. Shri Manohar emphasised that this last
aspect of the matter would mean that these employees were virtually transferred
to BDA because the payment of their salaries and all other benefits by BDA
would create the relationship of master and servant between the company and
these employees. The argument that they were the plaintiffs' employees is,
therefore, according to him, factually incorrect. To my mind, this entire
controversy is inconsequential and of no significance—it is not unusual for
persons to be deputed from one concern to another for specific reasons, but
that would in no way affect the status or management of the recipient.
Interlinked
with this argument, Shri Manohar points out that taking advantage of the
infancy of BDA, the plaintiffs entered into a marketing agreement whereby the
entire production of BDA was sold by the plaintiffs and, in other words, the
virtual cream out of all the efforts put in by BDA went to the plaintiffs apart
from the fact that they took all the liquor on credit which BDA just could not
afford. The plaintiffs for their own convenience, therefore, offered the bank
guarantee so that BDA could draw against it; whereas, in fact, the plaintiffs
were the real beneficiaries and that the plaintiffs are attempting to make
capital of the fact that they had provided the bank guarantee to the extent of
Rs. 5,50,00,000 to the Central Bank of India for the loan facilities to be
availed of by defendant No.1-company. This bank guarantee was furnished by
virtue of resolution of the plaintiff-company dated April 26, 1991, which was
subsequent to the entering into for the marketing agreement. Shri Manohar was
quick to illustrate that there was no risk or liability whatsoever to the
plaintiffs because they were fully secured by virtue of the huge liquidity,
namely, the recoveries from the sale proceeds of everything manufactured by BDA
and, more importantly, by the fact that the bank guarantee was only a
reassurance to the Central Bank of India, but did not involve any risk to the
plaintiffs because BDA was a running unit, the company possessed its own assets
and the subsequent events do illustrate that the bank guarantee was never
invoked nor were the plaintiffs required at any time to pay any money on this
account. It is quite evident, in these circumstances, that the plaintiffs have
presented half-truths to the trial court. The bank guarantee issue does not
assist the case of the plaintiffs one single bit.
Shri Manohar
then demonstrated to me that the plaintiffs had contended that they had
incurred expenses in marketing the brands, that they have conveniently
suppressed the fact that this was not to their own account. On the contrary,
under the terms of the marketing agreement, which are rather one-sided, the
plaintiffs were to hand over the sale proceeds to BDA after taking their
expenses and commission—the latter being rather hefty. As far as this head was
concerned, Shri Manohar was quick to insist on pointing out that there is
nothing on record to indicate that defendant No.3 was instrumental in either
passing the resolution in question or that he had a hand in any of these
arrangements.
Dealing with
the last aspect of the matter first, it is true that the plaintiffs have
contended, though without much substance, that defendant No.3 had carefully and
systematically planned all these moves. I do not need to dwell on this aspect
of the matter because they were simple incorporate agreements and one must take cognizance of the fact that
BDA had just about separated from the Shaw Wallace group, it had virtually
worked in association with the plaintiffs up to that point of time and that,
therefore, there was nothing unnatural and improper about these reciprocal
arrangements. Shri Venugopal has devoted considerable time towards several
references from the record to indicate that BDA on its own was neither
independent nor could it have functioned that way for a single minute and that
it was virtually, even after the transfer of the shares, wholly and completely
dependent on the plaintiffs. He stated that the strongest indication in support
of the plaintiffs' case that the management and control of BDA was with the
plaintiffs is completely established from the fact that pursuant to the
agreement, the requisite personnel were made available by the plaintiffs. Shri
Venugopal elaborated on this and he submitted that even as far as the technical
know-how was concerned, in other words, the making of the three brands of
liquors, it was not only the expertise and the professional experience but the
techniques and, more importantly, the various other inputs that went into the
production of the quality control and every stage of production came from the
plaintiffs. This last aspect was objected to by learned counsel on behalf of
the defendants, who contended that the plaintiffs are not and never were a
manufacturing unit and that, therefore, even if they sent some of their
administrative staff it was impermissible to contend that every single input
came from the plaintiffs. Shri Venugopal also contended that BDA has wrongly
created the impression that the employees concerned had become the employees of
defendant No.1-company and that it was wrong to contend that they were
functioning as employees of the plaintiffs. The argument is a novel one in so
far as Shri Venugopal submitted that, admittedly, they were employees of the
plaintiffs prior to April1, 1991, and that they were not reappointed after
their services were terminated by the plaintiffs. In substance, Shri Venugopal
contends that these employees were only on deputation and that, therefore,
since they were working physically for BDA, it was only natural that BDA had to
pay their salaries during that period of time.
The short
point that arises for determination from this state of affairs centres around
the question as to whether, in these circumstances, the conclusion arrived at
by the trial court that BDA was effectively under the management and control of
the plaintiffs as on the date of the filing of the suit is justified. The
marketing agreement cannot lead to any such conclusion because it was a plain
and simple commercial arrangement whereby the plaintiffs were to sell the
products of BDA, retain a certain amount
of money and hand over the rest to BDA. This would not give BDA the status of a
subsidiary or an interlinked company. On the contrary, the reverse position
would be evident in so far as if BDA was effectively still part of the group as
in the old set-up prior to the transfer of the shares and if it was effectively
managed and controlled by the plaintiffs, no such formal agreement would have
been necessary because they would have worked on the basis of a domestic
understanding. Again, I do not see any special significance in the plaintiffs
furnishing a bank guarantee of the Central Bank of
That brings
us closer to the circumstances that are alleged against the defendants as being
the immediate provocation for the present litigation. I have, in some detail,
dealt with the developments that took place in the year 1990-91 whereby the
status of BDA had changed from being one of the associate concerns of the Shaw
Wallace group to that of an individual corporate entity and that it was also
the fulfledged owner of the three brands that had been remnants of the old
set-up or rather the shackles of some sort had not been completely divested in
so far as the constitution of the board had not appreciably changed and Shri
Manohar points out on behalf of the defendants that for its own administrative
reasons, it became necessary to undertake a change so that the company could
manage its own affairs through a board of its choice. For purposes of
reorganising the board, a meeting of the board of directors of BDA was held on
March 9, 1992, in which resignations of three directors, Shri A.K. Jain, Shri
R.L. Jain and Shri R. Ramani, were accepted and new directors of the choice of
defendant No. 1 came to be appointed as additional directors, one of whom was
the third defendant. In a subsequent extraordinary general meeting of the
company held on April 9, 1992, the board was invested with the authority of
electing a chairman. In a meeting of the board of the company held on the same
evening, defendant No. 3 was appointed as chairman of the board and, acting in
this capacity, he appointed the fourth defendant as managing director and
issued the circular dated April 9/10, 1992, the validity of which is contested
in the present suit.
The trial
court has unfortunately glossed over what according to me was the real
background for the institution of the present suit. The plaintiffs have adopted
a sanctimonious approach whereby they have made out that defendant No. 3,
through his actions on April 9, 1992, virtually left the plaintiffs with no option except to 6eek legal redress and in
this context what is, in fact, pleaded is that this was an attempt to upset the
existing arrangement that then existed. Having regard to the volume of material
suppressed from the trial court at that stage, it was not difficult for the
plaintiffs to project the image that they were the aggrieved parties, taking
maximum advantage of the fact that BDA originally was one of the Shaw Wallace
companies and the trial court was made to believe that the old situation, in
fact, prevailed and was sought to be unjustifiably disturbed. Undoubtedly, if
this was true, the defendants would be put in the wrong box and it was on the
basis of such a projection that the ad interim orders were obtained. An interesting
document, and a very important one, is the letter of resignation submitted by
BDA's officers dated April 1, 1992. I shall have occasion to deal with this
document subsequently, but suffice it to say that it clearly exposes the true
state of affairs and what made it virtually necessary for defendant No. 3 to
take an urgent and immediate decision to stabilise the management and functions
of BDA regardless of what had happened. It is inconceivable to accept that the
en masse resignations on April 1, 1992, were voluntary or that they were not
inspired and there is no doubt in my mind, after a thorough investigation, that
this action was instigated by the plaintiffs and that it was a virtual plot in
order to create an internal revolt and virtually hijack the company. This,
unfortunately, is the true complexion of the sequence of events that
immediately preceded the filing of the suit and it was this action that was to
be used as justification for the invocation of the court assistance. Viewed at
in this light, the action taken by defendant No, 3 assumes an entirely
different complexion and is, in fact, not only explained but rendered fully
justified.
I need to
refer to one aspect of some significance that has taken place during this
period only because it concerns Mr. S. Roy, an employee of the
plaintiff-company and the person who has incidentally affirmed the present
plaint. He held a power of attorney of the first defendant-company which came
to be revoked on April 9, 1992, notice of which was published in the leading
newspapers on April 19, 1992. The record indicates that it was only after the
meeting of the first defendant-company on April 9, 1992, that steps were taken
by Shaw Wallace from April 11, 1992, which is of some significance, when the
powers of defendant No. 3 as the managing director of Shaw Wallace were
withdrawn even though there is a furious challenge in this litigation to the
earlier set of actions concerning BDA which, as I have illustrated, were
protracted over a period of time where collective decisions, all of which are
documented and in respect of
which considerably large sums of money have passed, but none of these
transactions were at that time questioned. At this stage, I need to also deal
with a vital part of the record which has been completely overlooked by the
trial court while considering the status of BDA. We have on record a document,
namely, the annual report and the balance-sheet of Shaw Wallace as well as
Arunava Investments Co. Ltd. for the year 1990-91 ending on March 31, 1991,
which as per requirements of law had to be tendered as at the annual general
meeting of Shaw Wallace in keeping with the provisions of the Companies Act,
appending therewith the balance-sheet of its subsidiaries. Shri Manohar made
capital out of the fact that the name of defendant No. 1-company had been
removed from the list of subsidiaries of Shaw Wallace in this balance-sheet and
in the balance-sheet of Arunava Investments Co. Ltd., the shareholding of BDA
Ltd. as well as one more company, Vinedale Ltd., which are to be found as on
March 31, 1990, have been deleted as on March 31, 1991. These balance-sheets
have been signed by the chairman of the group, Shri M.R. Chhabria, and the same
applies to the report. Under the statutory provisions of the Companies Act, the
balance-sheet has to be signed at least by two directors and has to be approved
at the annual general meeting. In this case, these requirements have been
fulfilled. The inevitable consequence that emerges from this record is that the
general body of the shareholders of both, Arunava Investments Co. Ltd. as well
as Shaw Wallace, had the knowledge of desubsidiarisation of defendant No.
1-company from Shaw Wallace. Short of the present challenge, it is quite
significant that neither the plaintiff-company nor Shaw Wallace nor Arunava
Investments Co. Ltd. took any action or any steps if, as is now contended by
them, the process of desubsidiarisation was clandestine and fraudulent. I have
principally referred to this document because it happens to be the most
reliable and official record of the plaintiffs and the Shaw Wallace group
prepared, verified, signed and published, by them and, in these circumstances,
nothing could bind them more than their own evidence. It is this very material,
unfortunately, that fully and completely establishes not the plaintiffs' case
but the case of the defendants. That brings me to the forceful allegations made
by Shri Manohar at the Bar that these facts were within the special knowledge
of the plaintiff-company as well as Shaw Wallace and were kept back from the
trial court when the ad interim ex parte injunction was obtained on April 16,
1992. This was one of the' strongest grounds on which Shri Manohar contended
and quite judiciously that the plaint must be. construed as a fraud on the
trial court.
Shri
Venugopal reacted equally sharply and he contended that the basic pleadings are
there, that all this material is a matter of evidence, that, in fact, his
clients were completely taken aback by the unprecedented "revolt and
declaration of independence by defendant No. 3" and that as the plaint
itself indicates, it had to be hurriedly drafted and filed. Shri Venugopal
objected to the charge that there was deliberate suppression of facts and he
maintained that the mass of material that was subsequently produced before the
court could never have been placed before the trial court at the earliest point
of time and in particular in the circumstances in which his clients were
placed. I shall deal with the main plank of Shri Venugopal's arguments whereby
he contended that defendant No. 3 who held the post of managing director of the
Shaw Wallace group right through the period turned out to be a traitor in their
camp and that he was systematically planning, plotting and working towards
snatching away some of the companies, such as BDA. According to Shri Venugopal,
nobody had ever suspected that defendant No. 3, who is the real brother of Shri
M.R. Chhabria, would, at any time, turn a traitor. In these circumstances, he
contends that if at all references of the aforesaid type did appear in the
records that it was not surprising and that it was only on April 9, 1992, with
a sense of sudden shock, that the plaintiffs and everybody else in Shaw Wallace
realised what the implications were.
I find it
impossible to even take a charitable view of what has happened in this case
because there is no manner of doubt that it is not a few stray facts or
documents that have been kept back from the trial court, but I find after the
three-week hearing of this proceeding from day to day that virtually everything
that mattered and everything that was of necessity was absent from the plaint.
I refuse to accept that this was because of exigencies of time or that it
happened accidentally. These are facts that Stare one in the face, and if any
of this material was placed before the trial court at the earliest point of
time, it would have been impossible for the plaintiffs to have obtained the ad
interim order. In these circumstances, the one and only conclusion is that the
material was deliberately suppressed. I need to add that it was not the ethical
consideration of being fair with the court which is on a higher plane that I am
concerned with, but I need to take a serious view of what has happened in so far
as it was incumbent on the plaintiffs to at least comply with legal
obligations. Though Shri Manohar appeared to be harsh when he insisted that a
fraud had been played on the trial court, after a very mature consideration of
the case, I am inclined to agree with that observation. It is in this
background that the question arises as to whether at all, devoid of every
other consideration, the plaintiffs are
entitled to a discretionary relief in the, form of an injunction. A lot of
case-law was cited on both sides with regard to the principles that need to be
observed in respect of the pleadings. I do concede that some degree of
allowance needs to be allowed and that laxity of approach is sometimes
required, but there can never be justification in a case where there has been
wholesale suppression. Even in a case where reasonably good material is relied
on, a court would refuse a relief to a party with tainted hands. This last
finding alone is sufficient to completely disqualify the plaintiffs from any
reliefs in this proceeding.
I have had
occasion to observe from time to time that the main attack in this proceeding
is directed against defendant No. 3. Much was said at the Bar on both sides,
which I would prefer to avoid dealing with in this judgment because it concerns
a furious family dispute, resulting in hostile relationships and the inevitable
sniping at each other. What I am, however, required, as of necessity, to deal
with is the legal head which has been repeated at some length, namely, the
accusation that there is a breach of a fiduciary capacity on the part of
defendant No. 3 in so far as he was the managing director of Shaw Wallace right
through the period 1990-91 and up to 1992 when everything that is the
subject-matter of this dispute had taken place. I shall deal with this aspect
under two brief heads. In the first instance, Shri Manohar pointed out to me
from the record that there are virtually no pleadings to justify this charge. A
stray reference here or there would not answer the definition of even general
allegations. The law on the point is more than well-crystallised and this is
probably the only field in which the principles of civil law and criminal law
have merged completely. One does not need to cite elaborate case law, but ever
since the decision of the Privy Council in the case of A.L.L. Narayan Chetiyar
v. Official Assignee, AIR 1944 PC 93 (sic), the position .has been quite
unambiguous, namely, that where a fraud or breach of trust are alleged as in a
criminal trial, the charge will have to set out full, complete and specific
particulars in the form of facts, dates, incidents and allegations and that
there can be no compromise with regard to this requirement. Shri Manohar
submitted that even in the case of an allegation of fraud or misconduct
relating to a director, the party making the charge and who is in possession of
the particulars of the fraud is obliged under Order 6, rule 4 of the Code of
Civil Procedure, 1908, to set out the full particulars of such objective facts.
It is impermissible to get away with, mere vague allegations in the plaint. It
is true that Shri Venugopal accepted that there is no quarrel with regard to
the requirements of law, but he maintains that in a case of the present type
where the broad particulars have
been averred, that the details were a question of subsequent evidence and
substantiation and he contended that the plaintiffs have placed on record
voluminous records from which the plaintiffs are in a position to completely
bring home the original accusation. This is virtually begging the question.
The
requirements of law in a case where fraud and breach of trust are pleaded do
not have to be restated and every judicial decision on the point lays down that
a party approaching the court with such a charge simply has to fully
substantiate it with full facts. For good reason, the law does not permit the
procedure which Shri Venugopal's clients have tried to adopt, that you level an
accusation and in common parlance state that you will prove it later on. This puts
the defendants to an impossible handicap and makes the task of the court even
worse because in the absence of the requisite material, the court cannot act on
the charge and as the plaintiffs begin to disclose their cards, the defendant
who in the first instance did not know what case he has to meet is taken by
surprise the inevitable result is the type of situation that we are faced with
in the present litigation, namely, that the plaintiffs come to court with no
case and thereafter burden the record with masses of material and the defendant
cannot be precluded from countering it in the same manner. This is precisely
how the record in the present case has grown in volume, out of all proportion
from time to time and today almost resembles the traditional octopus. The legal
position being quite unambiguous, it is most unfortunate that the learned trial
judge overlooked these basics and went to the extent of recording that the
charges under these heads were established. Even on an evaluation of the
material which I have done, since it was all placed before the court, such a
conclusion is unwarranted, but that exercise, to my mind, could have been saved
had the trial court adopted the correct position in law in having refused to
permit any material under this head to be produced by the plaintiffs at a later
point of time and to have recorded the conclusion that they are precluded in
law from agitating this head. I am required to repeat once again that even
though that was the correct course to follow, I have been required to do
otherwise by re-examining all the material under this head in so far as the
learned judge having recorded an adverse finding, it was necessary for me at
the appellate stage to decide as to whether that material justifies any such
conclusion. Though not strictly material, Shri Manohar stated at the Bar that
defendants Nos. 1 and 3 are being subjected to litigation in different forums
on the same record that is before this court and that, therefore, in order that
judicial time be saved, this court should apply its mind, hear both the parties and decide the issue once
and for all. That briefly is why this lengthy exercise became necessary. That
the plaintiffs have miserably failed to substantiate the charge against
defendant No. 3 would be putting it mildly.
It is now
necessary for me to deal with another unusual aspect of this case which
concerns the exercise on the part of the plaintiffs in disputing the minutes of
the meeting of its subsidiary Arunava Investments Co. Ltd. dated May 4, 1990,
as also disputing the minutes of the board meeting of BDA dated March 9, 1992,
and April 9, 1992. At the very outset, I found it rather unusual that a
challenge of considerable seriousness was levelled on these Counts even though
there were no pleadings in the plaint to that effect. What was really
surprising was that as far as the minutes dated May 4, 1990, relating to
Arunava Investments Co. Ltd. are concerned, not only had a period of two years
elapsed but, more importantly, the various steps that have been discussed by me
earlier had all been implemented as a follow-up of those minutes in spite of
which the very validity of the minutes has been called into question.
Unfortunately, there does not appear to be any consistency or direction when it
comes to challenges and accusations as far as the plaintiffs are concerned,
but, again, the trial court permitted this and adjudicated on it which entitled
learned counsel at the hearing of the appeal to argue at considerable length
under these heads, the inevitable consequence being that the issues in question
have to be decided. I have had occasion to refer to the provisions of section
195 of the Companies Act, which attaches a presumption as to the validity of
the minutes of the meeting of the company and the settled law is that the
minutes in the books are received, though not as conclusive yet as evidence of
resolution of the proceedings. At an interlocutory stage, this can be the only
correct approach. If a controversy is raised, evidence of a conclusive nature would
be a must, but on the present record and that too at an interlocutory stage
merely because the validity or genuineness of the minutes are called into
question, the trial court was not justified in expressing doubts or discarding
the minutes in question. The ground of challenge themselves have been looked at
by me and they are so weak and hollow that it is unnecessary to burden this
judgment with them since in law those records are sacrosanct. If the heads of
challenge were very substantial or if they had been supported by conclusive
material, then alone would there have been justification to express doubts. The
allegations in the present case are frivolous, virtually hanging in the air and
are devoid of substance and no cognizance can be taken of them.
As regards
the challenge to the meetings of BDA dated March 9, 1992, and April 9, 1992, it
is imperative for me to record that the plaintiffs are outsiders or, in other
words, strangers to the company and it is amazing that they have taken up the
challenge when neither the shareholders nor the directors of that company have
disputed those minutes. To my mind, the plaintiffs have no right to raise any
such plea nor do they have a locus standi to do so. During the hearing before
me, however, Shri Manohar produced the original minutes book, which was shown
not only to the court but to the plaintiffs' learned counsel. A careful
examination of this book completely satisfied me that there was no
justification for the adverse findings recorded by the learned trial judge in
respect of these minutes. The appellants' learned counsel pointed out to me
that the learned trial judge seems to have been swayed by trivialities and in
the process has overlooked the basic substance. The original minutes book
resolves the controversy completely, it inspires complete confidence and,
therefore, does not require detailed re-examination of that aspect of the case.
Two aspects
to which I have made a brief reference earlier require to be disposed of at
this stage, the first of them being the case of the defendants that the three
persons who ceased to be directors of BDA had orally expressed their desire to
resign. Shri Venugopal contended that this is unthinkable in a corporate set-up
and that not only was the plea a false one but that it justified the charge of
the plaintiffs that it was a clever ploy to get over the absence of the three
directors when defendant No. 3 took several crucial decisions. Shri Manohar
countered the arguments by pointing out that there is no prohibition in the
Companies Act against oral resignations and that such a resignation is
perfectly legal and valid. He further contended that the removal of a director
from the board of a company is an issue which concerns that very individual and
that, consequently, the plaintiffs cannot, under any circumstances, espouse the
cause of these three persons who have not taken any legal action and for that
matter not even recorded a protest through a letter.
As regards
the first aspect of the matter, Shri Manohar may be technically right when he
states that an oral resignation is permissible and if it is permissible that it
is also legal. Under normal circumstances, I would have looked upon the
transaction with some degree of hesitation. What unfortunately lends total
credibility to the whole action is the fact that not one but three persons, and
that too company directors who ceased to be on the board by virtue of what
transpired at that meeting, have neither protested nor have they taken action
to challenge that decision. In such a situation, the irresistible conclusion is
that the defendants are right
when they point out that these directors had expressed their desire to resign
and that this was why the minutes have recorded this fact and they were removed
from the board. In any event, where the individuals concerned have, through
their conduct, ratified the decision, it is not for a third party, namely, the
plaintiffs to question it.
Dealing now
with a slightly different head, I need to consider the legal implications of
admissions as far as the present record is concerned. There is one document to
which I have made repeated reference earlier, namely, the annual accounts and
the balance-sheet of Shaw Wallace and Arunava Investments Co. Ltd. for the year
1990-91 ending on March 31, 1991. The learned trial judge has unfortunately
lost sight of this crucial document and in the process has overlooked and
ignored it. The annual accounts and the balance-sheet being a statutory
document passed by the general body of the shareholders of Arunava Investments
Co. Ltd. and Shaw Wallace, which records the deletion of the shareholding of
defendant No. 1, BDA, in the balance-sheet of Arunava Investments Co. Ltd. and
the deletion of the name of defendant No. 1, BDA, from the list of subsidiaries
of Shaw Wallace is a clear and conclusive admission that binds those companies.
The balance-sheet has the signatures of the chairman of Shaw Wallace and its
directors and the same is the position as far as Arunava Investments Co. Ltd.
is concerned. The legal implication that flows from such a situation is that a
presumption arises on the basis of the material that all concerned, including
the shareholders to whom the balance-sheet was despatched, were in the
knowledge of the fact of desubsidiarisation of defendant No. 1-company. I do
not need -to deal with the judicial decisions cited by learned counsel at
length because the legal position is unambiguous, but as regards this aspect of
the matter, Shri Venugopal met the argument from an entirely different angle.
He reiterated that the transactions did, in fact, take place, but that in the
background pointed out by him, it must be accepted by the court that the act of
severance was for business and tax reasons with the full understanding of all
the parties that it was only for record purposes and not intended to be given
effect to or acted upon. Shri Venugopal's argument, therefore, proceeds on the
lines that these facts cannot be construed as admissions, but only reflect the
transactions which were not of any consequence. In this context, what he
further points out is that the arrangement did, in fact, work perfectly for
virtually two years until defendant No. 3 decided to "hijack" the
company. Shri Venugopal contends that there was no question of anybody challenging
the validity of those transactions as everyone understood them in the spirit in
which Shaw Wallace intended and that regardless of those transactions, BDA continued to function in exactly
the same manner as it did prior to the transfer of the shares and the
assignment. He states that it was only after Shaw Wallace and the plaintiffs
realised that defendant No. 3 was trying to capitalise on that position and to
appropriate the company that the plaintiffs were left with no option except to
present a challenge to the transactions. In this background, he maintains that
nothing contained in the balance-sheet and accounts constitute admissions. It
appears to me that the plaintiffs are virtually switching their stand from time
to time and from subject to subject. In respect of the transfer of shares and
the delinking of BDA as also the assignment of the three brands, they have
presented a comprehensive challenge from virtually every angle and have sought
to overcome every aspect of delay by stating that it was only after April 9,
1992, that their eyes were opened. When confronted with their own statutory
documents, which contain irrefutable evidence and that too emanating from the
plaintiffs' camp, there is a complete shift of stand and an attempt is made to convince
the court through an involved process of logic that these are no admissions.
This is a
judicial proceeding and one cannot, in the face of unimpeachable documentary
evidence, accept belated and involved explanations which run counter to the
plain letter of the material before me and that too statutory records
originating from the plaintiffs themselves. There is no way in which the
plaintiffs can get out of these admissions which not only bind them, but
establish to the hilt that the transfer of shares, desubsidiarisation and
assignment were official transactions with the full knowledge and consent of
the board of directors, shareholders, and all others concerned with Shaw
Wallace and the plaintiffs and that these transactions, which have become final,
cannot be called into question. Conversely, this material is very damaging to
the case of the plaintiffs in so far as it establishes the falsity of the
contentions put forward by them.
I need to
observe that in the rather involved and furious battle that this litigation has
created, a large number of documents have come on record. The learned trial
judge has been critical with regard to many of the documents produced by the
defendants, the ostensible reason being that these documents are either
documents of the plaintiffs or of the Shaw Wallace group to which they are
parties and thus have conscious knowledge. As I have had occasion to indicate
earlier, these documents ought to have been produced by the plaintiffs
themselves along with the plaint if they were serious about a full, candid,
faithful and fair disclosure to the court. What is surprising is that the
authenticity, probity and genuineness
of these documents is not disputed by the plaintiffs, nor for that matter is
the question of their relevance. The learned trial judge has been unjustifiably
critical of the conduct of the company secretary, Rajiv Dharmani, which, to my
mind, was unnecessary in so far as it would virtually amount to putting a
premium on deliberate suppression of documents from the court. The position in
law is illustrated in the case of Pushpadevi M. Jatia v. M.L Wadhavan [1987] 3
SCC 367 ; [1988] 64 Comp Cas 228 (SC).
It is true
that Shri Venugopal was very vehement on this aspect while dealing with this
issue and he did spend considerable time pointing out to me that one of the
virtual acts of breach of faith on the part of defendant No. 3 was that he had
decoyed several of the responsible officers at various levels from Shaw Wallace
and the plaintiff-company to switch their loyalties and come over to him and it
was through these sources that the documents and records have virtually been
"pilfered". The point made by Shri Venugopal was that this set of
documents produced has not come out of lawful custody of the defendants in so
far as the defendants could never have got them except through some devious
means and in so far as they constitute official records relating to the working
and business of his clients that the learned trial judge ought to have totally
excluded them from consideration. Shri Venugopal was severe on the manner in
which these documents have been obtained and he made an issue of the fact that
where it is clear as day light that these documents have come only through a
process of inducement to officers to shift their loyalty, that this court
should refuse to look at them.
I do not need
to adjudicate on this issue except to observe that it is the nature of
documents that is significant. If several of the officers have shifted over
from one camp to the other, those are individual decisions and senior
executives always have the freedom of choosing for whom they would like to work
and this, court cannot question such shifts. Had the documents been secret,
confidential or of such a character that their removal from lawful custody
would constitute an offence, perhaps, this court would have taken a different
view of Shri Venugopal's objections. Where the documents which are virtually
run of the mill records, where they are neither secret nor valuable and where
the defendants have essentially produced them because the plaintiffs have
suppressed them from the court, I do not see any justification in the
plaintiffs' objections. In passing, I need to record that one of the grounds on
which the transfer of BDA shares by Arunava was challenged by the plaintiffs
related to the provisions of section 293(1)(a) of the Companies Act in so far
as it amounted to a sale of
undertaking without a resolution of the general body of Arunava. When Shri
Manohar on behalf of the appellants took up this point, Shri Venugopal, learned
counsel on behalf of the plaintiffs, stated that the contention and challenge
under this head was not being pressed by the plaintiffs. I, therefore, do not
need to consider it.
The next
major head of controversy centres around the question as to whether at all BDA
as a company could have been severed from the Shaw Wallace group since a
petition under section 391/394 of the Companies Act for the amalgamation of
Arunava Investments Co. Ltd. with Shaw Wallace was proposed and the scheme was
pending approval of the court. The factual position is that the scheme of
amalgamation of 14 companies, including Arunava Investments Co. Ltd. with Shaw
Wallace, is set out at page 32 of the paper-book, and the scheme provides for
the appointed date, namely, July 1, 1988, and the effective date, meaning the
date on which the scheme becomes effective in accordance with clause (1) of the
scheme. Clause 1 in terms provides that the scheme is subject to the conditions
and upon the five conditions provided in clause 1(a) being fulfilled, one of
them being the sanction of the High Courts of Calcutta, Madras and Bombay under
section 391 of the Companies Act to the scheme and the necessary order or
orders under section 394 of the Act being obtained. Clause (d) provides that
with effect from the appointed day and up to the effective date, each of the
transferor companies shall be deemed to carry on all business activities and
they stand possessed of all their properties for and on account of and in trust
for the transferee-company and any profits accruing to the transferee-company
or losses arising or incurred by them shall, for all purposes, be treated as
profits or losses of the transferee-company. It needs to be stated that the
scheme does not prescribe any impediment or embargo as far as the dealing with
the properties of the transferor-company by them only with the prior approval
of the transferee-company and they are entitled to carry on their business,
including dealing with their properties, till the time and scheme is finalised
and approved. There is nothing on record to show that the requirements of
clause (1) have been satisfied and a statement was made at the Bar before me
that the High Court of Calcutta has not even till date sanctioned the scheme.
It is also significant to record that even after July 1, 1988, the shares of
BDA were acquired by Arunava Investments Co. Ltd. in September, 1988, and it is
not the case of the plaintiffs that for acquiring these shares the approval or
permission of Shaw Wallace was obtained. Likewise, on the same basis, there
appears no impediment for Arunava Investments Co. Ltd. as an investment company
to dispose of the shareholding
of BDA, particularly when as stated in the application to the Central
Government made by Arunava Investments Co. Ltd., the object of disposing of the
shareholding was in order to invest it in due course of business for earning
better income.
Shri Manohar
placed reliance on the case in Brooke Bond (India) Ltd. v. Dinkar Landge [1984]
56 Comp Cas 1 (Bom), in support of his submission that the scheme for becoming
effective requires the sanction of the court and even thereafter it does not
become immediately operative as there are certain approvals that are needed. He
also sought reliance on another case in Marshall Sons and Co. (India) Ltd. v.
ITO [1992] 74 Comp Cas 236 (Mad), in support of his argument that if the court
refuses to set its seal to the scheme of amalgamation, the arrangement would
fall to the ground and it is, therefore, the sanction of the court which gives
life to it. Learned counsel also pointed out to me that even an order of the
court does not have retrospective operation to enable a claim that the scheme
has been in operation from the date anterior to the date of the scheme. Also,
in support of his contention that this head of challenge is groundless, Shri
Manohar pointed out to me that as against the shareholding worth Rs. 2,50,000
of BDA, that Arunava Investments Co. Ltd. had transferred a shareholding of an
amount of Rs. 55,50,000 held by it in Vinedale Distilleries Ltd. and no
grievance had been made by Shaw Wallace in respect of transfer of this holding.
A scrutiny of the present record does indicate that there is no material
produced in support of any such challenge.
Shri
Venugopal, learned counsel representing the respondents, did seriously urge
that the pendency of the scheme of amalgamation would prescribe a complete bar
to any form of alienation while the scheme is pending, the principal reason
being that according to learned counsel where it is proposed that a group of
companies amalgamate, the process virtually becomes final on the decision being
arrived at and the scheme being placed before the court for its approval.
Referring to the provisions of the present scheme, Shri Venugopal stated that
the companies along with their assets and liabilities had effectively merged
with Shaw Wallace once the scheme had been lodged in court as specifically
provided therein and that, consequently, any transfer of the present type is
void in law. Answering Shri Manohar's submission with regard to Vinedale, Shri
Venugopal stated that the transaction relating to that effect has also been
challenged before the appropriate forum. As far as the present transfer is
concerned, Shri Venugopal contended that it was wholly impermissible and that
it would, therefore, have to be struck down. He further contended that there is always a time-lag between the
finalisation and presentation of a scheme and the completion of the requisite
judicial process and it is precisely for this reason that specific prohibition
is in-built for preventing any transfers. This, according to Shri Venugopal, is
an essential requirement because the scheme is required to be kept intact until
the legal process is completed as otherwise the complexion of the holdings will
have drastically altered and the scheme itself would require modification.
As far as
this head of challenge is concerned, it is undisputed that the scheme is
pending approval and that, at least, one out of the three High Courts has so
far not approved of it. What I find difficult to accept is the plaintiffs'
argument that the court is bound to accord its approval to the scheme which, to
my mind, is contrary to the position in law. In a given instance, for commercial
reasons or with the best of intentions, a scheme of amalgamation may be
presented to the court, but, as often happens, some of the shareholders,
creditors, etc., may oppose the sanction of the scheme or, on the other hand,
the court itself may find that it is not in the interest of the company or in
the public interest, in which case the approval will be refused. The sanction
of the court, therefore, is not something that is certain, nor can it be
presumed. In these circumstances, the scheme is no more than a proposal or
declaration of intent or, in other words, it cannot be invested with a garb of
finality. If this is its legal status, then it necessarily follows that the
proposals contained therein are not of a binding character, but are essentially
fluid and flexible. Apart from other aspects of the issue which I have referred
to earlier, in the ultimate analysis, before the transfer can be questioned on
grounds of legality or permissibility, a specific legal prohibition will have
to be pointed out. The terms of the present scheme of amalgamation viewed at
from any angle do not provide any such prohibition and, therefore, the transfer
in question cannot be struck down on this ground.
Having held
that the transfer does not suffer from any infirmity, one needs to devote some
time to the examination of the next argument canvassed by Shri Venugopal, which
is to the effect that it was only an ostensible transfer or, in other words,
that it was a sham transaction. To summarise, it was supposed to have been done
in order to get out of and avoid the provisions of the Monopolies and
Restrictive Trade Practices Act to avail of taking facilities which were
otherwise not available or, to put it very candidly, to jump over various legal
provisions. I have earlier pointed out that it was also argued that certain
excise difficulties were experienced for which the transfer was pleaded as the
solution. In the first instance, it is rather amazing that such an argument is
at all canvassed by a party who
has approached a court for the grant of a discretionary relief of injunction.
If the contention advanced were to be accepted, it would mean a candid
admission that the plaintiffs had entered into a transaction to defeat the
provisions of law and regardless of that fact, the court should still turn a
Nelson's eye to their conduct and grant them the relief prayed for.
Shri Manohar
has seriously contested this position. He draws my attention to the value of
the internal memo signed by S.C. Mazumdar, the company secretary, dated July
23, 1990, which categorically states that upon receipt of the bank draft of Rs.
2,50,000 from Intrust Securities and Investments Ltd., necessary steps to
deregister BDA Ltd. under the Monopolies and Restrictive Trade Practices Act
would be taken and that it shall cease to be the subsidiary of Shaw Wallace.
The application made by Arunava Investments Co. Ltd. to the Central Government,
particularly clause 4(d), states about the composition of the board of
directors of the company whose shares are proposed to be transferred by
indicating that there is no nominee director of Arunava Investments Co. Ltd. in
the board of BDA. Shri Manohar also points out that the various agreements
entered into by the plaintiffs' company with BDA, including the marketing and
service personnel agreements, totally belie the correctness of the submission
that the transaction was an illusory one. One also needs to take cognizance of
the fact that under the provisions of the Benami Transactions Act, the transfer
cannot be claimed to be either nominal or ostensible.
I have had
occasion to comment about this aspect of the matter in the earlier part of the
judgment, but it did require a further consideration in so far as this issue is
very basic to the litigation. The case has been extensively argued, every
conceivable angle has been debated by both sides and it was, therefore,
necessary to record a conclusive finding on this crucial aspect of the matter.
Shri Manohar
was extremely critical of the type of relief granted by the trial court and
there were even flashes of anger in his argument when he severely attacked the
validity of what had been done. He advanced before me an argument which is one
of considerable substance and requires to be upheld. I had occasion to observe
earlier that in sum and substance, the learned trial judge had handed over the
management and control of BDA to the plaintiffs. Shri Manohar pointed out to me
that this would virtually invest the plaintiffs with the status of a managing
agent as defined in section 2(25) of the Companies Act. Section 324A of the
Companies Act abolishes the concept of managing agency and under section 294, the appointment of sole selling
agents has been prohibited. The relief granted, therefore, would be tantamount
to appointing the plaintiffs as the managing agents of BDA and would be in
complete violation of law. Admittedly, defendant No. 1-company has only one
manufacturing unit at
The gravity
of this last aspect of the matter needs to be further highlighted. I have had
occasion to refer earlier to the need of a sense of complete caution and
responsibility on the part of a court dealing with a case of this type because,
inter alia, there are the lives and careers of the employees and officers, of
the directors and the shareholders, the interest of financial institutions and
banks, of dealers and a host of other angles which need to be responsibly taken
cognizance of. In the present instance, there is the aspect of compliance with
obligations, contracts and, above all, legal responsibility under the numerous
laws and regulations, a breach of which would entail not only serious civil
consequences but also criminal liabilities. Where the record has demonstrated
that the parties are virtually at war, it was a reckless act, to my mind, to
have permitted the management and control of defendant No. 1-company to vest in
the ' hands of persons, admittedly, hostile and belonging to the opposite group
and, above all, having adverse interests. That irreparable injury to the
defendants was most likely to result is something which the trial court could
not have overlooked. Shri Manohar pointed out to me that in spite of the
defendants' best efforts, the injunction order has continued for a year in the
course of which staggering losses have accrued to the defendants and that the
company itself would find it extremely difficult to get going from this stage
onwards. I have carefully applied my mind to this aspect of the matter and, as
indicated by me in the order dated April 27, 1993, I have held that the
injunction order should not be permitted to continue for even a single minute
and even if the paper-work in relation to the judgment takes time the interim
orders should be vacated forthwith.
On April 12,
1993, when me arguments of the appellants were almost, completed, a civil
application under Order 41, rule 27 of the Code of Civil Procedure, 1908, was
filed by Shri Venugopal on behalf of the respondents and the appellants have
filed their reply to that civil application. I have passed a separate order
whereby the application has been rejected, but it is necessary for a brief
reference to be made in this judgment to the contents of that civil
application. The effort of the respondents was to admit additional evidence and
annexed to the application were extracts of affidavits of defendant No. 3, K.R.
Chhabria, in a litigation pending at
The two
principal contentions repeatedly advanced by the respondents as also emphasised
in their written submissions centred around the charge that the managing
director of Shaw Wallace, who at the relevant time was the third defendant,
derived personal advantage in transferring the shareholding of BDA as well as
the three brands of I.M.F.L. products to himself and his family members for his
private and personal benefit at an extremely inadequate consideration which
constitutes the breach of his fiduciary duty. Once again, it is my bounden duty
to record that even though learned counsel appearing on behalf of the
respondents has devoted the greater part of his energies and arguments towards
these two heads, on a strict consideration the respondents would be precluded
from arguing these points. The only three grounds on which the transfer of
shareholding of BDA was challenged were (a) violation of section 291(1)(a) of
the Companies Act, (b) the transfer
being in violation of the scheme of amalgamation, (c) the third defendant
acting in breach of his fiduciary capacity and I need to clarify here that
beyond these bald statements, the supportive data is conspicuously absent in
the entire pleadings; and (d) the transfer being contrary to the provisions of
law and the regulations of the company.
The ground
that the transfer was invalid or illegal because of the inadequacy of price of
the shares is not even averred in the plaint and as far as the transfer of the
trade marks are concerned, the only reference is to an agreement to assign the
brands, there is not even a pleading as regards the actual agreement, the
consideration or for that matter its inadequacy. In this background, therefore,
I would have been justified in refusing to consider this head of challenge.
However, as indicated at the commencement of this judgment, since this litigation
is virtually the forerunner of numerous other ones, it would only prolong the
agony of the parties and utilise the judicial time of another court if the
angles canvassed are to be left undecided. It is true that certain limited
references have been made in the affidavit of Shri S. Roy, which came to be
filed as late as on April 28, 1992, when the matter was being heard, but what
needs to be noted is that the statements made therein are not supported by what
was later contended before me at the Bar during the oral arguments.
In order to
test the validity or otherwise of the charge levelled against defendant No. 3,
which would have a bearing on the larger issue, I have scrutinised everything
that has come before this court which has been done in spite of the absence of
the pleadings in order to look at the material, if any, that even if it had
gone by default, when the suit was originally filed, could be of assistance to
the plaintiffs. Admittedly, the shareholding of BDA was transferred in favour
of Intrust Securities and Investments Co. Ltd., but I also find that the third
defendant and his family members had no concern with this company. It is not
alleged in the plaint nor is there any document on record to show that Intrust
was a nominee devised or designed by defendant No. 3. This is the obvious
reason why the transfer in favour of Intrust cannot be and, in fact, is not
challenged or impugned in this suit. In any event, Intrust is not even a party
to this proceeding and, therefore, nothing concerning the transfer to that
company can be examined in their absence. What is relevant to note is that the
defendant was not responsible for, nor did he play any role' in the resolutioa
of Arunava Investments Co. Ltd. dated May 4, 1990, the application preferred
by Arunava Investments Co. Ltd. to the
Central Government under section 30C of the Monopolies and Restrictive Trade
Practices Act dated May 8/24, 1990, nor did he play any role in determining the
price of the shares or at any time instruct anyone to take any of these steps.
Though it is easy to hurl accusations, either in writing or orally, it is
necessary before a court of law to establish that the nexus was real and that
the mala fides are not imaginary. Merely being the director of the plaintiffs
or the managing director of Shaw Wallace, defendant No. 3 held no fiduciary
capacity qua Arunava Investments Co. Ltd. and the question of breach of the
fiduciary capacity cannot be examined in a vacuum in the absence of any
specific allegation against defendant No. 3 in the pleadings. We, therefore,
come back to the position that the transaction was one determined by the
business prudence of Arunava Investments Co. Ltd. not objected to by the
plaintiffs or Shaw Wallace till the issuance of the circular by defendant No. 3
on April 9, 1992. Another aspect of the matter which is crucial is that
defendant No. 3 had no interest whatsoever even as a shareholder in either
Intrust or even in BDA.
Coming to the
price factor, the record indicates that in September, 1988, when Arunava
Investments Co. Ltd. acquired the shareholdings of BDA, it did so at a face
value of Rs. 2,50,000 and it is conspicuous to note that the total liabilities
of the company at that time was around Rs. 55,00,000. The final decision to
desubsidiarise BDA was taken in the minutes of the meeting of the group
management committee of Shaw Wallace dated January 3, 1990, which,
significantly enough, was chaired by Mr. M.R. Chhabria and in terms of these
decisions, the board of directors of Arunava Investments Co. Ltd. on May 4,
1990, resolved to dispose of the shareholding at a face value of Rs. 10 each. I
find that it is virtually admitted even from the affidavit of Mr. S. Roy that
even on August 2, 1990, when the shareholding was actually transferred, the current
liabilities of BDA were Rs. 3,31,00,000 as is clear from page 130 of the
paper-book. In practical terms, therefore, the company which was acquired in
September, 1988, with current liabilities of Rs. 55,00,000 was being sold on
August 2, 1990, when the liabilities had mounted to Rs. 3,31,00,000. It is in
this background that Shri Venugopal's charge that the company has been
"hijacked" for an amount of Rs. 2,50,000 will have to be not only
examined but straightaway discarded. The valuation of the shares, which is
normally worked out on the basis of the assets and liabilities, was done so by
the board of Arunava Investments Co. Ltd. on the basis of the balance-sheet,
which was available to them for the year 1988-89 ending March 31, 1989. If one
traces the relevant date for purposes of the price as May 4, 1990, when it was resolved to dispose of the
shareholding at face value, the balance-sheet of BDA for the year 1989-90 was
not available. In terms of the decision reported in 100 CLR 447, at page 456,
the directors would be acting diligently and correctly if they were to go by
the immediately last available balance-sheet for purposes of determining the
value of the shares. I have taken the trouble to cull out a few relevant
figures, particularly because Shri Venugopal did repeatedly advance the
argument that the figure of Rs. 2,50,000 was so ridiculously absurd that the
plaintiffs were entitled to succeed on this solitary argument.
As on March
31, 1989, the liabilities of BDA, as per the balance-sheet (page 262 of the
record) were Rs. 1,10,34,000 whereas the liabilities as already stated on
August 2, 1990 (record page 236) were Rs. 3,31,40,016. Even on March 31, 1990,
the balance-sheet discloses that the liabilities were Rs. 2,22,48,143 (record
page 240). The other important factor which needs to be seen is that as per the
balance-sheet of BDA as on August 2, 1990, the secured and the unsecured loan
amounted to Rs. 55,95,085 (record page 236) and this unsecured loan comprised
an amount of Rs. 37,50,000 of Arunava Investments Co. Ltd., which has been
repaid by BDA after the transfer was effected, a gesture which is relevant even
for examining the claim of the ostensible nature of the transfer. Another
aspect of significance is that the application made to the Central Government
on May 8/ 24, 1990, clearly states that no revaluation of the assets has been
made ; whereas as per the balance-sheet of August 2, 1990 of BDA, the balance
in the profit and loss account gives a figure of Rs. 12,82,922 and to. it is
added the capital reserves by devaluation of the fixed assets to the extent of
Rs. 7,54,818 (record page 238). The revaluation assumes significance if it is a
consistent feature, but, if done for the first time, could equally be an
exercise to project as bright a picture to the shareholders as possible which
is the normal window dressing in order to avail of bank facilities. I have had
occasion to mention earlier that not much of all this is of any consequence
because the application made to the Central Government was a serious matter and
Arunava Investments Co. Ltd. itself had worked out the value of shares at Rs. 3
on the basis of the last available balance-sheet ending March 30, 1989, and the
Central Government, on a perusal of the records, has accorded the approval for
the transaction. This last aspect virtually put a full stop to the controversy.
It is binding, conclusive and beyond question.
I have dealt,
in passing, with certain references and features pertaining to the Companies
Act, but it is necessary to deal specially with the provisions relating to
subsidiaries because that is one of the main planks of challenge in this litigation. Under
section 212 of the Companies Act, particulars of the subsidiaries are required
to be furnished and attached to the balance-sheet of the holding company and
such particulars are to be signed by the persons by whom the balance-sheet of
the holding company is to be signed. Under section 215 of the Companies Act,
every balance-sheet is to be signed by not less than two directors and the
manager and the secretary. It does not require to be emphasised that these are
responsible officers and persons holding positions of some status. It is also a
requirement that the balance-sheet in question is required to be approved by
the board of directors before filing. Section 220 of the Companies Act requires
laying of the accounts before the general body and in pursuance of these
provisions, the balance-sheet of Arunava Investments Co. Ltd. for the year
ended March 31, 1991, was approved by the general body on June 24, 1991, which
revealed the disposal of the shareholding of BDA at the face value of Rs. 10.
Similarly, the balance-sheet of Shaw Wallace to which was appended the
balance-sheet of Arunava Investments Co. Ltd. was approved by the board of
directors of that company on June 26, 1991, and was approved by the annual
general meeting of the shareholders on September 27, 1991. These
balance-sheets, which clearly convey to the shareholders the disposal of the
shareholding of BDA at the face value of Rs. 10, cannot be lightly ignored and
the contents of the balance-sheet are, in law, an admission made by the board
of directors and proved against them under section 21 of the Evidence Act. The
legal position is amply illustrated in the case of Official Liquidator v.
Krishnaprasad Singh [1969] 1 Comp LJ 327, at page 339. This, in substance, was
the submission canvassed by Shri Manohar in support of his contention that it
is nothing short of absurdity to allege that the entire transaction relating to
the disposal of BDA shares Was clandestine or that it was without the knowledge
of the persons in the management or shareholders of the respective companies or
that it was a one-man manipulation attributable to defendant No. 3 when it has
gone through all these proceedings.
Shri
Venugopal counters the argument by contending that, undoubtedly, the requisite
procedures were followed and a prima facie view of the relevant records would
indicate that it was a collective, well-considered and correctly executed
operation, which is now being questioned. Shri Venugopal submitted in detail
that in order to appreciate his argument, it would be necessary to take stock
of two factors, the first being that defendant No. 3 is no other person than
the younger brother of Shri M.R. Chhabria, the chairman of Shaw Wallace, and,
secondly, that he was holding
the most powerful position in Shaw Wallace, namely, that of managing director.
Shri Venugopal contended that the managing director of the group is virtually
the person in complete charge and control and that the chairman, as always
happens, is only a titular figure-head. It is his case that in these
circumstances, when defendant No. 3 decided to execute his scheme of breaking
away from the group and taking with him some of the most valuable assets, that
he went about his job very carefully, very systematically and very
intelligently. It is Shri Venugopal's case that defendant No. 3 only by virtue
of the position which he occupied fully and completely dominated everything
that was happening in Shaw Wallace and, frankly, that there was never any
opportunity for Mr. M.R. Chhabria to so much as worry about, leave alone
suspect, what he was up to. In these circumstances, Shri Venugopal contends
that defendant No. 3 was instrumental in getting the decision to alienate BDA
passed through the requisite channels without personally involving himself
because the various executives were virtually all under his control. Shri
Venugopal also contended that the court will have to take cognizance of the
fact that even if many of these persons had smelt a rat and did not like what
they were being asked to do, they had virtually no option and dared not go
against the managing director of the group, who happened to be the chairman's
own brother. He, therefore, submitted that this court would have to adopt the
unusual approach of disregarding the fact that all procedures right up to the
Government approval are apparently beyond question and would have to review the
entire transaction in this background.
Shri
Venugopal thereafter proceeded to enumerate before me at con siderable length
various facts and figures on the basis of which he justified a paper
calculation that the value of the share could not have been less than Rs. 90.
He contended that it is, therefore, a matter of examining the evidence that the
entire transaction is vulnerable and that it would have to be set aside.
In the first
instance, where the requirements of law have been complied with and where the
challenge has been presented for the first time something like two years after
the transaction has been completed, a court would be fully justified in
refusing to even entertain a challenge, howsoever ingenious it might be. In the
present instance, the basis on which it is argued that the shares were
undervalued is merely another way of juggling around with figures. I did
seriously examine the correctness of this exercise and, to my mind, it is
highly speculative approach. I did even consider the last argument advanced by
Shri Venugopal as to whether the
line projected by him is capable of being substantiated by evidence through the
witness-box and, to my mind, after a careful consideration of that material, I
am sorry to conclude that it is so much of wishful thinking.
The added
reason for this conclusion is obvious in so far as the other limb of the
argument proceeded on the footing that defendant No. 3 was exercising the
powers synonymous with a military dictator, and, secondly, that highly placed
executives at different points of time would carry out whatever he asked them
to do regardless of the consequences. A perusal of the record of this case, and
particularly the notes and minutes, will indicate that this could never have
been the state of affairs. What really clinches the whole issue is the fact
that even though there has been a clear division at least after April 9, 1992,
when the present litigation started, none of the persons involved in the
transactions who are even today working with the Shaw Wallace group and holding
top positions have come forward with a complaint or an affidavit or otherwise
that defendant No. 3 had coerced them into fabricating notes, minutes and being
parties to decisions. It is easy to level accusations, particularly in the
course of a litigation, but it is equally necessary to sustain those
accusations and it is in the latter exercise that the plaintiffs have miserably
failed. It is my considered view, on a very complete and thorough appraisal of
the record, that the charges levelled, in particular those directed against
defendant No. 3, are not only unjustified but are false.
The parallel
allegations relate to the adequacy of consideration in respect of the three
brands of IMFL products and that the entire transaction is liable to be struck
down. Once again, it is my painful task to record that there are no pleadings
in the entire plaint except a reference to an agreement of assignment and even
that is so hopelessly inadequate that it does not even mention the deed for the
assignment thereof. In the course of arguments before me, capital was made of
the total consideration being only Rs. 15,00,000, and Shri Venugopal devoted
considerable time towards supporting this charge. He demonstrated to me,
through various references, that the three brands were virtually market leaders
and that the turnover in respect of these three brands ran into not only lakhs
but into crores of rupees. Even though there is no pleading to that effect,
Shri Venugopal contended that these brands were virtually conceived, promoted and
propagated until they reached the top of the ladder on which exercise alone,
about Rs. 11,00,00,000 have been spent. As far as the pleadings go, the
solitary reference is in the affidavit of Shri S. Roy dated April 28, 1992,
wherein at page 153 of the paper-book in paragraph 3(g), we find a bald statement "the plaintiff has
incurred since 1988, substantial amounts running into several crores on the
promotion and development of the brands". Shri Venugopal proceeded to
substantiate his argument that the assignment which, admittedly, has taken
place and is recorded and in respect of which the consideration has passed was
never intended to be acted upon, the reason being that it was to tide over
certain excise and business difficulties. He did explain to me at the Bar as to
what exactly the whole arrangement was, which I have had occasion to deal with
and need not repeat once more and, therefore, contended that the consideration,
if hopelessly inadequate, would be destructive of the legality of the entire transaction.
Shri Venugopal spent considerable time in showing to me the figures
particularly in respect of the turnover, sales, etc., relating to these
transactions which are undoubtedly substantial and he concluded by stating that
where it is demonstrated that these three brands are virtually money-spinners,
virtually at the top of the market and worth crores of rupees to the owner
nothing more needs to be illustrated in support of the argument that the
consideration of Rs. 15,00,000 is not even a small fraction of what a court of
law would regard as either adequate or lawful.
Shri Manohar
in response, firstly, contended that the plaintiffs are disqualified on a
simple rule of legal procedure from spending the precious time of the court in
advancing arguments that are not supported by pleadings, but he essentially
maintained that unless the deed of assignment was challenged and a declaration
is claimed for declaring the assignment as invalid or illegal that the
plaintiffs cannot argue anything in respect of the transfer being bad in law.
He, however, stated that he did not want to run away from what was argued on
the merits as the defendants had to face those contentions some time and would,
therefore, like to set the matter at rest. He pointed out to me that as far as
the time-frame was concerned that the brands were conceived sometime in the
year 1988 and came to be manufactured for the first time in October, 1988, that
they were introduced in the market a couple of months later around December,
1988. It was on April 24, 1990, which was within hardly a year, that the
plaintiffs had resolved to assign the labels to BDA for a consideration fixed
at Rs. 15,00,000. Shri Manohar has objected' very strongly to the manner in
which the plaintiffs have glossed over one very important fact, namely, that
the figures themselves would indicate that these brands did not catch on like
wild fire, that the turnover was relatively small to start with and that it
took considerable amount of effort before they received public acceptance and
began to do well. Shri Manohar illustrates this by pointing out that one would have to draw the
line at about March/April, 1990, and that it is true that in the subsequent
period, these brands not only did well, but that the sales virtually galloped.
In retrospect, by April, 1992, when the present dispute arose, undoubtedly, the
plaintiffs or Shaw Wallace must have regretted having disposed of them because
they were doing extremely well. What we are concerned here is with the status
and performance of these brands in the pre-April, 1990, period during which
time there was absolutely no indication that they would turn into market
leaders. In relation to the position as it obtained at that point of time, the
consideration of Rs. 15,00,000 was a very fair and correct evaluation. Shri
Manohar also presented before me certain calculations in support of the
defendants' contention that it is really one of the three brands, namely,
Officer's Choice that was reasonably well-received and the performance of the
other two was, in fact, relatively poor. It was this one which really anchored
the other two and, therefore, the price of Rs. 5,00,000 each cannot be faulted.
As far as
this head of challenge is concerned, I have had occasion to observe earlier
that the record does not support the contention that it was a mere arrangement
in order to get over certain excise or business difficulties. This is a claim
made in the air unsupported by material and directly contrary to what the
documents and records indicate and will, therefore, have to be rejected in its
entirety. As regards the question of consideration, the defendants are right in
pointing out that the pre-April, 1990, position is what was, in fact, material.
I am considering these aspects of the case even though there is no prayer in
the plaint challenging the transaction or for a declaration that it should be
struck down only because, as indicated by me in the beginning of this judgment,
the issue has been agitated threadbare, considerable amount of judicial time
spent and, therefore,, it does not have to be shifted to some other court or
forum for a re-examination. There was nothing at the beginning of 1990, from
which the plaintiffs themselves could have assumed that the three brands would
skyrocket. The documents indicate that it was the plaintiffs who fixed the
price and not the defendants, that they accepted the consideration and, if at
all, it was improper or inadequate, one would have expected a composite
challenge and that too at an earlier point of time. The utter inconsistency of
approach is well-illustrated from the fact that the plaintiffs are totally and
completely confused even in their contentions before the court because on the
one hand they contend that the transaction is perfectly in order, but was
intended not to be given effect to. I fail to understand how a
legally-concluded transaction can either be put into cold storage or be ignored, particularly at an
intercorporate level. If this was so, the plaintiffs would never have put in a
negative covenant extinguishing any right on their part in the brands. In the
same breath, a composite attack is levelled against the main transaction where
the plaintiffs have virtually gone for the jugular, which incidentally is quite
inconsistent with their earlier plea, contending in the alternate that the
transaction itself should be struck down. On the figures placed before me, at
the point of time when the evaluation was done and having regard to the
totality of circumstances, it is crystal-clear that the plaintiffs willingly
and voluntarily disposed of the three brands for a price which they themselves
fixed and which they obviously considered to be adequate. The challenge,
technicalities apart, is, therefore, wholly and completely devoid of any merit.
I need to
mention, in passing, that Shri Manohar pointed out to the court that the
plaintiffs have not done any act of charity to the defendants because the plea
with regard to the expenses spent on promotion is utterly false and hollow. He
stated that the expenses mentioned by the plaintiffs had been incurred on
account of BDA from out of the sale proceeds of its products which were
marketed by the plaintiffs. He pointed out to me that the entire sale proceeds
in respect of all the production of BDA have been received by the plaintiffs
and that even though on paper they were required after deducting the
expenditure, including that for promotion of the brands, marketing charges and
commission, to pay over the remaining amount to BDA, this has not been done.
Shri Manohar contended that the interim order of the court was so wrong and
unfair that it enabled the plaintiffs to bleed defendant No. 1 by physically
taking charge of all its production and putting back nothing. I refrain from
commenting about this last part of the argument, but have recorded it for the
limited reason that I do see justification in the charge made by the
defendants' learned counsel that the interim order was an atrocious one because
it enabled the plaintiffs from the date on which that order was passed to not
only run the unit but to appropriate the entire production. To think that such
an illegality has taken place, as a result of court orders, is something
very-very disturbing, to put it mildly.
The maximum
amount of heat that was generated in the course of the very protracted
arguments centred around the allegations levelled against defendant No. 3
personally under the head of breach of fiduciary duty. A lot of the court's
time was spent citing case-law on both sides, but as is apparent from the
pattern followed by me in this judgment, it is the legal principles that are
culled out from the cases cited that have, in fact, to be applied to the facts.
I do not, for a moment, dispute the proposition canvassed by Shri Venugopal that respondent No. 3, who
through the entire period of time that we are concerned with, namely, from 1990
up to April, 1992, was the managing director of Shaw Wallace. Shri Venugopal
insisted that the court must be equally conscious of the fact that he was the
younger brother of the chairman of the company because he maintained that the
relationship between the two brothers has much to do in this case in so far as
it was for the latter reason that defendant No. 3 was never questioned about
anything he did and was implicitly obeyed by officers of the companies and even
directors up to the highest level. That defendant No. 3 was required by virtue
of the office which he held to act in consonance with law and to uphold at all
times the interests, particularly financial, of the concerned companies is
accepted. I, however, consider it wholly irrelevant to take cognizance of the
relationship between the two brothers because, to my mind, that has little to
do with legal responsibilities. If defendant No. 3 has misused his position or if
he has been guilty of breach of fiduciary duty, merely because he is the
chairman's younger brother would not in the least bit come to his assistance
before a court of law. Also, the argument that senior executives and directors
would join hands with him in sabotaging the interest of the company of the
magnitude of Shaw Wallace is to my mind, far-fetched and in any event this
charge is unjustified on an examination of the present record. The plaintiffs
contend that it was defendant No. 3 who was responsible for the alienation of
BDA shares by Arunava Investments Co. Ltd. I have discussed the transactions in
some detail and have recorded the finding that this was not so. The plaintiffs
further allege that defendant No. 3 was responsible for the price at which the
shares were transferred, the material in support of this charge has been
examined by me and I have recorded a conclusive finding that this allegation is
baseless. It is also contended that part of his manipulations included the
assignment of the three brands by the plaintiffs to BDA for what is termed as
an absurdly low price of Rs. 15,00,000 and Shri Venugopal contended that the
court will have to view all these developments in retrospect when the whole
plan clearly falls into place even though it may not have appeared so at an
earlier point of time. I have devoted considerable time towards considering the
evidence in support of this charge and I find that the defendant No. 3 had no
hand in the decision to assign the three brands to BDA nor for that matter was
he responsible for the price fixation. The last allegation and one which
subsequently emerged in the course mainly of the arguments at the Bar was that
the transfer of the shares to Intrust Securities Ltd. was planned out by
defendant No. 3 and that this was the final step in the operation to snatch away this company. This
allegation again is impossible to sustain because the directors of that
company, namely, Khairullas, are persons with whom no connection whatsoever of
defendant No. 3 has been established. It has not even been alleged that these
persons who were the directors and shareholders of the company were the
nominees of defendant No. 3.
While dealing
with this aspect of the matter, I need to record that Shri Manohar pointed out
to me that neither Intrust nor the Khairullas are parties to this litigation
and in their absence, a transfer in their favour cannot even be discussed,
leave alone adjudicated upon in the present litigation. He also pointed out to
me that the only party entitled to complain, if at all that was permissible, is
Arunava Investments Co. Ltd., who held the shareholding of BDA and this party
is also not before the court and one other significant aspect of the matter is
that the plaintiffs project this challenge as though they were the mouthpiece
of Shaw Wallace without Shaw Wallace itself being a party to this litigation.
Shri Manohar is justified in contending that on these technical pleas, the
court should refuse to spend any time examining this argument. I have repeatedly
said through this judgment from time to time that under normal circumstances, I
would have straightaway adopted a strict cut and dried approach and pointed out
to the plaintiffs that everything that is outside the original set of pleadings
will be ignored. I have been virtually prevented from adopting that procedure
because the trial court permitted the scope of the dispute to be enlarged and
magnified and based its decision on that material. Also, it has been pointed
out to me repeatedly that there is a host of litigations between the same
parties effectively where all these issues have, in fact, been canvassed and
that, therefore, this court must not refuse to give its decision on all points.
The interest of justice would require that a total adjudication of the entire
matter is the right and correct course rather than a piecemeal one and it is
certainly not in the interest of judicial time that there should be multiple
hearings before different courts. This is precisely the reason why in spite of
strong pleas from Shri Manohar who did of course also deal with the merits of
each point since he had to contend with the judgment of the lower court, that I
have to give my findings on the merits in respect of each issue.
As indicated
earlier, in the circumstances of this case, I refuse to avoid deciding the
issue or bypassing it on to another forum. The examination of what is placed
before me indicates that one test alone would be sufficient to completely
nullify the plaintiffs' case and that is the time factor. We are concerned with
a two-year time span which encompassed the period April, 1990, to April, 1992. Each of the transactions was
official. They involved several persons. They have been reflected in all the
records right up to the balance-sheets and annual report of Shaw Wallace, etc.,
and, therefore, it would be downright wrong to argue that these transactions
were clandestine. There is not even the remotest of evidence to support the
plea that defendant No. 3 had misused his position or that he had coerced any
of the executives or directors to assist him in such activities. For this long
period of 24 months, not only was there no challenge to the transactions in
question, but they were not questioned and nobody so much as pointed a finger
at defendant No. 3. This, to my mind, is very-very significant. The timing of
the allegation, namely, after defendant No. 3 assumed charge of BDA, indicates
that the whole charge is an afterthought and that it is a weak but vain attempt
to malign him at a point of time when the real game is to somehow get control
of BDA by means that have been demonstrated to be more foul than fair.
I now need to
deal, in passing, with the general contentions that have found favour with the
trial court. The first of these is the general statement that as on the date of
passing of the ad interim orders, BDA was de facto being managed by a board of
directors who were under the control of Shaw Wallace. This statement has
unfortunately found favour with the learned trial judge while effectively
passing the impugned orders which are justified by him as they are on the lines
of continuing what according to him was the existing arrangement. This position
was factually and legally incorrect because, in the first instance, after the
transfer of shares, the status of BDA had changed and, consequently, after that
point of time, its character had changed in so far as the management was that
of an independent entity and not a satellite or subservient or subsidiary
company. The contention that the management of BDA was in the hands of the
plaintiffs or of Shaw Wallaee is also not correct in view of the specific
prohibition under section 324 of the Companies Act. This important aspect of
the matter has been lost sight of by the learned judge who was possibly misled
by the fact that after BDA ceased to be a subsidiary in view of the past
association, there was no immediate sudden change in the management structure,
but the important difference in law was that they were no longer nominees of
Shaw Wallace. This is more than adequately established from the affidavit of
Shri S. Roy dated April 28, 1992, where, in paragraph (15), he states that
since the desubsidiarisation, the share capital of BDA increased and this had
to be done by a resolution of the board of directors who took the decision in
question regarding the allocation. It is significant that no additional shares
were issued and allotted either
to Shaw Wallace or to any of its allied companies, but the allotment was made
to different persons with which Shaw Wallace had no concern.
Shri
Venugopal did advance the argument before me that regardless of the
transactions concerning the shares and assignment of the brands, de facto BDA
was managed and controlled by Shaw Wallace personnel and that this was the principal
reason why the ad interim and interim orders came to be passed. It is his
argument that the validity of the other transactions having been challenged, as
far as the day-to-day continuity of the working was concerned, it was very
necessary for the court to maintain the status quo ante pending an adjudication
of the illegalities in question. This, Shri Venugopal contended, was necessary
in the interest of continuity of production and avoidance of any dislocation to
the unit. Shri Venugopal's argument proceeds on the footing that several
employees who were, in fact, working with BDA had, admittedly, been deputed
from the plaintiff-company. I have dealt with that aspect of the matter earlier
and pointed out that the affidavit of Shri S.S. Sanyal at page 66, in
sub-paragraph (4) specifically points out that all these persons were on the
pay-roll of BDA and that the entire administrative expenditure was looked after
by that company. Significantly, this has not been denied "by Shri S. Roy,
who has filed a detailed affidavit on behalf of the plaintiffs, It is true that
he has made a general statement that directions for the running of the
day-to-day affairs of BDA used to come from the corporate office of the company
at Delhi. If he expects a court to act on a statement of this type since we are
concerned with the working of a company and not an individual, I would have
expected him to substantiate this statement, but there is nothing that has been
produced in support thereof. The plaintiffs were interested in the entire
production of BDA and there was obviously commercial communication which is
entirely different to controlling and managing the company. Shri Manohar has
pointed out to me that such capital has been made with regard to the power of
attorney dated December 26, 1990, in favour of Shri S. Roy and he has clarified
the position that the defendants do not at all dispute that in the early
stages, they had availed of the technical personnel from the plaintiffs and
their expertise, but that they have paid for all of this. On the other hand, he
points out that this document supports the case of the defendants that BDA has
become a separate entity and it was precisely for this reason that Shri S. Roy
required a formal power of attorney on the basis of which he could act on
behalf of BDA. This power of attorney was subsequently revoked. The plaintiffs had also contended that the
factory manager had been employed by them. This claim does not appear to be
justified because the document at page 375 wherein the signature of the factory
manager, who incidentally is plaintiff No. 2, appears at serial No. 1 shows
that he is resigning from the service of BDA. I do not need to emphasise that
he could resign from service only if he was an employee of BDA. Shri Manohar went
on to state that this document would indicate something else of importance,
namely, the fact that in the course of this unfortunate dispute, the loyalties
of many of the employees have shifted and that was the principal reason why the
third defendant was required to take the steps which he did on April 9, 1992,
which were necessary for the proper administration of BDA since some of the
employees had crossed the floor.
Another head
that was relied upon by the plaintiffs and which Shri Venugopal did emphasise
was that there is considerable amount of equipment in the possession of BDA,
which has been provided for by Shaw Wallace. He stated that this is conclusive
proof of the fact that the character of BDA was that of being one of the group
companies which had never been challenged and that was the reason why Shaw
Wallace had provided it with such assistance. He also stated that this
equipment remained with BDA long after the events of 1990 and that it,
therefore, supported his contention that at least the day to day management and
control continued with Shaw Wallace or, for that matter, with the plaintiffs.
In response to this, Shri Manohar has drawn my attention to page 20/21 of the
record which clearly shows that Shaw Wallace was recovering lease rent on everything
that was supplied, that the assistance was not gratis and that it was on
payment of regular lease money and, therefore, a simple commercial arrangement
between the two companies.
One more
angle that was referred to by Shri Venugopal was with regard to the annual
report of Shaw Wallace ending on March 31, 1991, which mentions Officer's
Choice as a premium brand and this, according to Shri Venugopal, supports his
argument that irrespective of the paper arrangements, the understanding between
the parties even thereafter was that the old situation would still continue,
namely, that the plaintiffs would for all intents and purposes be regarded as
the owners of the brand. Shri Manohar has explained this reference by pointing
out that right up to February 26, 1991, the plaintiffs were, in fact, the
owners of the brands which covers almost eleven months of this financial year,
which explains the reference to this brand. This, in fact, is a complete
answer.
I do not need
to dilate at any great length with regard to this last group or heads, but I
have referred to them as they have influenced the decision of the trial court. To my mind, one
has to get down to basics and the real guts of the matter without being
sidelined by trivialities, and after a very thorough examination of the record,
I am more than satisfied that there is nothing to stop the conclusive finding
that after the transfer of the shares, BDA assumed the status of an independent
corporate entity. The fact that some of the old employees of the Shaw Wallace
group may continue at different levels is irrelevant because on and from that
date their status in law automatically changed. Again, merely because BDA did
not, for good reason, sever its business links or working arrangements from the
Shaw Wallace group cannot, under any circumstances, lead to the conclusion that
it was legally interlinked or subservient or that it was being managed and
controlled by the Shaw Wallace group. Out of the voluminous record running into
thousands of pages, there is not one scrap of paper that can support this view.
Shri Manohar
advanced a strong plea at the conclusion of his arguments, as he had done in
the beginning, that immediate interference by the appellate court is essential
in the present case. He submitted that after three weeks of day-to-day hearings
and of a threadbare examination of the record, it will be more than evident to
this court that the trial court has ignored the three basic requirements,
namely, the existence of a prima facie case, the balance of convenience and the
aspect of irreparable injury which governs the grounds for the grant of a
discretionary order. Shri Manohar contended that this has been done in blatant
disregard and violation of the basic norms and that the trial court has acted
unreasonably and capriciously that it has ignored material and facts on record
and has arrived at perverse and unsustainable findings. He stated that painful
as it may seem, the two orders whereby the total management and control of the
company has been handed over to the plaintiffs and the lawfully empowered
authorities of the company have been bound hand and foot are even worse than a
final decree and that in the interest of the survival of his clients, the
orders must be vacated forthwith.
On behalf of
the plaintiffs, Shri Venugopal submitted that it is unfair to make such strong
charges against the learned trial judge who has directed that once the unit was
being run and looked after by his clients he has only continued that
arrangement. He stated that this was merely an interim order and that it is
only after a final adjudication of the evidence that a composite decision can
follow ; that the plaintiffs are running the unit as well as it was being done
earlier and as that his clients were perfectly ready for the suit to be heard
immediately.
I do not need
to repeat what I have said more than once; that the manner in which the and
interim and interim orders were passed, and that too in the face of a record of
the present type, are sufficient for me to hold that all existing norms and
canons of jurisprudence have been flouted. The type of damage that has occurred
is almost unthinkable and it was for this reason, after reading and re-reading
the record and checking and re-checking the law on each and every point, that
was canvassed in this case, I found that it was virtually a matter which
shocked the conscience of this court and required immediate corrective steps. I
had, therefore, observed in my order dated April 27, 1993, that the interim
orders cannot be allowed to continue for even a single minute and that was the
ground on which I had held that there was no justification whatsoever, for the
grant of any stay of that order, even if the plaintiffs desired to carry the
matter higher.
Shri
Venugopal on behalf of the respondents listed a series of circumstances, which
I shall summarise, in support of his argument that the plaintiffs were
justified in factually contending that the management and control of BDA was
with the Shaw Wallace group as on April 16, 1992, when the suit was filed and
they are as follows :
(i) BDA was a 100 per cent. subsidiary
of Shaw Wallace until August 1, 1990, through the plaintiffs.
(ii) Being a part of the group of
companies, the plaintiff-company as well as Shaw Wallace made huge investments
by way of capital expenditure, manpower, adoption, utilisation and promotion of
trademarks, labels, brands, making available expert advice, know-how, marketing
and distribution facilities, incurring liabilities and obligations, making
available office premises, giving bank guarantees, etc. In fact, the bank
guarantee was given on April 29, 1991 (at page 247).
(iii) In March, 1989 (see exhibit 10, at
page 261, volume 1), the board of directors of Arunava approved a scheme of
amalgamation of Arunava with Shaw Wallace with the purpose that "the
business of Arunava could become integrated with that of Shaw Wallace and the
company's investment would be rationalised by their being held by a single
company, namely, Shaw Wallace." Under the scheme, the business of Arunava
was to vest in with effect from July 1, 1988, i.e., the appointed date.
(iv) In March, 1989 (see exhibit 10, at
page 259, volume 1), the board of directors of Shaw Wallace approved such a
scheme.
(v) On March 29, 1989, applications
filed by Arunava and Shaw Wallace in the High Court at Calcutta for directions
regarding holding of meeting of the shareholders to consider the scheme of
amalgamation. The High Court directed the holding of the meeting (pages 282 to
328, volume 1).
(vi) In May, 1989 (see exhibit 10, at
pages 262-263 of volume 1), the shareholders of Arunava and Shaw Wallace
approved the scheme of amalgamation as required by law.
(vii) Thereafter, in June, 1989, the
petitions were filed in the High Court at Calcutta for sanction of the scheme
proposed and approved by the shareholders of Arunava and Shaw Wallace (pages
138 and 139 of volume 1).
(viii) On June 12, 1989, an application was
made on behalf of -Shaw Wallace under section 23(2) of the Monopolies and
Restrictive Trade Practices Act, 1969, seeking approval of the Central
Government to the scheme of amalgamation (exhibit 10, at page 256 of volume 1).
(ix) On March 22, 1991, order passed by
the Central Government under section 23(2) of the Monopolies and Restrictive
Trade Practices Act, 1969, approving the scheme of amalgamation (see exhibit
10, at pages 255 and 256).
(x) Between August, 1989, and August,
1990, the GEC (Group Executive Committee) and the GMC (Group Management
Committee) of Shaw Wallace decided to desubsidiarise BDA and convert it into a
"tie-up unit" for three reasons :
(a) to
bring down, the cost of labour,
(b) easier
access to finance from banks, and
(c) to prevent the stifling of growth on account
of restrictions contained in the Companies Act, 1956, and the Monopolies and
Restrictive Trade Practices Act, 1969, due to "interconnection" (see
documents at pages 431, 393, 396, 397 and 441 to 445 of volume 2).
It was not the intention
of the GEC or the GMC that there should be an outright sale of the shares or to
convert BDA into a competitor of the Shaw Wallace group. Nor was the intention
of the GEC and GMC that the plaintiff or Shaw Wallace would cease to exercise
any control over this "tie-up unit".
(xi) In April, 1990, the board of
directors of the plaintiff-company decided to assign three trademarks/labels to
BDA on account of problems faced
from certain State Excise Departments (see minutes of the meeting of the board
of directors dated April 24, 1990, exhibit 1, at page 450).
(xii) Pursuant to the above, an agreement of
assignment was executed on August 30, 1990, under which the plaintiff agreed to
assign the three valuable trademarks for a nominal sum of Rs. 5,00,000 for each
brand (see pages 79-81, page 450 of volume 1).
(xiii) Pursuant to the above, on February 26,
1991, a deed of assignment was executed between the plaintiff and BDA (see
exhibit 6, at page 86 of volume 1).
(xiv) Even after BDA was desubsidiarised and
the aforesaid three trademarks assigned, the existing arrangements with regard
to the management and control of the affairs of defendant No. 2 continued to
subsist.
(xv) In fact, a general power of attorney
was given to Mr. Shovan Roy as far back as in December, 1990, by BDA, was not
terminated or revoked, on the contrary Shri Shovan Roy continued to exercise
the powers conferred thereby ( pages 131 and 132 of the plaintiff's
affidavit-in-rejoinder).
(xvi) In April/May, 1991, further liabilities
were incurred by the plaintiff by giving a corporate guarantee for Rs. 5.50
lakhs (see pages 260-261 and pages 244-251 of volume 1).
(xvii) Even subsequent to the
desubsidiarisation, the board of directors of BDA consisted of nominees
appointed by Shaw Wallace and/ or the plaintiff (see page 127 of volume 1).
(xviii) Defendant No. 3 continued to be a
managing director of Shaw Wallace as well as director of the plaintiff-company.
At the same time, defendant No. 3 has illegally claimed the control of the
affairs of BDA (see para 15 at page 135 of volume 1 and para 16, pages 553-554
of the judgment) and wants to engage in business in competition with the Shaw
Wallace group.
(xix) For the first time on April 9/10, 1392,
an attempt was made by defendant No. 3 to disturb the existing arrangement and
assert his rights over BDA (see page 19, volume 1 and pages 13 and 14 of volume
1 plaint).
(xx) On April 11, 1992, and April 25, 1992,
the board of directors of Shaw Wallace curtailed the powers of defendant No. 3
as a managing director of Shaw Wallace on account of his subversive activities
(see pages 165-167 of volume 1). The board of Shaw Wallace consisted amongst
others of independent professionals and a nominee of financial institutions.
One can
almost carry on the debate endlessly and in this long judgment, I have had
occasion to glean the more substantial issues and to evaluate the main areas
that govern the overall decision of the case without losing sight of the
relevant facts and the law, This sequence as presented by Shri Venugopal does
at first blush look both impressive and convincing, but have already dealt with
every one of these factors, the answers presented by Shri Manohar piecemeal and
on an overall basis and my findings, stage by stage and collectively to
establish that both in law and on the facts, the trial court was in error in
holding that the management and the control of BDA as on the date of the filing
of the suit continued with the plaintiffs or with the Shaw Wallace group.
The
subsequent contentions raised by Shri Venugopal are in relation to what he
categorised as subsequent conduct which is highly supportive of his contentions
and he lists out the following set of circumstances in support of his plea that
even after August 2, 1990, there was no change of situation. Shri Venugopal
contends that despite the transfer of BDA Breweries and Distilleries Ltd. by
Arunava to Intrust of August 2, 1990, BDA Breweries continued to be managed and
controlled as a part of the Shaw Wallace group without any interference by any
third person. The facts relevant in this regard are as under :
(i) The directors of BDA Breweries and
Distilleries Ltd. continued to be the nominees of the Shaw Wallace group,
namely, the executives and employees of the group companies. Neither the
Kheyroolas nor any of the Chhabrias or their nominees became the directors.
(ii) The day-to-day affairs of BDA
Breweries and Distilleries Ltd. were looked after and controlled by Cruickshank
and Co. Ltd. All directions were given by Cruickshank's corporate office at
Delhi. Mr. Sankar Sanyal, the chief executive and Mr. S.K. Sinha, the factory
manager, and others were reporting to the Delhi office of Cruickshank where Mr.
S. Roy, the vice-president of the Shaw Wallace group, was functioning. All
sanctions were being taken from Mr. S. Roy.
(iii) A general power of attorney dated
December 26, 1990, was executed by BDA Breweries and Distilleries Ltd. in
favour of S. Roy which continued to remain in force until April, 1992, without
any interference whatsoever (cancelled on April 19, 1992).
(iv) Cruickshank provided a corporate
guarantee in the sum of Rs. 5,50,00,000 for credit facilities sanctioned to BDA
Breweries by the Central Bank of India. This guarantee was given in April-May,
1991, i.e., after the desubsidiarisatiori.
(v) The principal employees working at
the factory of BDA Breweries and Distilleries Ltd. were those
deputed/assigned/seconded by Shaw Wallace group. These include technical
people, such as the factory manager, the blender, etc.
(vi) The essences, specification, the
blending formula developed by Shaw Wallace group continued to be used by BDA.
(vii) The registered office of BDA Breweries
has been at all relevant times situated within the premises taken by Shaw
Wallace on lease.
(viii) At the time of acquisition of BDA
shares by Arunava in 1988, BDA Breweries had a liability of Rs. 55,00,000. The
acquisition cost was, therefore, Rs. 57,50,000 (Rs. 55 lakhs plus Rs. 2.50
lakhs). The sale price was only Rs. 2,50,000, particularly when the book value
of the shares at the time of transfer of shares was itself Rs. 90. After
transfer of the shares, the Shaw Wallace group arranged for finances and other
facilities to BDA Breweries and Distilleries, including the following :
(a) Deferment of amount due from BDA to
Cruickshank amounting to Rs. 2,25,00,000 at the time of transfer on August 2,
1990.
(b) Lease
of machines and equipment.
(c) Arrangement
for procuring raw materials and packing materials.
(d) Corporate
guarantee of Rs. 5,50,00,000.
(e) Arrangement
for deputing technical personnel.
(ix) The annual report of Shaw Wallace for
the year ended March 31, 1991, specifically mentions Officer's Choice as one of
the premium brands of the group with large market potential. The director's
report of Cruickshank mentions Officer's Choice becomes a million case brand
and additional sources of supply identified.
(x) Even after August 2, 1990, BDA
continued to manufacture the three brands as before, without any document
incorporating any agreement for such manufacture after the desubsidiarisation.
If the letter dated April 24, 1989 (at page 20) is ignored, there is no other
document on record regarding any agreement, particularly concerning the period
after August 2, 1990. Admittedly, BDA continued to manufacture the said three
brands after August 2, 1990.
Here, again,
Shri Manohar has, in the course of his submissions, dealt with these
contentions and, in order of sequence, I have examined each one of them. I am
conscious of the fact that it is not one or two stray circumstances or for that matter a point here
or a document there that has to be picked out, but that the approach of the
court has to be to uphold at all times the position in law regardless of what
may be pleaded otherwise. As far as this area of controversy is concerned, it
is probably the weakest area of the plaintiffs' tottering case and it is,
indeed, with a degree of courage that they solemnly contend before a law court
that legally concluded transactions be ignored on the ground that these were a
camouflage for getting over various legal provisions or contributions by way of
taxes to the State and its exchequer. One can scarcely look for a more absurd
argument.
As regards
the question of breach of fiduciary duties by defendant No. 3, Shri Vehugopal
summarised the position under the following heads :
(a) It is obvious from the facts stated
above that defendant No. 3 has abused his powers as a managing director of Shaw
Wallace and as a director of the plaintiff-company and has committed the
gravest breach of his fiduciary duties as a trustee of the shareholders of Shaw
Wallace and the plaintiffs by acquiring the control of the company which was a
substantial asset and/or one of the undertakings of the Shaw Wallace group at a throw-away price and that too
without disclosing his interest therein.
(b) The breach of fiduciary duties on
the part of defendant No. 3 is two-fold, namely, (i) by acquiring control over
BDA on the erroneous footing that there was an intended outright sale of shares
of the under taking of BDA, and (ii) by converting BDA into a competitor of
Shaw Wallace and the plaintiff whilst holding charge as a managing director of
Shaw Wallace and a director of plaintiff No. 1. The argument that the real
value of the shares held by Arunava in BDA as on March 31, 1990, or August 2,
1990, was not known or available is an eyewash. The real question is whether
the same could not have been ascertained. Defendant No. 3 being a managing
director of Shaw Wallace in any event cannot be heard to say that he was not
aware or could not have ascertained the real value of the shares. The argument
that the application to the monopolies and restrictive trade practices
authorities required the valuation to be ascertained on the basis of
"latest audited balance-sheet" is fallacious. Neither the provisions
of the Monopolies and Restrictive Trade Practices Act, 1969, nor the requisite
form states so (see clause 16(a) of Form 6(a) at page 406).
(c) The contention that the sale of shares
of BDA was in favour of the Kheyroolas is only a red-herring and/or a smoke
screen. This can be demonstrated by the following :
(i) Kheyroolas are not the defendants ;
(ii) Kheyroolas never objected to the control
and management of BDA being with the plaintiff and Shaw Wallace and Kheyroolas
never insisted that the control of BDA should vest in them;
(iii) No material has been placed by defendant
No. 3 as to how, when and for what consideration the share capital of defendant
No. 2 came to be transferred to the companies under the control of defendant
No. 3 and/or to his family members.
(iv) The fact that the interest of BDA was never
intended to be inimical to the interest of the plaintiff and Shaw Wallace was
never in doubt.
(v) Equally, it was never intended that the
ultimate beneficiary of all the shares of BDA should be defendant No. 3.
(vi) On the contrary, if defendant No. 3 were
the intended beneficiary of the shares of BDA, defendant No. 3 has clearly
placed himself in a position where there is a clear conflict of duty and
interest which the company law as well as the law of trust abhors.
(d) Defendant No. 3 has, however, asserted
that the intended beneficiary of the shares of BDA were the members of his
family and companies under his control pursuant to a family arrangement. This
is clearly borne out by the assertions made by defendant No. 3 in an affidavit
filed by him in the Calcutta High Court wherein it is clearly alleged that BDA
came to their share as part of a "family arrangement" (see para 4(b)
pages 5-11 of the affidavit dated May 10, 1992, of defendant No. 3 filed in the
Calcutta High Court) and also (see arguments advanced on behalf of the
defendants before the trial judge listed at para 16 of the judgment dated May
5, 1992, pages 553 and 554).
(e) In this connection, the allegations made
in the plaint filed by BDA Limited, declared on June 7, 1992, in the Bombay City
Civil Court, to the effect that BDA limited along with the various other
companies forms part of "Kishore Chhabria Group of Companies" is also
extremely relevant (see para 6 of the plaint filed in B.C.C. Suit No. 4421 of
1992).
I am firmly
of the view, after hearing learned counsel for both sides, that there is more
of a personality clash than substance in this head of charge and that is the
reason why voluminous case-law was cited in support of the contention that the
conduct of defendant No. 3 is unpardonable. It is unnecessary for me to repeat
the findings that I have recorded earlier except to observe that my approach to the matter has been totally
dispassionate and to decide the controversy strictly in keeping with the
accepted principles of law that a court has to observe. That defendant No. 3
has been relentlessly attacked is an understatement, but none of the grounds of
attack are capable of being sustained or upheld.
Shri
Venugopal then adverted to his main defence as far as the order is concerned,
by pointing out that regardless of the plea canvassed by BDA that it is
entitled to be maintained by its own shareholders and to enjoy an independent
corporate existence apart from the Shaw Wallace group, the contention itself is
unsound both as far as the facts are concerned, but, more importantly, that
there was a complete legal justification for the grant of the reliefs. I have,
therefore, summarised his contentions under this important head, which are as
follows :
(a) In support of the aforesaid submissions,
the defendants have placed reliance upon three decisions, two of which are of
the Calcutta High Court and one of which is of the Madras High Court, namely,
(i) ILR 1976 (2) Cal 286 ; (ii) Turner Morrison and Co. Ltd. v. Hungerford
Investment Trust Ltd., AIR 1969 Cal 238 ; and (iii) Spencer and Co. Ltd. v. CWT
[1969] 39 Comp Cas 212 ; [1969] 72 ITR 33 (Mad) ; AIR 1969 Mad 359. As far as
the decisions reported in AIR 1969 Cal 238 and AIR 1969 Mad 359 are concerned,
the same have been expressly overruled by a decision of the Supreme Court in
State of U.P. v. Renusagar Power Co. [1991] 70 Comp Cas 127, at page 158. As
regards the other decision which is to the same effect, the same is also deemed
to be impliedly overruled by the law as laid down by the Supreme Court in the
aforesaid Renusagar's case [1991] 70 Comp Cas 127. The law as recently laid
down by the Hon'ble Supreme Court in the case of Life Insurance Corporation of
India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370, at page 1418, para
90 ; end in the case of State of U.P. v. Renusagar Power Co. [1991] 70 Comp Cas
127 clearly carves out an exception to the law enunciated in A. Salomon v. A.
Saloman and Co. Ltd. [1897] AC 22 (HL) to the effect that the veil of corporate
personality ought not, and cannot, be easily lifted. In fact, since Saloman's
case [1897] AC 22 (HL), which was decided in the year 1897, the law has
undergone a sea-change, which is clear from the following observations made by
the Hon'ble Supreme Court in Renusagar's case [1991] 70 Comp Cas 127, 159 :
"The ghost of Saloman's case
[1897] AC 22 (HL), still visits frequently the hounds of company law but the
veil has been pierced in many cases."
The law with regard to the
lifting of the corporate veil as laid down by the Hon'ble Supreme Court is
expressly applicable and has been applied in the case of holding and subsidiary
companies, particularly where the facts requires the court to assess "the
business realities" and where the facts would disclose that the subsidiary
company was in substance though not in law of partnership between the holding
company and its subsidiaries.
(b) Similar is the position in England
which would be revealed by the statement of the law as set out in Palmer's
Company Law, 24th edition, para. 18-23, sub-paras 12, 14 and 16 at pages 218 to
220.
(c) In this behalf, it would not be out
of place to refer to the law with regard to the role of a managing
director/director, the duties cast upon him and the position enjoyed by him qua
the shareholders of the company of which he is a director/managing director.
(d) The law in this behalf is found
eloquently stated in paragraph 63-13 at page 943 of Palmer's Company Law as
also in the ratio of the case decided by the House of Lords in the case of
Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378, at pages 389, 391 and
392 ; and in the case of Cranleigh Precision Engineering Ltd. v. Bryant [1964]
3 All ER 289 (QB) (referred to by the trial judge). See Pennington's Company
Law, 6th edition, pages 606 and 607. Also see Buckley, 14th edition, pages
988-989. Also see the judgment delivered by a Division Bench at the Delhi High
Court in the case of Globe Motors Ltd. v. Mehta Teja Singh and Co. (Agencies)
[1984] 55 Comp Cas 445.
(e) In view of the fact that the law
permits the courts to lift the corporate veil in order to ascertain the
"business realities" and in order to ascertain as to where the real
control and beneficial ownership of the company's undertaking lay, the
arguments advanced on behalf of the respondents that section 293(1) does not
apply to the facts of the present case, inasmuch as in the present case what
was transferred was only the "shareholding" of Arunava in BDA and not
the "undertaking" itself is nothing short of an attempt to make the
court shut its eyes to the "business realities". As per the law laid
down by the Supreme Court in Renusagar's case [1991] 70 Comp Cas 127, the court
is empowered by lifting the corporate veil to ascertain as to who is the
equitable owner of the properties or undertaking of the company (see [1991] 70
Comp Cas 127, at page 155).
(f) The contention that the corporate
veil can only be lifted in exceptional cases, such as fraud, is no longer the
law as applicable to companies in India in view of the expanding horizons of
"modern company jurisprudence" as per the law as laid down by the
Hon'ble Supreme Court. On the other hand, in cases where there has been a
breach of fiduciary duty on the part of directors, it has been held that the
right of the company to recover the property so transferred is unlimited and
the director's knowledge of such a transaction does not preclude the company
from having the transaction set aside :
See–
(i) AIR
1983 Bom 539 (sic),
(ii) Selangor United Rubber Estates Ltd. v.
Cradoc (No. 3) [1969] 39 Comp Cas 485 at page 589,
(iii) The aforesaid passages from the commentaries
of Company Law referred to on page 10 of the submission.
(iv) Commentary by Ramaiya, 12th edition, at page
1427 relying upon the decision of the House of Lords in the case of Guinness
plc. v. Sounders [1990] 1 All ER 652 (HL).
My short
comment with regard to all these legal niceties is that this case and at the
present stage requires to be decided exclusively on the facts, which is why I
have consciously avoided extensive references to case law. I see no camouflage
or ambiguity nor do I need to go into any involved research for purposes of
deciding on the status of BDA, which originally was a subsidiary of Shaw
Wallace and thereafter ceased to be one, both factually and legally, which is
why it needs to be treated as a wholly-independent corporate entity.
Apart from
what has been pointed out by me earlier, Shri Venugopal advanced certain
contentions with regard to the board meetings dated May 4, 1990, March 9, 1992,
and April 9, 1992, which I am recounting :
(1) In order to support the allegation
that the meeting of the board of directors of Arunava was purportedly held on
May 4, 1990, and that the meeting of the board of directors of BDA was
purportedly held on March 9, 1992, reliance was placed by the appellants upon
the provisions of section 195 of the Companies Act as also upon the ratio of
the judgments of the Bombay High court in (i) F.A.C. Rebello v. Co-operative
Navigation and Trading Co. Ltd., AIR 1925 Bom 105 at page 109, and (ii) Killich
Nixon Ltd. v. Dhanraj Mills Pvt. Ltd., [1983] 54 Comp Cas 432 at page 451 and
452.
(2) The provisions of section 195 only
give rise to prima facie evidence, which is rebuttable (see paras 58-03
footnotes 3 and 4 and at page 864 of Palmer's Company Law, 24th edition and at
para 58-05 foot note 20 at page 865, Palmer's Company Law 24th edition). The
same is the position as found in the decision of the Division Bench of the
Bombay High Court in Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd. [1983] 54
Comp Cas 432. It is submitted that the prima facie presumption has been
rebutted in the case of the purported meetings of Arunava held on May 4, 1990,
by the affidavit filed by Shri Shovan Roy dated April 28, 1992. Since the
plaintiffs' contention was that in the absence of Shri Shovan Roy, a meeting of
the board of directors of Arunava could not have taken place and the purported
minutes are invalid the question of challenging the same in the plaint as was
sought to be alleged could not and did not arise.
(3) Even in the case of the purported
meeting of BDA held on March 9, 1992, the presumption has been rebutted in the
affidavit filed by Mr. Ramani dated April 28, 1992, and the other dated May 16,
1992, filed by Mr. R. Ramani and the affidavit of Mr. R.L. Jain dated May 14,
1992, both filed in the proceedings at Calcutta and Bombay.
(4) It is significant to note that, on
the other hand, the defendants save and except for relying upon the purported
minutes have not produced any other evidence whatsoever to establish that the
purported board meetings were held. In any event, the purported board meeting
dated May 4, 1990, is invalid and illegal inasmuch as :
(i) there
was admittedly no quorum for the said meeting ;
(ii) Mr. Sadashivan, as would be clear from the
purported minutes, came to be co-opted after the purported resolution for
transfer of shares had already been passed ;
(iii) Mr. Shovan Roy had already tendered his
resignation as far back as on April 19, 1990. It is well-settled that the resignation
by a director does not have to be accepted by the company in order to become
effective, see—
(a) T.
Murari v. State [1976] 46 Comp Cas 613 (Mad),
(b) Lakshmana Pillai (S.S.) v. Registrar of
Companies [1977] 47 Comp Cas 652 (Mad),
(c) Glossop
v. Glossop [1907] 2 Ch 370.
As would be clear from a plain
reading of section 195 of the Companies Act, the presumption contained therein
would be applicable only where
the minutes of the proceedings of the "meeting of the board of directors
have been kept in accordance with the provisions of section 193." The
burden of proving that the minutes of the meeting have been kept in accordance
with the provisions of section 199(3) rests upon the party which is seeking to
place reliance upon such minutes. It is only when this burden is discharged
that the burden of proving "to the contrary" is shifted to the other
party. Section 193 sets out the manner in which the mitiutes of the proceedings
of board and other meetings are required to be kept.
(5) As regards the purported
resignations of Mr. R.L. Jain, Mr. A.K. Jain and Mr. R. Ramani from the board
of BDA, it is pertinent to note that the same is alleged to be oral. No
particulars of the day, date, time and place and to whom and by whom the
purported oral request was made are forthcoming. Furthermore, Mr. P.R. Pandya,
who acted as the chairman of the purported meeting, reportedly held on March 9,
1992, has not filed any affidavit in these proceedings. The purported minutes
merely seek to record the alleged request of the aforesaid three directors to
resign. The law as is clear from the passage relied upon by the appellants
themselves as found reflected in Ramaiya's Commentary on the Companies Act
(Ref. page 1300, 12th edition), requires that the oral request to resign must
be made by the director only "at the general meeting" and ought to be
accepted at that meeting of the shareholders. In fact, in Palmer's Company Law,
24th edition, at page 898, para 60-31 the law is set out as under :
"A verbal resignation
accepted at a general meeting is effective even though the articles provide
that a director shall vacate office if by notice in writing he resigns his
office. A verbal resignation would not, however, be effective in the light of
such an article if made to and accepted by the board, since the board would
have no authority to accept, and the resigning director would be unable to end
his contract with the company, except in accordance with its terms, express or
implied, or with the company's agreement."
This is admittedly not the case
and the arguments of the defendants in this regard are untenable.
(6) The futile attempt made to fabricate
the minutes of the pur ported meeting held on March 9, 1992, is amply
demonstrated by the observation made in the judgment of the trial court in
paragraph 14 at page 546, volume 2.
(7) The argument that Mr. Ramani has not
impugned the meeting purportedly held on March 9, 1992, is deliberately
misleading. The purported minutes of the meeting purportedly held on March 9,
1992, have not been referred to in any earlier affidavit filed by the
defendants. The same were furnished for the first time with the affidavit dated
May 2, 1992, which was filed on the last date of the hearing before the trial
court (i.e., on May 2, 1992), giving no opportunity to the plaintiffs to rebut
the same. Mr. Ramani declared his affidavit on April .28, 1992. However, Mr.
Ramani has, in a subsequent affidavit dated May 16, 1992, filed in the
proceedings in the Calcutta and Bombay High Courts, challenged the impugned
minutes.
(8) If the purported meeting dated March
9, 1992, was never held, as is now abundantly clear, the extraordinary general
meeting purportedly held on April 9, 1992, as well as the purported meeting of
the board of directors held on April 9, 1992, of BDA would be equally null and
void.
(9) In the circumstances, defendant No.
3 would also have no authority to issue the purported circular dated April
9/10, 1992 (see page 19, volume 1).
Shri Venugopal also advanced a
contention in law that the sale of shares of BDA was illegal under section 30B
of the Monopolies and Restrictive Trade Practices Act and what he contended was
as follows :
(i) The purported transfer of shares held by
Arunava in BDA is also in violation of section 30B of the Monopolies and Restrictive
Trade Practices Act. The argument that by reason of a letter addressed by Shri
Sadashivam (page 421, volume 2), in which it is alleged that section 30B is not
applicable, the said section is inapplicable is an untenable contention. The
provisions of section 30B are mandatory. There can be no estoppel against a
provision contained in a statute. If the provision of section 30B are
attracted, the same cannot be nullified by any letter addressed by Arunava to
the contrary.
(ii) The argument that section 30B is applicable
only to cases where the shares of a private company, which is subsidiary of
public company, are acquired by a company "under the same management"
is a clear misreading of the provisions contained in section 30B. The words "under
the same management" appearing in section 30B govern only the words
immediately preceding thereto, namely, the words "bodies corporate".
In other words, the provisions of section 30B would be attracted to an
individual firm group, constituent of a group, as well as to any body corporate
as well as to two or more "bodies corporate under the same
management" if they are acquiring shares in a private company, which is a
subsidiary of a public company which, exceeds 25 per cent, of the paid-up
equity share capital of such company.
(iii) As is clear from section 30A(b) read with
section 30B, section 30B would apply in acquiring shares in a company which was
the owner of an undertaking to which part a of Chapter III applied. Admittedly,
BDA at the time of the purported transfer of shares was owning an undertaking
registered under Part A of Chapter III. In fact, Part A of Chapter III
continues to apply to such undertaking till it is deregistered under section
26(3). In this behalf, the pleadings on behalf of the respondents/plaintiffs
set out at para (g) at pages 143-144, volume 1 of the compilation may also be
taken into consideration.
It is rather
late in the day for the plaintiffs to come out with this "profound"
challenge, which in any event has been examined by me, since it was argued.
Each stage of the process of transfer has been scrutinised and I have upheld it
right up to the final extent. These arguments virtually amount to legal
hair-splitting and do not assist the plaintiffs' case one bit.
Shri
Venugopal concluded by defending the order passed by the trial court on the
following grounds :
(i) In the light of the above, it is
submitted that the injunction as granted by the trial judge has been granted
after due and careful consideration of the facts, material and evidence on
record and in proper exercise of the discretionary jurisdiction vested in him.
It is submitted that since the exercise of discretion by the learned trial
judge is in accordance with the well-known principles of law and based on sound
exercise of judicial discretion, the appellate court is not empowered to
interfere with the same. See the law as laid down by the Hon'ble Supreme Court
in the case of Wander v. Antox India Pvt. Ltd. [1990] Suppl. SCC 727. All that
I need to observe is that the basic premise on which the argument is founded is
absolutely wrong—the learned trial judge, if he had gone through the exercise
required of him, could never have passed the orders in question.
(ii) The trial court in granting the
injunction had also acted within the four-corners of law inasmuch as the
present case being a clear case of breach of trust and fiduciary duties by
directors who are constructive trustees is a case where compensation in
monetary terms cannot afford adequate
relief and would clearly be governed by the exception contained in section
41(h) of the Specific Relief Act. The reply to this is that sadly enough, the
court has not assessed the more important aspect, namely, the havoc caused by
the passing of the order. I have had occasion to deal with this at the end of
the judgment.
I have had
occasion to refer more than once to the charge levelled against defendant No.
3, which alleges that he has been guilty of impropriety which is defined as
breach of fiduciary duties during the period when he was managing
director/director and Shri Venugopal has repeatedly adverted to this aspect of
the matter because, according to him, the entire case hinges on this. I have
summarised the sequence of his arguments very briefly as follows :
That
admittedly :
(i) BDA was a subsidiary and part of
the Shaw Wallace group until August 2, 1990, and;
(ii) K.R. Chhabria is presently claiming
that BDA is now owned and controlled by himself, his father and uncle ;
(iii) K.R. Chhabria was the managing
director of Shaw Wallace and a director of Cruickshank and Company Ltd. (the
plaintiff) at all material times, namely :—
(i) At
the time when BDA became a subsidiary of Shaw Wallace group in 1988 ;
(ii) At the time when the plaintiff and Shaw
Wallace invested substantial amounts in BDA and promoted it as one of the
principal manufacturing unit ;
(iii) At the time when the proposals for
desubsidiarisation of BDA were mooted and decisions taken during 1989-90 ;
(iv) At the time when the shares held by Arunava
in BDA were transferred in July-August, 1990, to Intrust Securities and
Investments Ltd. (a company with negligible share capital of Rs. 2,000 and with
no activity and the shares purported to be held by Mr. and Mrs. Kheyroolas) and
;
(v) At
the time when the impugned circular was issued around April 9/10, 1992.
(iv) K.R. Chhabria is presently claiming that
Intrust and through Intrust BDA belongs to his group of companies.
Consequently,
Shri Venugopal submits that everything pleaded by the defendants, namely, the
transfer of shares, the change of status of BDA and the assignment of the three
brands would all come into the category of illegal and fraudulent transactions
which have to be struck down. I have examined each of these heads earlier and I
have also examined the present arguments of Shri Venugopal, the basic premise
of which is unfortunately unacceptable. I have recorded a conclusive finding
that the transaction in question cannot be attributable personally to the third
defendant. The only limited aspect that survives for consideration is the
question of the timing and Shri Venugopal's charge that the third defendant,
while he held the aforesaid positions with the Shaw Wallace group, ought never
to have assumed control of BDA. It is not merely a matter of ethics that we are
concerned with because even in the field of corporate management, there are
certain requirements of law. The situation that we are faced with, however, to
my mind, cannot be of any assistance to the plaintiffs because it is their case
that the transactions right up to the process of delinking were done on the
grounds of business and trade and financial considerations alone. Shri
Venugopal's argument completely overlooks the fact that it is the plaintiffs'
own case that the entire production of. BDA was being marketed by them, that
they had no manufacturing unit of their own and that, consequently, they were
heavily dependent on BDA as far as the sales were concerned and, according to
them, the I.M.F.L. was one of the main products of the Shaw Wallace group ;
though I found it a little difficult to comprehend, all these involved business
intentions. Shri Venugopal repeatedly told me that there was also the intention
of generating "internal competition between various brands, etc."
This kind of shadow-boxing was apparently the name of the game. If I were to,
therefore, proceed on the basis of this logic and thought process of Shri
Venugopal's clients, I would assume that it would be beneficial rather than
detrimental for the plaintiffs and the Shaw Wallace group if, even after it had
become an independent entity, a person connected with the Shaw Wallace group
were to head the management and control of that company also. As developments
took place, this situation was short-lived because Shaw Wallace stripped defendant
No. 3 of all these powers, but even assuming that this did not happen, I do not
see the plaintiffs being able to justify their charge on the basis of the
present record even on the admitted set of facts. Defendant No. 3 having parted
company with Shaw Wallace really renders all this purely academic.
Learned
counsel on both sides have, in the course of their arguments, advanced a large
number of decisions. In a furious tug of war centred around the question as to whether this is a case in which the corporate
veil ought to be lifted or not. I cannot afford to burden this judgment any
more with much reference to case-law, but I shall recount as briefly as
possible Shri Venugopal's contentions in this regard which are as follows :
(i) In order to demonstrate that though
a holding company owns the entire share capital of a subsidiary company, both
the companies are distinct and separate entities and that to explain the
concept of a holding company and a subsidiary company reference was made to
Spencer and Co. Ltd. v. CWT [1969] 39 Comp Cas 212 ; AIR 1969 Mad 359 and
Turner Morrison and Co. Ltd. v..Hungerford Investment Trust Ltd., AIR 1969 Cal
238. The question of lifting the corporate veil does not arise in the present
case at all.
(ii) In A. Saloman v. A. Saloman and Co.
Ltd. [1897] AC 22 (HL), it has been laid down that the corporation in law is
equal to a natural person and has a legal entity of its own. The entity of the
corporation is entirely separate from that of its shareholders ; it bears its
own name and has a seal of its own. Its assets are separate and distinct from
those of its members ; it can sue and be sued exclusively for its own purpose.
This doctrine has been subjected to certain exceptions in special
circumstances. For example, the court will pierce the corporate veil in cases
of fraud and tax evasion and other cases of circumventing the taxation laws.
These are the broad categories and the court may lift the corporate veil
facade.
(iii) Tata Engineering and Locomotive Co.
Ltd. v. State of Bihar [1964] 34 Comp Cas 458 ; AIR 1965 SC 40, decision by the
Constitution Bench of five judges.
Certain sales tax recovery was
challenged as invalid on various grounds and one of the grounds was violation
of article 19. The protection of article 19 is available only to a citizen. The
Supreme Court earlier held in State Trading Corporation of India Ltd. v. CTO
[1963] 33 Comp Cas 1057 ; AIR 1963 S.C 1811, that a company and corporate body
is not a citizen. In order to overcome the decision of the Supreme Court, a
petition came to be filed by the company and some of the shareholders. It was
argued that the shareholders are the real beneficial owners and, therefore,
they are entitled to complain in a case of violation of article 19 (paragraphs
6, 23 to 27).
The Supreme Court reiterated the
principles of a company being equal to a natural person and having a legal
entity of its own following the
judgment in A Saloman v. A Saloman and Co. Ltd. [1897] AC 22 (HL). The Supreme
Court after categorising the cases where the doctrine of lifting the veil
applied, overruled and rejected the arguments of the shareholders for lifting
the corporate veil.
(iv) Heavy Engineering Mazdoor Union v.
State of Bihar [1969] 39 Comp Cas 905 ; AIR 1970 SC 82.
The question was whether the
company is carried on under the authority of the Central Government within the
meaning of section 2(a), 2(g) and section 10 of the Industrial Disputes Act
(paras 1 and 4).
The Supreme Court again, after
referring to the cases of Saloman [1897] AC 22 (HL) and also Kuenigl v.
Donnersmarck [1955] 1 QB 515, held that the company incorporated under the
Companies Act derives powers and functions from and by virtue of its memorandum
of association and its articles of association and, therefore, the mere fact that
the entire share capital of the company was contributed by the Central
Government and the fact that all its shares are held by the president and
certain officers of the Central Government does not make any difference.
(v) Life Insurance Corporation of India
v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370. In view of certain
schemes introduced by the Union of India, 13 NRI companies purchased shares.
The argument was that all the 13 companies are a facade and Mr. Swaraj Paul was
the real investor. The Supreme Court refused to investigate into this question
by observing that when the Legislature requires lifting of the corporate veil
for a particular purpose the court will lift the corporate veil only to that
extent and no more. Basically, the question of lifting the corporate veil
arises while considering various legislations, (paragraphs 90, 91).
(vi) Juggilal Kamlapat v. CIT [1969] 73
ITR 702; AIR 1969 SC 932 and Chandulal Harjiwandas v. CIT [1967] 63 ITR 627;
AIR 1967 SC 816, respectively are the examples where the court has lifted the
corporate veil as the conception of corporate veil was used for tax evasion or
to circumvent the tax obligation.
(vii) Turner Morrison and Co. Ltd. v.
Hungerford Investment Trust Ltd., AIR 1969 Cal 238,
The holding company and a
subsidiary company are two different and distinct entities. In a suit between
the subsidiary companies, the holding company has no locus standi. The High
Court pointed out that the holding company and subsidiaries are incorporated
companies and each is a separate
legal entity. Each has a separate corporate veil except to the extent that the
statute indicates the nature of the holding company and the subsidiary company,
the corporate veil still remains (para 21).
(viii) Spencer and Co. Ltd. v. CWT [1969] 39
Comp Cas 212 ; [1969] 72 ITR 33 ; AIR 1969 Mad 359.
On the construction of the
Wealth-tax Act, the court held that it was not a case of tax evasion and,
therefore, it was not necessary to lift the corporate veil (paras. 6 and 7).
(ix) CIT v. Associated Clothiers Ltd., AIR
1963 Cal 629.
There were two
companies, A and B, having identical set of directors. The entire shareholding,
of company, B, was owned by company, A. Company B's property was transferred to
company, A. It was contended that the transfer was self to self and, therefore,
there was no liability to pay tax. The company's claim was that they are
actually one and the same person and, therefore, the corporate veil should be
lifted and, Therefore, they are not liable to pay tax. The court refused to
lift the corporate veil.
The High Court, after laying down
the broad category of cases for lifting the corporate veil, observed that this
is generally permitted when the statute gives a lead in that respect and not
otherwise (paragraphs 9, 10, 11, 16, 17, 21 and 22).
(x) State of U.P. v. Renusagar Power Co.
[1991] 70 Comp Cas 127 (SC).
Hindustan Aluminium Corporation
(Hindalco) is a statutory corporation having its factory in U.P. Renusagar
Power Company is a wholly-owned 100 per cent. subsidiary of Hindalco. Renusagar
Power Company is producing electricity solely for consumption for Hindalco. The
judgment refers to several facts and various amendments in the Electricity
(Duty) Act of U.P. Only the last amendment is relevant (pages 134-136). The
question was whether the case of Hindalco would be covered by clause (c) which
contemplated a person who is consuming electricity from his "own source of
generation". The question was one of interpretation of the words "own
source of generation" (page 141, second paragraph).
From pages 143-147, the Supreme
Court has narrated various facts and circumstances which, firstly, show that
Renusagar was a captive unit of Hindalco, generating power only for Hindalco.
Secondly, under the Indian Electricity Act, Renusagar was held to be Hindalco's
own source of generation.
Thirdly, all along the Government
of India and the State of U.P. proceeded on the basis and treated that Hindalco
had its "own source of generation" in Renusagar. In fact, the
Government took advantage of the fact that Renusagar was its "own source
of generation" of Hindalco in various ways and aspects.
Fourthly, in State of U.P. v.
Hindustan Aluminium Corporation Ltd., AIR 1979 SC 1459, the Supreme Court
proceeded on the basis that Renusagar was its own source of generation of
Hindalco (page 146).
In the escapable conclusion that
Renusagar was its own source of generation for Hindalco, the State of U.P.
argued that such conclusion would be violative of article 14 (page 150). In
order to meet this contention, the Supreme Court considered the concept of
lifting the corporate veil.
After making reference to the
Supreme Court judgments, the Supreme Court proceeded to consider the English
cases and thereafter the relevant discussion is at page 158, where the Supreme
Court has made a reference to the judgments of the Calcutta High Court and the
Madras High Court and also Escorts' case [1986] 59 Comp Cas 548 (SC). All that
the Supreme Court said was that the three tests laid down by the various judgments
are not conclusive by themselves and, in the facts and circumstances of the
case, the Supreme Court held that there are special circumstances to hold that
the corporate veil should be lifted. These principles are laid down in the
context of a fiscal statute. The Supreme Court has not laid down that the
corporate veil needs to be lifted as and when demanded by the parties. The
English decisions referred to by the Supreme Court cannot be read out of
context. In all the cases the court was considering the effect of cases of
fully-owned subsidiaries. The respondents are simply picking up some sentences
from these observations and saying that the facts of the present case are on
par with the facts of those cases and, therefore, the corporate veil should be
lifted. This is only an attempt to mislead this court and nothing else.
The entire discussion in
Renusagar's case [1991] 70 Comp Cas 127 (SC) is about lifting of the corporate
veil between a holding company and a subsidiary company It is an undisputed
fact that BDA has been desubsidiarised and is no longer a subsidiary of Arunava
Investments Ltd. and, consequently, there does not exist any "holding
company-subsidiary company" relationship between the plaintiff company and
the defendant-company. In each and every case, there existed a "holding
company-subsidiary company" relationship between the two companies.
(xi) Further, in this case, the party
which was involved and concerned in the desubsidiarisation and has taken
advantage of desubsidiarisation, now comes before the court and submits to the
court to ignore the desubsidiarisation and urges that the corporate veil should
be lifted for this purpose. It is submitted that this should not be allowed.
Further, it is the case of the plaintiffs that desubsidiarisation took place to
come out of the clutches of the Monopolies and Restrictive Trade Practices Act
and to get around the excise problem. Thus, according to the plaintiffs, they
used this method of desubsidiarisation to get out of certain legislation and
statutes and have as such derived certain benefits and the court should not aid
such a party and lift the corporate veil because it would amount to assisting a
party which has on its own showing tried to avoid certain legislation by the
method of desubsidiarisation and is now using the concept of lifting the
corporate veil to set aside the effect of desubsidiarisation.
It is
necessary for me to reiterate that this entire and rather profound debate is
hardly relevant on the present facts. I have considered and decided this issue
already, bearing in mind the principles applicable to the present facts.
This brings
me to the final summation of the case. The plaintiffs had approached the trial
court on April 14, 1992, on the false plea that BDA was still under their management
and control and that this situation was sought to be disturbed by defendant No.
3 who, in actual terms, had taken certain steps towards independent management.
The subsidiary pleas apart, the plaintiffs had essentially contended that BDA's
status had not changed regardless of the shares having been transferred by
Arunava and regardless of the legal assignment of the three brands. The trial
court, as indicated earlier, upheld the plea of the plaintiffs and passed an ad
interim order which had the effect of permitting BDA to be managed and
controlled by the plaintiffs without any interference from the remaining
defendants and as indicated earlier, the ad interim order was confirmed in even
wider terms. I have pointed out that almost the entire case pleaded by the
plaintiffs is justification for their action has seen the light of day long
after the plaint was presented to the court and the plaintiffs have
successfully managed to hold on to the initial orders right up to April, 1993,
when this appeal was heard. After a day-to-day hearing lasting over three
weeks, I indicated on April 27, 1993, through my order of that date, that the
appeal is allowed and that the orders of the trial court are set aside. I have
set out in this judgment the salient and the material areas that fall for
determination with reference to the relevant parts of the record and that which is of crucial
importance. Undoubtedly, this is a hotly contested litigation and quite apart
from the documents and pleadings the written submissions and compilations of
cases run into several thousand pages. The conclusions that emerge ultimately
are as follows :
(a) That the record establishes that the
BDA shares were trans ferred to Intrust and that this constituted the entire
holding of Arunava as far as BDA was concerned, which was done for a valuable
consideration. The entire transaction right from the requisite procedure up to
the Government approval is a valid and binding transaction, which has assumed
finality. The legal implications and the immediate fall-out of this situation
is that BDA as a company has assumed independent status and it, there fore,
cannot be subjugated or managed or controlled by any outside agency other than
its own board of directors and the power of taking all decisions in respect of
its working also vested in the general body and the board of directors.
(b) That the grounds on which the
transfer of shares has been called into question are not only stale, but are
totally devoid of substance. There is no merit in the challenge. The
time-factor regardless, even on a consideration of the merits, this is the
position.
(c) The lengthy debate with regard to
the contention that this court must, in the light of what has been pointed out
by the plaintiffs, examine the de facto status of the company BDA brushing
aside what may apparently appear is not a doctrine that needs to be applied in
the present case where there is no ambiguity whatsoever about the status of PDA
either before or after the transfer.
(d) As far as the assignment of the
three brands is concerned, the position that emerges is that this was an action
instituted by the plaintiffs, that the consideration has passed and that the
transaction has assumed a binding character in so far as it is lawful, duly
executed and for valid consideration. I would categorise this transaction as
having become irrevocable. The grounds on which the court has been asked to
ignore it or water it down are wholly and totally unacceptable. These brands
are undisputedly the property of BDA. There is no subsisting right, title or
interest in them as far as the plaintiffs are concerned and BDA is, there fore,
entitled to treat these brands as its very own.
(e) As regards the main charge, which is
to the effect that defendant No. 3 is guilty of breach of fiduciary
responsibilities, the allegation proceeds on a personal basis, but the material
on record does not support any adverse finding against him.
(f) As regards the general charge
levelled by the plaintiffs against the defendants, which concerns the
allegation that the minutes of the meetings have been fabricated because the
meetings were never held, after a careful consideration and, in fact, a
repeated consideration of everything placed before me, the only permissible
finding is that the allegation is completely groundless. There is ample
supportive evidence to indicate that the meetings were held, they were valid
and that the decisions taken therein are legally sustainable and binding.
I am
constrained to observe at this stage that the record before me justifies the
defendants' charge that the plaintiffs had suppressed almost all relevant
material from the trial court at the stage when the ad-interim order was
obtained and that this was highly improper. The word "improper" is,
in fact, a gross understatement, the conduct of the plaintiffs bristles with
mala fides. Regardless of the plaintiffs' conduct, the record before the court
at that time could never justify an ex parte injunction order let alone the
type of order that was passed. That order is atrocious and the plaintiffs
cannot be permitted to get away with the damage that has resulted, more so
considering the fact that they have ensured at all stages that the order
continued for as long as possible, which was a matter to their benefit and to
the detriment of the defendants. A party who obtains interim relief from a
court in these circumstances cannot be absolved of the responsibility and
would, therefore, be liable to compensate the plaintiffs for the entire loss
that has occurred. Shri Manohar, in the course of the hearings, demonstrated in
actual terms how staggering these figures are, but it will still be essential
for the heads to be quantified. The defendants may, if they so desire, quantify
the loss/damage and apply to this court separately for the award of such
compensation.
Having
examined virtually every letter of the record, sifted through it carefully and
discreetly and assessed whatever is most relevant, I find a very devious plan
which has been the real basis for this litigation. At page 375 of the record,
there is a very shabbily drafted-out letter dated April 1, 1992, a xerox copy
of which is on record. In view of its importance, I am reproducing it verbatim
:
"Dear
Sir,
We
respectably wish to mention that we, the undersigned, were appointed in
Cruickshank and Co. Ltd. and were working at the factory at BDA Breweries and
Distilleries Ltd., Aurangabad, for over two years. We had agreed to join
Cruickshank and Co. since it was a part of the Shaw Wallace group and we were
looking apart from prospects job security and status.
Subsequently,
we joined BDA Breweries and Distilleries Ltd. on April 1, 1991, after
technically resigning from Cruickshank and Co. as it was conveyed to us that it
may be better in the long run as indirectly we would still be part of the Shaw
Wallace/Cruickshank as BDA was still within the group.
We now feel
that this information was not correct and from what we hear, attempts are now
to take this unit away from the group and hence would prefer it to back to
Cruickshank and Co., i.e., reverse of what was done last year.
Yours faithfully,
(Sd.)………………."
This strange
document, which does not indicate to whom it is addressed and in respect of
which even the English and the contents leave much to be desired, is supposed
to have been signed by 13 persons, including plaintiff No. 2, though there
appear to be all sorts of overwriting, etc. I refer to this document because
the justification for the entire litigation has emanated from the charge that
it was defendant No. 3 who fired the first short by virtue of the circular
dated April 9, 1992, etc., which according to the plaintiffs, was responsible
for upsetting the apple cart. In actual fact, there is no doubt in my mind,
whatsoever, that it was the letter dated April 1, 1992, which was virtually an
en masse resignation of the officers of BDA that was instigated by the
plaintiffs in order to bring about a virtual coup and swing the company back
into the hands of the Shaw Wallace group through such devious and unfair means.
Put very simply, the game was directed towards paralysing the working of BDA on
the one hand and then using the court machinery for purposes of taking over the
company. This was the real reason for instituting the proceedings in Aurangabad
and, to my mind, when at the beginning of April 1992, BDA was faced with a plot
of this type, there was no option left except to take immediate corrective
steps. It was the virtual conspiracy between the executives of BDA who were
ex-Cruickshank/Shaw Wallace to enact the drama of resigning en bloc and to
collectively sign the letter dated April 1, 1992, that made it absolutely
necessary for defendant No. 3 to issue the 9th April circular. It was
inevitable when a situation of this type emerged for defendant No. 3 to take necessary
measures for the survival of the company and to keep it running and to offset
the act of treachery that had been instigated. A mere reading of the letter
dated April 1, 1992, leaves no doubt in my mind that this was the
carefully-planned step which was the forerunner to the court proceedings and it
was used in order to hijack the unit
and achieve a coup in conspiracy with the executives. That the so-called
resignations were not only inspired but were part of a plot is as clear as
daylight and the action that followed from the plaintiffs in misusing the court
machinery to achieve their objective clearly puts the plaintiffs very much in
the wrong box.
The appeal
succeeds and is allowed. The interim orders passed by the trial court that are
the subject-matter of this appeal are vacated. It shall be necessary for me to
further direct, since those orders were of an exceptional nature whereby they
divested the entire management and control of BDA from the persons in lawful
authority of that company and virtually handed over the same to the plaintiffs,
that the trial court shall take all necessary and immediate steps to ensure
that the effect of the orders that have been set aside is completely
eliminated. The defendants shall be entitled to function in their independent
capacity and after removal of all fetters that have been put on them as a
result of the ad interim and interim orders and the trial court shall ensure
that this is done forthwith.
I need to
also record here that the defendants have been subjected to this harrowing
litigation since April, 1992, which is thoroughly and completely unjustified
and to this extent, therefore, this court will have to take stock of the volume
of the litigation, which has gone into as many as five vigorous rounds, the nature
of the litigation, the length of the hearings and a realistic view of the
actual legal expenses that the defendants have been subjected to, and having
regard to all of these, the appeal is allowed with costs that are quantified at
Rs. 5,00,000.
Before
parting with this judgment, I need to record my deep appreciation and
indebtedness for the valuable assistance from not only the two senior counsel,
Shri Manohar and Shri Venugopal, but to the teams assisting them.
(The
aforesaid orders and directions shall, undoubtedly, be subject to such orders
as the Supreme Court may pass in this case. The office records placed before me
indicate that even though a special leave petition was filed before the Supreme
Court against the order dated April 27, 1993, the apex court has so far not
granted any reliefs staying the operation of the judgment of this court. The
office shall furnish to the parties a copy of this judgment immediately and the
respondents shall, if they so desire, apply for appropriate orders from the
Supreme Court within an outer limit of three weeks, failing which the orders of
this court shall be implemented.)
[1953] 23 Comp Cas 536 (TRAV-COCH)
v.
Vanchinad Rubber
& Produce Co. Ltd.
Sankaran and Gangadhara
Menon, JJ.
A.S. No. 706 of 1122 M.E.
April 1, 1952
M.
Abraham and N.K. Narayana Pillai for the Appellant.
N.K. Job and K.N.
Narayanan Nair for the Respondent.
judgement
Sankaran J. — The plaintiff whose suit was dismissed by the lower court has preferred this appeal. Defendant No. 5 was the holder of 121 shares in the first defendant company and he had pledged these shares with the plaintiff and had also entrusted to him the share certificate which has been marked as Exhibit C. Since defendant No. 5 failed to redeem the pledge, plaintiff instituted a suit as O.S. No. 63 of 1108 in the Trivandrum District Court against defendant No. 5 for recovery of the amount due as per the pledge already mentioned. Since the amount was sought to be recovered by the sale of the shares held by defendant No. 6 the first defendant company was also made a party to the suit. In execution of the decree obtained by the plaintiff in that suit he sold these shares in court auction and himself purchased the same on 15-3-1112. Exhibit A is the copy of the sale certificate granted to him. Subsequent to such purchase he had some correspondence with the defendant company to have these shares transferred to his name on the strength of the court sale. The company informed the plaintiff that defendant No. 5 had already transferred 40 shares in favour of defendant No. 2, 25 shares each in favour of defendants Nos. 3 and 4 and that these transfers had already been recognised by the company and the necessary entries made in share register. The plaintiff was also informed that defendants Nos. 2 to 4 as transferees of these shares were being paid the dividends due in respect of such shares and that for certain amounts due to the company from defendants Nos. 3 and 5 the company had a lien over the 25 shares standing in the name of defendant No. 3 and over the 31 shares still standing in the name of defendant No. 5. According to the plaintiff the transfer of shares in favour of defendants Nos. 2 to 4 has been fraudulently effected as a result of collusion between them and defendant No. 5 and that such transfer does not affect the rights acquired by the plaintiff as per sale certificate Exhibit A. On these allegations Company Petition No. 15 of 1115 was filed by the plaintiff in the Kottayam District Court under Section 41, Travancore Companies Act, corresponding to Section 38, Indian Companies Act, for getting a rectification of the share register of the defendant company by substituting his name in the place of defendants Nos. 2 to 5 as the owner of the 121 shares covered by the share certificate Exhibit C. In view of the conflicting claims put forward by the plaintiff and defendants Nos. 2 to 5 that court directed the plaintiff to institute a regular suit to get his rights declared. The order to that effect was passed on 6-11-1117. The present suit was accordingly instituted by the plaintiff on 24-11-1117 praying for a rectification of the share register of defendant No. 1 company by entering in it the name of the plaintiff as the owner of the 121 shares covered by the share certificate Exhibit C and also for a decree for recovery from the company of the dividends due on these shares for the period from 15-3-1112, the date of the sale certificate (Exhibit A), together with 6% interest on such amount and also for costs of the suit. The suit was resisted by the defendants. The defendant company contended that when the transfer of shares in favour of defendants Nos. 2 to 4 was recognised by the company and the names of such transferees entered in the share register the company was not aware that defendant No. 5 had pledged these shares with the plaintiff and that such transfer which had already come into effect could not be affected by the subsequent suit instituted by the plaintiff on the basis of the pledge in his favour or by the decree and the court sale which followed it. It was also contended that defendants Nos. 2 to 4 had also paid the call at the rate of Rs. 5 for each share and that they were regularly getting the dividend due in respect of those shares. Defendant No. 4 also raised similar contentions and stated that defendants Nos. 2 to 4 purchased the shares from defendant No. 5 in good faith and for valuable consideration and without any knowledge of the pledge with the plaintiff. Defendant No. 5 also supported the contentions of defendants Nos. 2 to 4. He further contended that the plaintiff's suit is not maintainable and that it is barred by limitation. Still another contention raised by defendant No. 5 was that since the court sale evidenced by Exhibit A was not followed by the delivery as contemplated in Rules 76 and 77, of Order XXI, Travancore Civil Procedure Code, the plaintiff had acquired no valid title to the shares in question. The lower court overruled the plea of limitation raised by the defendants but upheld the other contentions raised by them and accordingly dismissed the suit. Hence this appeal by the plaintiff. Defendants Nos. 1, 4 and 5 have filed objection memorandum challenging the correctness of the lower court's finding that the suit is not barred by limitation and also reiterating the contentions that the non-compliance with the procedure prescribed in Order XXI, Rules 76 and 77, Civil Procedure Code, is fatal to the rights claimed by the plaintiff.
Of the several grounds raised by the defendants against the maintainability of the plaintiff's suit one ground alone is seen to have been considered by the lower court. That ground is to the effect that plaintiff should have pursued his remedies by way of proceedings in execution of the decree in O.S. No. 63 of 1108 and that a fresh suit like the present one is barred by Section 47, Civil Procedure Code. The lower court upheld this contention and ruled that the present suit for the enforcement of the plaintiff's right under the sale certificate Exhibit A granted in O.S. No. 63 of 1108 is not maintainable. This view is obviously erroneous. Plaintiff' s claim in O.S. No. 63 of 1108 was for recovery of a debt due to him from the present defendant 5. That suit was decreed in favour of the plaintiff and in execution of the decree the right, title and interest which the present defendant 5 who was the judgment debtor in that case had over the 121 shares covered by the share certificate (Exhibit C) were sold in court auction and was purchased by the plaintiff himself. The sale was duly confirmed in his name and the sale certificate (Exhibit A) was issued in his favour. It was a sale of movable property and the mode in which the delivery of that property covered by that sale is to be effected is the one prescribed by Order XXI, clause (3) or Rule 76, Travancore Civil Procedure Code, (corresponding to clause (3) of Rule 79 of Order XXI of the Indian Code). The provision is to the effect that delivery of the shares sold shall be made by a written order of the court prohibiting the creditors from receiving the debt or any interest thereon and the debtor from any payment thereof to any person except the purchaser or prohibiting the person in whose name the share may be standing from making any transfer of the share to any person except the purchaser or receiving payment of any dividend or interest thereon and the manager, secretary or other proper officer of the corporation from permitting any such transfer or making any payment to any person except the purchaser. Beyond this nothing further could be done by way of proceedings in execution on the strength of the sale certificate (Exhibit A). It follows therefore that none of the reliefs claimed in the present suit could be obtained by the plaintiff by way of execution proceedings in O.S. No. 63 of 1108. The main relief claimed in the present suit is to get a rectification of the share register of the defendant I company by registering the name of the plaintiff as the holder of the 121 shares of which he has become the purchaser under Exhibit A. The other reliefs claimed are only consequential ones following the main relief. Since the reliefs claimed in the present suit were entirely beyond the scope of the prior suit O.S. No. 63 of 1108 there is no force or substance in the contention that the plaintiff should have applied for these reliefs in the court executing the decree in O.S. No. 63 of 1108. Such reliefs could be obtained by the plaintiff only by way of other independent proceedings and hence it cannot be said that Section 47, Civil Procedure Code, operates as a bar to the present suit.
The next point urged on behalf of the respondent is that the non-compliance with the procedure prescribed by Rules 79 and 80 of Order XXI, Civil Procedure Code (corresponding to Rules 76 and 77 of the Travancore Code) makes the present suit based on Exhibit A unsustainable. It is contended that the delivery as contemplated in clause (3) of Rule 79 is essential to complete the title of the auction purchaser, under the sale certificate Exhibit A, to the shares covered by that certificate. The rule only prescribes the different modes in which delivery is to be effected in the case of sales of movable properties. When such property consists of shares in a corporation it is stated that the delivery may be effected by prohibiting the parties concerned from transferring the shares or any interest thereon to any person other than the purchaser. But there is nothing in the rule to indicate that the title of the auction purchaser to the shares purchased by him will be perfected only after delivery is made by the issue of the prohibitory order as prescribed by clause (3) of Rule 79. On the other hand the conditions necessary for perfecting the auction-purchaser's title are prescribed by clause (2) of Rule 77 of Order XXI (Rule 74 of the Travancore Code). Clause 2 of this rule lays down that "on payment of purchase money the officer or other person holding the sale shall grant a receipt for the same and the sale shall become absolute. "So far as the sale evidenced by Exhibit A is concerned, these conditions were duly complied with and satisfied. It is also clear from a reading of clauses (2) and (3) of Rule 79 that the modes of delivery prescribed therein are intended to govern cases where the movable property sold happens to be in the possession of some person other than the judgment-debtor. In such cases the interests of the auction purchaser are sought to be safeguarded by the issue of notices to the third parties in possession of the property sold intimating them about the fact of the sale and of the consequences following such sale. The compliance with such a procedure was not necessary in the case of the sale evidenced by Exhibit A. The share certificate relating to the 121 shares sold under Exhibit A has already been delivered over to the plaintiff decree holder auction purchaser even at the time when defendant 5 had pledged these shares with him. At the time of the auction sale and even subsequently possession of the share certificate has been with the auction purchaser himself and it was he who produced it in this case and got it marked as Exhibit C. There is the further fact that the defendant company had been made a party defendant in O.S. No. 63 of 1108. Thus the auction sale of the shares in question was conducted after notice to the company as well. Since the auction sale of the shares was conducted in such a situation it cannot be said that it was essential that the issue of a delivery order as contemplated by clause (3) of Rule 79 was essential for the completion of the proceedings in execution in that case. There was in substance and in effect such a delivery order and the company as a party defendant in that case had the necessary notice that subsequent to the court sale the auction purchaser alone could be treated as the owner of the shares in question. The absence of a formal delivery order as contemplated by clause (3) of Rule 79 cannot therefore in any way prejudice the plaintiff's rights under Exhibit A.
Coming to the procedure prescribed by Rule 80 it is clear from a reading of the rule itself that the procedure is not obligatory. Clause (1) of the rule runs as follows:
"Where the execution of a
document or the endorsement of the party in whose name a registered instrument
or a share in a corporation is standing is required to transfer such negotiable
instrument or share the Judge or such officer as he may appoint in this behalf
may execute such a document or make such an endorsement as may be necessary and
such execution or endorsement shall have the same effect as an execution or
endorsement by the party."
This provision is to govern cases where the execution of a document or the endorsement by the party in whose name the negotiable instrument or the share in a corporation is standing, is necessary for effecting a transfer of such negotiable instrument or share. It is a rule which prescribes the procedure when what is required or when what is decreed or ordered is the transfer of the share. In such cases the court by complying with the procedure prescribed by this rule will be doing what the party in whose name the share stands was bound to do in order to effect a transfer of the share. But where it is not a transfer of the share in the real and strict sense of the term the execution of a document or the endorsement by the party may not be required. The question of the court executing such a document or making such an endorsement as contemplated by Rule 80 will not also arise. The rights of a shareholder may pass to another either by way of transfer or by way of transmission. There is a clear distinction between transfer and transmission of shares. Transfer is by voluntary act of parties whereas transmission is by operation of law. Sale of shares in court auction comes under the category of transmission by operation of law. This distinction between transfer and transmission of shares has been clearly explained in Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. and also in In re Wahid Bus & Mails Transport Co. Ltd., Multan. In the Madras case it was pointed out that in the case of court sale of shares the purchaser will acquire a complete title to the shares when delivery thereof is effected by passing a written order of prohibition by the court as contemplated by clause (3) of Rule 79 and that the compliance with the procedure prescribed by Rule 80 is not obligatory. The same view was taken in Nagabhushanam v. S. Ramachandra Rao. It was held in that case that where a court sale in respect of the shares is confirmed and an order contemplated by clause (3) of Rule 79 is issued no further steps need be taken for completing the transmission of the shares in favour of the purchaser. It is seen from the articles of association of the defendant company that separate provisions have been made to govern transfer of shares as distinct from the transmission of shares. These articles are contained in Exhibit XXII. Articles 14 to 17 deal with transfer of shares while articles 18 to 21 deal with transmission of shares. In the case of transfer of shares same has to be effected by the execution of a document in the manner prescribed by article 15. The execution of such a document is not insisted upon in the case of transmission of shares. On the other hand, such transmission will be recognised and implemented by the company on production of the evidence in proof of such transmission. The plaintiff in whose favour the shares covered by the share certificate (Exhibit C) had been transmitted by the sale in O.S. No. 63 of 1108 has produced the sale certificate (Exhibit A) in support of his claim to the shares and it is sufficient to substantiate his claim to have his name entered in the share register of the company, as the holder of these shares. For the reasons stated above we hold that the objection that the plaintiff's suit based on Exhibit A is unsustainable for the reason of noncompliance of the procedure prescribed by Rules 79 and 80 of Order XXI, Civil Procedure Code, cannot prevail.
Still another objection urged on behalf of the defendants is that the plaintiff's remedy is by way of an application under Section 38, Companies Act, and not by way of a fresh suit like the present one. No doubt that section provides for an application for rectification of the share register of the company and for consequential, reliefs being granted to the applicant. Even though such a summary procedure is prescribed by the Companies Act is cannot be said that the provision takes away the right of the party to seek the necessary reliefs by way of a regular suit. The provisions of the Companies Act do not by express words or by necessary implication take away the party's right of suit in respect of matters coming within the scope of Section 38. Hence it has to be taken that the right of suit available to the party under common law subsists in spite of the provision made in Section 38 of the Companies Act. It will be open to the party to resort to the summary procedure prescribed by that section or to seek reliefs by instituting a regular suit. In Ramesh Chandra Mitter v. Jogini Mohan Chatterji it was held that in a simple case where an immediate rectification is essential, it may be desirable to apply under Section 38, but if the case is at all complicated, an action should be brought. This decision was followed in Mohideen Pichai Taraganar v. Tinnevelly Mills Co. Ltd. where also it was held that a regular suit for rectification of the share register and for consequential reliefs is maintainable and that the remedy in that direction is not confined to an application under Section 38 of the Companies Act. In the present case the plaintiff had as a matter of fact filed an application to the District Court under Section 38 of the Companies Act. That court found that the questions raised by the parties were of a complicated nature which could only be properly dealt with in a regular suit and accordingly directed the applicant to institute a fresh suit to get the reliefs claimed by him. Exhibit D is the copy of the order striking off his application with a direction to institute a regular suit. The present suit was accordingly instituted by the plaintiff. Considered in the light of all these aspects we hold that the present suit is maintainable.
The position taken up by the defendant is that the plaintiff's suit is governed by the three years' period of limitation prescribed by Article 48 or 49 of the Limitation Act. Article 48 governs suits for specific movable property lost or acquired by theft, or dishonest misappropriation or conversion, or for compensation for wrongfully taking or detaining the same. Article 48-A applies to suits to recover movable property conveyed or bequeathed in trust, deposited or passed and afterwards bought from the trustee, depositary or pawnee for a valuable consideration. Article 48-B relates to suits to set aside sale of movable property comprised in a Hindu, Muhammadan or Buddhist religious or charitable endowment, made by a manager thereof for a valuable consideration. Article 49 applies to suits for other specific movable property, or for compensation for wrongfully taking or injuring or wrongfully detaining the same. The reliefs claimed in the present suit do not come under the category of any of the reliefs specified in Articles 48 and 49. There is no other particular article applicable to suits of this nature. In the absence of any other specific article governing the present suit it has necessarily to be taken that the present suit is governed by the residuary article, i. e., Article 120, Limitation Act. That this is the article applicable to suits for rectification of the share register of a company and for other incidental reliefs is also the view taken in Jawahar Mills Ltd., Salem v. Official Receiver, Sha Mulchand and Co. Ltd.
The next point for decision is whether by virtue of the court sale evidenced by Exhibit A the plaintiff has acquired the ownership in respect of all the 121 shares covered by the share certificate (Exhibit C). The court sale of these shares was only on 15-3-1112. Long prior to that date defendant No. 5 had transferred 60 of these shares in favour of defendants Nos. 2 to 4. Exhibits XXIV, XXV and XXVI are the assignment deeds under which such a transfer was effected by defendant No. 5. All these assignment deeds were executed on 3-11-1101. Exhibit XXXV shows that 40 shares were transferred in favour of defendant No. 2, Exhibit XXV shows that 25 shares were transferred in favour of defendant No. 3 and Exhibit XXVI shows that 25 shares were transferred in favour of defendant No. 4. The board of directors of the company at the meeting held on 30-12-1101 recognised these transfers as proper and valid and accordingly resolved to register the names of the transferees as the holders of their respective shares in the books of the company. This is evident from Exhibit V the minutes of the directors' meeting held on 30-12-1101 and Exhibits II to IV and VI to XXX which are the accounts and other registers maintained by the defendant company show that from 30-12-1101 onwards defendants Nos. 2 to 5 were treated as the holders of the 40 shares, 25 shares and 31 shares, respectively. It is contended on behalf of the plaintiff that the transfer of shares as per the assignment deeds, Exhibits XXIV and XXV, in favour of defendants Nos. 2 and 4 were effected fraudulently and as a result of collusion between these defendants and defendant No. 5 with notice that all the 121 shares covered by Exhibit C had already been pledged with the plaintiff.
According to the plaintiff defendant No. 5 had pledged these shares with him on 5-8-1101. The document evidencing the pledge has not been produced in the case and therefore it is not possible to know the nature, the terms and the conditions of the pledge. From the pledge itself no notice can be attributed to the company or to defendants Nos. 2 to 4. Admittedly the plaintiff did not issue any notice to the defendants and the company intimating them of the pledge of these shares in his favour by the defendant No. 5. Plaintiff's suit (O.S. No. 63) for the enforcement of the pledge was instituted only in the year 1108. Present defendants Nos. 2 to 4 were not made parties to O.S. No. 63 of 1108 and hence it cannot be said that they had any notice of the proceedings in that case which terminated with the issue of the sale certificate (Exhibit A) to the plaintiff. The defendant company was a party to that suit and thus it can be taken that in the year 1108 the company had notice of the pledge in favour of the plaintiff of the shares in question. But nearly seven years prior to that date defendants Nos. 2 to 4 had become the transferees in respect of 90 of these shares and they had been duly recognised as the holders of those shares from the position occupied by defendants Nos. 2 to 5 in relation to the defendant company the plaintiff wants the court to draw the inference that all these defendants had notice of the pledge in his favour of the shares in question. Defendant No. 5 has all along been the president of the first defendant company. It is stated that defendant No. 4 was the managing director of the company and defendants No. 2 and 3 are his brothers. Defendant No. 4 as D. W. 2 has stated that he become the managing director of the company only in the year 1105. The transfer of the shares in favour of defendants Nos. 2 to 4 by defendant No. 5 was in the year 1101. There is the evidence of defendant No. 4 as D. W. 2 that defendants Nos. 2 to 4 obtained the assignment of these shares as per Exhibits XXIV, XXV and XXVI in all good faith and for valuable consideration and without any knowledge of the pledge of these shares in favour of the plaintiff. Defendant No. 5 has been examined as D. W. 3 and he has also supported the evidence given by D. W. 2. Defendant No. 5 has not stated that either before or subsequent to the execution of the assignment deeds Exhibits XXIV to XXVI he has mentioned to the transferees anything of the pledge in favour of the plaintiff. He has further stated that at the time of the assignment the security in favour of the plaintiff was more than sufficient and that he bona fide believing that there was nothing wrong in executing assignment deeds Exhibits XXIV to XXVI. The trial court has believed the version given by D. W. 2 and 3. As against such evidence adduced on behalf of the defendants there is practically no counter evidence on the plaintiff's side to make out his allegation that the aforesaid assignments were unsupported by consideration and brought into existence fraudulently and in collusion. The plaintiff alone has been examined on his side and he has not deposed to any such fraud and collusion. The mere fact that, defendant No. 5 who effected the transfers of these shares in favour of defendants Nos. 2 to 4 after the same had been pledged with the plaintiff happened to be the president of the defendant company, cannot by itself be taken to mean that the company had knowledge of the pledge even before such transfers were recognised as proper and valid as per the proceedings evidenced by Exhibit V.
Under the constitution of the company the president has no duties cast upon him to disclose all his personal dealings to the company. As a matter of fact there is no evidence to show that there was such a disclosure in respect of the pledge of the 121 shares covered by Exhibit C to the directors when they had passed the proceedings under Exhibit V. Under such circumstances the knowledge of defendant No. 5 regarding the pledge cannot be deemed to be the knowledge of the directors of the company. There is also nothing to show that the pledge in favour of the plaintiff was under a registered document. At best it could only be taken to have been effected under an equitable mortgage by deposit of the share certificate (Exhibit C). At the same time it was not accompanied by any transfer either in full or in blank executed by the mortgagor. As already stated the deposit of the share certificate by defendant No. 5 with the plaintiff by way of security for the loan was not intimated to the company. In the absence of any such intimation there was nothing wrong in the company having recognised the transfer of the shares in favour of defendants Nos. 2 to 4 under Exhibits XXIV to XXVI as proper and valid and in giving effect to such a transfer.
On behalf of the plaintiff it is urged that without the production of the share certificate (Exhibit C) the company should not have recognised the transfer of these shares under Exhibits XXIV to XXVI. The note at the foot of Exhibit C is relied on in support of this contention. That foot-note is as follows :
"No transfer of any
portion of the shares comprised in this certificate can be registered unless
accompanied by this certificate. Payment of calls will be endorsed on the back
hereof."
At the outset it has to be stated that this foot-note cannot have the force of a provision in the articles of association of the company contained in Exhibit XXII. Exhibit XXII contains no provision insisting on the production of the share certificate along with the deed of transfer. The requirements of a valid transfer are provided for in article 15 and if such requirements are satisfied by the execution of a deed of transfer as contemplated by that article, it will be perfectly open to the company to recognise such transfer if the company is satisfied that the transfer was effected bona fide and for valuable consideration. The note at the foot of the share certificate is obviously intended as a caution to the holder of the share certificate and it gives an option to the company to call for the production of the share certificate also in respect of the transfer of any particular share. All the same the non-exercise of that option cannot by itself invalidate the act of the company in recognising a transfer otherwise valid and proper. A similar question arose for consideration in Rainford v. James Keith & Blackmail Company Ltd. There also the share certificate contained a foot-note stating that "without the production of this certificate no transfer of shares mentioned therein can be registered." C, the holder of such a share certificate, had pledged the same with R as a security for a loan. Subsequently C sold the same to Y. The directors of the company acting in good faith accepted the transfer in favour of Y and registered the shares in his name and issued a fresh certificate in his favour, even though the share certificate held by C was not produced along with the deed of transfer. It was held that R was not entitled to enforce the pledge in his favour against the company and that the foot-note in the share certificate did not amount to a representation to or contract with the holder of the certificate that the shares would not be transferred without the production of the certificate, but was only a warning to the owners of the shares to take care of the certificate because he could not compel the company to register a transfer without its production. Applying these principles to the facts of the present case it is clear that there was nothing wrong or illegal in the defendant company having recognised the transfer of the shares in favour of defendants Nos. 2 to 4 as proper and valid and entering their names as holders of the respective shares in the share register of the company. The result is that when the plaintiff became the auction purchaser under Exhibit A there were only 31 shares standing in the name of the judgment-debtor who is the present defendant No. 5. The title to these 31 shares alone passed to the plaintiff under that court sale. It follows therefore that on the strength of the sale certificate (Exhibit A) plaintiff is not entitled to enforce any claims in respect of the remaining 90 shares which had already been registered in the names of defendants Nos. 2 to 4. So far as these defendants and the shares registered in their names are concerned the suit has to fail and the plaintiff can get a decree in this case only in respect of the 31 shares standing in the name of defendant No. 5.
In the result this appeal is allowed only in respect of the 31 shares-covered by Exhibit C still standing in the name of the defendant No 5. Plaintiff is given a decree for the several reliefs claimed in the plaint only in respect of these 31 shares subject to the lien in favour of the defendant company for whatever amount that may be due to the company from defendant No. 5 up to 15-3-1112 the date of court sale under Exhibit A. Plaintiff will get proportionate costs throughout from defendant No. 6. In other respects the appeal is dismissed with proportionate costs to respondents Nos. 1 to 4. The objection memoranda filed on behalf of respondents Nos. 1, 4 and 5 are dismissed.
[1953] 23 Comp Cas
399 (
v.
Pandit Shirali &
Co.
Sarkar, J.
February 29, 1952
D.C.
Sethia, for the plaintiff.
G.
Mitter, for the company.
Sarkar J.—In this suit there are three defendants but only one of them, namely, defendant 3, appeared to contest the claim. The other two defendants filed their written statements but did not appear at the hearing. The substantial contest is whether the plaintiff or defendant 3 is entitled to a prior charge over certain shares belonging to defendant 2.
The plaintiff alleges that on 1st August, 1946, defendant 1, Pandit Shirali & Co., executed a promissory note for Rs. 37,500 payable to him on demand and defendant 2, Hemmad, guaranteed the due payment of the promissory note and as security for the guarantee, in or about November 1947, pledged to the plaintiff certain shares held by him in the Orient Movietone Corporation Ltd., which is defendant 3 in this suit. The plaintiff claims the amount of the promissory note against the debtor and the guarantor and also the enforcement of the pledge by the guarantor. He has proved the promissory note and the guarantee and is, therefore, entitled to the money decree claimed against Pandit Shirali & Co. and Hemmad.
The difficulty arises with regard to the other part of the plaintiff's claim, namely, his enforcement of the pledge. This claim is opposed by defendant 3, the Orient Movietone Corporation Ltd. I will call this defendant, the defendant company. It says that it has a prior charge over the shares. This question of priority was the principal point argued in this case.
The defendant company also denied that the plaintiff had any pledge. As I have said, the plaintiff proved the pledge and produced the share scrips and transfers. These transfers are, however, completely blank except for the signatures of Hemmad and of a witness who attested Hemmad's signatures thereon. It does not seem to me that this condition of the transfers makes the pledge invalid and I did not understand learned counsel for the defendant company to contend seriously that it was so. It is well settled that the person, to whom share scrips and transfers in blank as to the name of the transferee and the date of the transfer are given, has the authority of the transferor to fill up these blanks. See In the matter of Benegal Silk Mills Co. Ltd.
This authority is presumed from the fact that the transferor did intend, by what he had done, to transfer the shares to the transferee or to such person as the transferee wanted, and as the transfer would not be complete in law unless these blanks were filled up, the transferee must be deemed to have been authorised by the transferor to fill up the blanks. If such is the principle, then the transferee must be deemed to have been authorised to fill up all blanks necessary to make the transfer effective in law. Further, to my mind, even if the transfers were held invalid that would not affect the question. The deposits of the share scrips themselves would be sufficient to create a pledge thereon. The transfers, if in order, would have transferred the title in the shares to the plaintiff, but a transfer of title is not necessary to create a pledge, simple delivery of possession being enough. It must, therefore, be held that the plaintiff became a pledgee of the shares in or about November 1947.
The defendant company then says that, even if the shares had been pledged to the plaintiff in November 1947, it held a prior charge thereon. Its case is that, under an agreement between it and Pandit Shirali & Co., it had advanced large sums of moneys to the latter in connection with the exploitation of certain cinematographic films. It is stated that in February 1949 a sum of Rs. 61,095-13-9 was due to the defendant company from Pandit Shirali & Co. under this agreement. It is further stated that, upon the defendant company pressing for payment of this sum, Hemmad interceded and guaranteed repayment of the moneys.
According to the defendant company, upon such guarantee and upon Hemmad pledging with the defendant company the shares mentioned above, it gave Pandit Shirali & Co. a year's time to pay. These facts, excepting the actual pledge, were established in evidence. It will be remembered that the share scrips were lying with the plaintiff and had not admittedly been delivered to the defendant company. The verbal evidence and the minutes of the directors' meeting of the defendant company show that there was only an agreement by Hemmad to pledge the shares but no actual pledge. Such agreement to pay, to my mind, is of no avail. It does not result in an actual pledge as the scrips were not delivered in terms of the agreement. There is no evidence of any agreement creating a charge on the shares without a pledge. The result is that the defendant company cannot establish that in February, 1949, it acquired any right to the shares which would have been binding on the plaintiff. It is also clear that, even if it had acquired any rights then, such rights must, on the facts proved, have been of a kind which would have ranked in priority after the pledge in the plaintiff's favour because the plaintiff's rights accrued earlier and no equity has been established entitling the defendant company to supersede the plaintiff.
The defendant company then contends that it has, in any event, a lien on the shares under Article 39 of its articles of association. That article is in these terms:
"The company shall have a first and paramount lien upon all the shares registered in the name of each member (whether solely or jointly with others) and upon the proceeds of sale thereof for his debts, liabilities, and engagements, solely or jointly with any other person to or with the company, whether the period for the payment, fulfilment, or discharge thereof shall have actually arrived or not and no equitable interest in any share shall be created except upon the footing and condition that clause 16 hereof is to have full effect. And such lien shall extend to all dividends from time to time declared in respect of such shares. Unless otherwise agreed the registration of a transfer of shares shall operate as a waiver of the company's lien, if any, on such shares."
On behalf of the plaintiff it is said that, the debts, engagements and liabilities mentioned in Article 39 were those arising out of the company relationship and did not include those arising out of an independent transaction, e.g., the guarantee in the present case. The binding force of an article arises from Section 21(1) of the Companies Act. That section states:
"The memorandum and articles shall, when registered, bind the company and the members thereof to the same extent as if they respectively had been signed by each member and contained a covenant on the part of each member, his heirs and legal representatives, to observe all the provisions of the memorandum and of the articles, subject to the provisions of this Act."
In Hanutmal Boid v. Khusiram Benarsilal, Das J. had to consider how far an article of a company, providing in very wide terms for reference to arbitration of disputes between the members inter se, constituted an arbitration agreement between them on which an application for stay under the Arbitration Act could be based. He there held:
"The contractual force
given to the articles by Section 21(1) is, by judicial decisions, limited to
matters arising out of the company relationship of the members as members. The
statutory result does not extend beyond that and does not convert the articles
into a contract or covenant in reference to rights entirely outside the company
relationship and does not affect or regulate the rights arising out of a
commercial contract with which other members have no cencern."
I am asked to apply this decision and hold that the statute does not give a contractual force to Article 39 so as to include within it the debt due to the defendant company from Hemmad on the guarantee, on the ground that that is a commercial transaction outside the company relationship.
The judicial decisions on which Das J. based his view are decisions of English Courts on the corresponding section of the English Companies Act which is in the same terms as the section in the Indian statute. The extent of the contractual force given to the articles by the statute has always been and still is a question which cannot be regarded as fully settled. This is recognised in those judicial decisions themselves. One of the authorities, which Das J. called to his aid, is a passage in Halsbury's Laws of England (1932 Edition), Vol. V, Article 256, at p. 142. That passage, as in the case before Das J., is concerned with the binding force of the articles as a contract between the members inter se. I am concerned with the binding force of the articles as between a member and the company. This position is considered in Article 255 at p. 140 of the volume in Halsbury's Laws of England already referred. It is there stated:
"The articles constitute a contract between the company and a member in respect of his rights and liabilities as a shareholder, and the company may sue a member and a member may sue a company to enforce and restrain breaches of the regulations contained in the articles dealing with such matters."
It would not be wrong to presume from the reasoning employed by Das J. that he would have expressed his agreement with this statement of the law, if he had to consider a case between the company and a member. The question is, what are "rights and liabilities as a shareholder?" Can it be said that the debt of Hemmad on the guarantee is as a shareholder? I think, it can. In Bradford Banking Co. Ltd. v. Briggs Son & Co. Ltd., a similar decision was arrived at. That is one of the cases on which the statement of law read from Halsbury is based. One Easby held some shares in Briggs Son & Co. Ltd. The articles of Briggs Son & Co. Ltd., contained a provision, being Article 103, similar to Article 39 in the defendant company's articles before me. Briggs Son & Co. Ltd., carried on business as coal proprietor while Easby was a coal merchant. Easby purchased coal from Biggs Son & Co. Ltd., and became indebted to it for the price of coal purchased. It was held by the House of Lords that Briggs Son & Co. Ltd., had a lien on Easby's shares of the amount due to it from Easby Lord Blackburn in his speech put the position in these words at pages 33-34:
"John Faint Easby, a coal merchant, became a proprietor of a number of shares in the respondent company, and obtained certificates for them. This property in the shares was, by virtue of the 16th section of the Act already quoted, I think, bound to the company as much as if he had (at the time he became holder of these shares) executed a covenant to the company in the same terms as Article 103, but I do not think it was bound any further.
John Faint Easby filed a petition for liquidation on the 31st on December, 1883, being then indebted to the company. He had been a customer of the respondent company, and owed them a considerable sum at that date. He still continued the registed holder of the shares, and, if there had been no more in the case, it is not now at least disputed that the respondent company would have had a first lien on the shares."
It is impossible to find any distinction between the debt that Easby owed to Briggs Son & Co. Ltd., and the debt that, in the case before me, Hemmad owes to the defendant company. I, therefore, come to the conclusion that the defendant company has, by virtue of Article 39, a lien on Hemmad's shares for the debt due to it from him on the guarantee.
I have already said that the shares were pledged to the plaintiff in or about November 1947 and Hemmad's guarantee to the defendant company was in February 1949. The question then arises, who has the priority, the defendant company under its lien or the plaintiff under its pledge? On this point Bradford Banking Co. Ltd. v. Briggs Son & Co. Ltd., is again an authority. There Easby had pledged the shares with the Bradford Banking Co. Ltd. as security for the balance due and to become due on his current account with the banking company. The banking company had given notice of the pledge to Briggs Son and Co. Ltd., who replied that Easby was indebted to them and, under their articles, they had a first and paramount lien on the shares. A question arose as to who had the priority and it was held that Briggs Son & Co. Ltd. had priority in respect of the money that had become due to it before the Bradford Banking Co. Ltd. had given notice of the pledge but not in respect of the moneys that became due to it subsequent to the notice. It was held that the service of the notice decided the question of priority. Lord Blackburn put the matter thus at page 36:
"The first mortgagee is entitled to act on the supposition that the pledgor who was the owner of the whole property when he executed the first mortgage continued so, and that there has been no such second mortgage or pledge until he has notice of something to shew him that there has been such a second mortgage, but as soon as he is aware that the property on which he is entitled to rely has ceased so far to belong to the debtor, he cannot make a new advance in priority to that of which he has notice. As Lord Campbell says, 'the hardship upon the bankers from this view of the subject at once vanishes, when we consider that the security of the first mortgage is not impaired without notice of a second.' "
The position then, applying the same principle here, is that, the security created by the lien in favour of the defendant company is not impaired till it had notice of another security created on the same shares. Now, the security created by the lien, it has to be remembered, is in respect of moneys due in present or to become due in future. This is what Article 39 provides. In the present case it does not appear that any notice was given by the plaintiff to the defendant company of the pledge in his favour. It follows that the lien in favour of the defendant company was never impaired and covered all moneys due by Hemmad under the guarantee whether they became so due before or after the pledge to the plaintiff.
It was then said that notice of the pledge had been given to one of the directors of the defendant company. No such notice was, however, pleaded and no issue was raised as to whether any such notice had been given. And naturally, no evidence was led on the question. It is, therefore, not open to the plaintiff to rely on any notice. Further more, I do not think that the defendant company had in fact any notice of the pledge to the plaintiff. It is said that Hemmad himself, was a director of the defendant company and as he knew of the pledge, having himself made it, the defendant company must also be deemed to have known of it, for a director is an agent of the company and notice to an agent is notice to the principal. It is said that it was so held in In the matter of Union Indian Sugar Mills Co. Ltd.
In that case it appeared that one Debi Dutt was a director of the company and held under its articles "all powers exercisable by the directors" in the management of the company's affairs. The company had under its articles a lien on the shares held by Debi Dutt. But Debi Dutt pledged the shares with another person to secure advances received by him from that person. The question arose, whether the lien or the pledge had the priority. It was held, following Rainford v. James Keith & Blackwan & Co. Ltd., that notice to the directors even in their personal capacity was notice to the company. It was also held that as the director was the agent of the company notice to him was notice to the company and the only exception was where the agent was acting in fraud of the principal. With regard to the last proposition, I think, it states the law too broadly.
The correct proposition may be gathered from Bowstead on Agency (10th Edn.) Article 110, page 222, and it is that knowledge acquired by an agent otherwise than in the course of his employment on the principal's behalf is not imputed to the principal. In pledging the shares to the plaintiff, Hemmad was not obviously acting as the director of the defendant company and his knowledge of the pledge was, therefore, not the knowledge of the defendant company. Now, coming to Rainford v. James etc., Co. Ltd., on which also the Allahabad case is based, it appears that the rules of a company provided that no transfer of shares would be effected without the production of the scrips. Notwithstanding this, however, the directors allowed a transfer of certain shares to be registered without the scrips being produced, relying on a statement of the transferor that the shares were lying with a friend but not as security. Under the terms of the arrangement relating to the registration of the transfer, the price of the shares was paid by the transferee, not to the transferor but to the company in reduction of the transferor's liability to it. The arrangement had in reality been made for the benefit of the company. The shares had, however, been actually pledged by the transferor to another person, who thereafter produced the scrips and the transfer deed signed by the pledgor and asked the company to register a transfer in his favour. The company refused. The pledgee then brought an action claiming relief for the wrongful registration of the transfer by the company and was held entitled to recover the price of the shares from the company. It was said that the transferor's statement that the shares were lying with another person put the company on enquiry about the right of that person in the shares and the company was affected with notice that that person might have a charge on the shares. Furthermore, it appeared that the directors of the company, who were in charge of making the arrangement allowing the registration for the transfer in favour of the first transferee and the appropriation of the price paid by him towards the company's dues from the transferor, had in fact notice of the pledge. As the notice was received by the directors while acting as directors, that is to say, in the course of their employment under the company, the company, it was held, must be deemed to have notice of the pledge. The matter was put in this way by Stirling L.J. at page 161:
"Where the company in which the shares are held sees fit to deal with the shares for its own benefit, then that company is liable to be affected with notice of the interest of a third party, and is affected with such notice if it is brought home to the agents who managed the transaction on its behalf."
On these grounds the company was made to refund the price of the shares appropriated by it, to the pledgee. This case, therefore, turned on the fact that those who made the bargain on behalf of the company, had notice of the plaintiff's rights. When, in making the bargain, they acted as agents of the company and had notice of the plaintiff's rights, the notice must, of course, be imputed to the company.
The facts in the present case are different. The agreement of guarantee by Hemmad was made on behalf of the company by its directors other than Hemmad. Such directors had no knowledge of the pledge by Hemmad and Hemmad's knowledge of the pledge cannot be imputed to the defendant company, for such knowledge was not received by Hemmad as agent of the company. In making the pledge he was in fact acting for himself and not the company. The Allahabad case may be justified by reason of the special provision in the articles of the company there concerned, making Debi Dutt, in substance, the sole director of the company. In the case before me there is no such provision. I am unable, therefore, to agree that In re Union Indian Sugar Mills Co. Ltd., covers the present case.
It was then said that the defendant company had waived its lien because it entered into the agreement for pledge with Hemmad in February, 1949. Rajib Nath v. Chota Nagpur Banking Association Ltd. was cited as an authority for this contention. There, the defendant bank had an article substantially the same as Article 39 before me. The bank brought a suit against one of its shareholders for a debt due to it and obtained a money decree and in execution thereof the shares of the debtor were put to sale expressly stating that they would be sold free of incumbrance and itself purchased the same. The bank then realised that such a purchase would be bad, as it would result in reduction of its share capital without an order in that behalf from the court under Section 55(1), Companies Act. It thereupon allowed the shares to stand in the debtor's name and subsequently purported to sell them in the exercise of its lien under the articles, to some of its directors. The debtor's heirs having sued to set aside the sale, the suit was allowed. One of the grounds of the decision was that the bank's conduct in the previous suit, amounted to a waiver of the lien upon which it could not afterwards rely. The learned Judges based their decision on a passage in Halsbury's Laws of England (Hailsham Edition) Article 738 page 584 and two cases cited in support of that passage. The passage states that a lien is waived or destroyed where a party claims to retain goods on grounds different from those on which he rests his claim for lien and makes no mention of the lien. This statement of the law is clearly meant to apply to possessory liens and not to a non-possessory lien created by contract giving rise to an equitable charge, as was the case before the learned Judges of the Patna High Court and as is the case before me. I am unable, therefore, to hold that that case decides the question in the case in hand.
There is no doubt, however, that a contractual lien may also be waived. The question is, was there such a waiver in the present case. The law as to waiver of a contractual right may now be set out from Halsbury's Laws of England (Hailsham Edn.) Vol. VII, Article 285 page 204.
"A contract may be discharged either wholly or in part, before there has been any breach of it, by a waiver of the right to insist upon its performance. Waiver is based on fresh contract or estoppel. Where, for instance, one party consents at the request of the other to extend the time for performance or to accept performance in a different mode from that contracted for………if the new arrangement is in fact carried out, the obligation of the other party under the contract is discharged to the extent to which the promisee has waived his rights."
It is true that if a person having a contractual lien creating an equitable charge in his favour accepts a pledge of the goods over which he has the lien, the lien disappears by waiver, for the pledge is a higher security than the equitable charge and the acceptance of it implies an intention to give up the lower security. As is stated in the passage just read from Halsbury, in order to have this effect the pledge must have been created, or to put it in the language of that passage, "the new arrangement must in fact be carried out." Now, in the present case there was only an agreement to pledge which had never been carried out. The pledge had never in fact been made in terms of the agreement to make it. It cannot be said that a mere agreement to take a pledge amounts to a waiver of the existing lien. There is in such a case no executed contract giving up the lien nor any conduct creating an estoppel against the exercise of the rights under the lien. In the Patna case there may have been waiver because an order for sale had actually been made expressly providing that the sale would be without any incumbrance. I am, therefore, unable to hold that, in the case in hand, the defendant company had waived its lien.
There will, in the result, be a decree for Rs. 43,000 with interest on judgment and costs against defendants 1 and 2. Such costs are certified for two counsel.
There will be a declaration that the plaintiff is a pledgee of the shares mentioned in the plaint but such pledge will rank in priority after the lien thereon in favour of defendant 3. The plaintiff will pay the costs of this suit of defendant 3.
There will be an order that the shares may be sold by the Official Receiver of this court and out of the sale proceeds defendant 3 will be paid the sum of Rs. 42,435-0-11. After payment of this sum to defendant 3 if there is any balance left that will be paid to the plaintiff in pro tanto satisfaction of the decree made in his favour against defendants 1 and 2.
[1931] 1 Comp Cas 206 (BOM.)
HIGH COURT OF
v.
B.N. Lang
Marten, C.J.
and Kemp, J.
February 27, 1927
Jinnah and Mulla for the Appellant.
Kanga and B.J. Desai for the Respondent.
Marten, C.J. — This is a petition for the rectification of the company's register under s. 38 of the Indian Companies Act by entering the names of petitioners Nos. 2, 3, 4 and 5 as holders of 854, 1, 1 and 1 shares which have been transferred to them respectively. The respondents to the petition are the company and its four present directors. It is stated that the whereabouts of respondent No. 5 to the petition, Peerbhoy Adamji Peerbhoy, are now unknown, and at the hearing before Taraporewala, J., his name was struck out. He appears to have become insolvent in the year 1920, but to have subsequently obtained his discharge.
2. The petition is opposed
mainly in reliance on articles 21, 23, 30 and 31 of the articles of
association. It is alleged that by virtue of articles 21, 23 and 30 the Board
are entitled to refuse the registration, as the company has a paramount lien
upon the shares in question for moneys due to it from the registered holders of
the shares. Alternatively, it is contended in reliance on article 34 that the
board may refuse to register a transfer without giving any reason, if they
disapprove of the proposed transferee.
3. Mr. Justice
Taraporewala decided the case in favour of the petitioners, and ordered the
rectification to be made. The company now appeals.
4. In our judgments of
August 16 and 26, 1926, we have
explained the circumstances under which we have no formal judgment of the
learned Judge setting out his reasons. We have, however, a transcript of the
notes which he dictated to his shorthand clerk. These notes were never signed,
but they will be found at p. 56 of the appeal paper book, and I will refer to
them as the provisional judgment.
5. The main facts are set out in the provisional judgment and in the judgment of my brother Kemp which I have had the advantage of reading. I need not, therefore, recapitulate them. The position, shortly, stated is this. The company was incorporated about the year 1908, and its share capital consists of 2,000 shares of Rs. 500 each, fully paid. The shareholders were Sir Adamji Peerbhoy and his six sons. The balance-sheets, Exhibit E, show that in January 1911, January 1912, and March 1913 they each held 285 shares with the exception of Abdul Husein Adamji Peerbhoy who held 290 shares. They were also the directors of the company as is shown by article 97 of the articles of association. The balance-sheets for the year ending June 1912 and June 1913 are signed by the six sons as directors, but Sir Adamji's signature does not appear. In addition, it appears that Sir Adamji and his six sons were a partnership firm carrying on business in the name of Adamji Peerbhoy & Sons. By clause 3 (s) of the memorandum of association, one of the objects of the company was expressed to be to appoint this firm to be the agents of the company. By the agreement, Schedule B to the articles of association, this firm were appointed the managing agents of the company and were given very wide powers. Clause 3 provided that "subject to the control of the directors the said firm shall have the general conduct and management of the business and affairs of the company." Then, after giving several specific powers the clause gave power to the firm "generally to make all such arrangements and do all such acts and things on behalf of the company, its successors and assigns as may be necessary or expedient and as are not specifically reserved to be done by the directors."
6. As the directors were also the agents of
the company, the supervision of the directors was only nominal. Substantially,
therefore, and unfortunately as is frequently the case in
7. As regards Sir Adamji and his six sons, Sir Adamji died in 1913 and Abdul Husein in 1918. The five remaining sons have become insolvent. I have already dealt with Peerbhoy Adamji. The remaining four, viz., Mahomedalli, Karimbhoy, Ebrahim, and Allibhoy became insolvent in 1924, and all their estate and effects became vested in the first petitioner, the Official Assignee. Of the 1990 shares mortgaged to Sir Shapurji, these four sons had each held 284 shares, making in all 1136. Of these 1136 shares, 1134 have been transferred to the name of the Official Assignee with the consent of Mr. Dinshaw as mortgagee and the remaining two have been transferred to the names of Mr. Dinshaw and Mr. N.M. Raiji. Apart, then, from these 1136 shares, there are still 854 shares out of the original 1990 mortgaged. It is these 854 shares which have been transferred to Mr. Dinshaw and which are now asked by prayer (a) of the petition to be registered. The remaining three transfers which are sought to be registered are of one share each to Mr. Daji, Mr. A.H. Wadia, and Mr. S.S. Balsekar, by the Official Assignee at the request of Mr. Dinshaw.
8. The present position then is that Mr. Dinshaw, as mortgagee of the 1990 shares, is the person primarily interested in the company. The equity of redemption in those 1990 shares is alleged to be of remote or little value, and even then it is vested as to 1136 shares in the Official Assignee. The remaining ten shares appear to have been retained by the Adamji Peerbhoy family in order to provide the necessary director's qualification of one share each under article 99. It appears that prior to their insolvencies in 1924, the four sons, Mahomedali, Karimbhoy, Ebrahim, and Allibhoy, appointed the four present directors in their place, and transferred to them one share each. They are said to be merely the nominees of the old directors, as are also the remaining shareholders set out in para. 13 of the petition, other than those represented by Mr. Dinshaw and the Official Assignee and their nominees.
9. The present position, therefore, is that out of the fourteen registered shareholders, three are dead, viz., Sir Adamji and his sons Abdul Husein and Hassanali Sullemanji; and the whereabouts of another son Peerbhoy are not known. That leaves ten shareholders, of whom three are Mr. Dinshaw, Mr. Raiji and the Official Assignee, the remaining seven are alleged to be the nominees of the old directors. The allegation of the petitioners further is that the refusal of the present directors to register the transfers in question is not bona fide but is made with the ulterior object of preventing Mr. Dinshaw from enforcing his rights as a mortgagee. Further, with the present number of shareholders, Mr. Dinshaw cannot be sure of a quorum under article 74, and so cannot pass any resolution for removing the present directors. Accordingly, the result of the present litigation may affect the future control of the company.
10. Next, as regards the indebtedness to the company on which the respondents relied, it appears from the accounts, Exhibit H, that the agency firm of Adamji Peerbhoy and Sons had an account with the company and that they were in debt to the company at the date of the agreement of mortgage to Sir Shapuriji Broacha. On the other hand, that debit was wiped out by subsequent credits, and in particular by a credit item on March 1, 1914, of Rs. 1,02,500. Consequently, although the agency firm remained indebted to the company it was in respect of items occurring after the date of that agreement, having regard to the rule in Clayton's case (See Deeley) v. Lloyds Bank, Limited. It is also material to observe that if Mr. Dinshaw as mortgagee was entitled to hold 199/200ths of the company's share capital, then, even if any money was recovered by the company in respect of the debt owing by the agency firm, it would in effect only go as to 199/200ths to Mr. Dinshaw subject to a due declaration of dividend.
11. As regards the refusal to register the transferee, I may clear the ground by saying that no suggestion is made on personal grounds against the proposed transferees. It is not suggested that they are not respectable and responsible persons; and indeed Mr. Dinshaw is already a registered shareholder. In the correspondence prior to these proceedings, the only reference to any reason for the refusal is that contained in the chairman's letter of October 7, 1925, in which he refers the applicants to article 31 of the articles of association. In his affidavit, in answer to the petition, the chairman, Mr. Bhave, who is respondent No. 2 to the petition and a vakil for the Peerbhoy family, states as follows:—
"With reference to paras. 14 and 15 of the said petition, I say that the company is perfectly justified in refusing to transfer the shares as that would have amounted to a waiver of the lien which the company has thereon. The reference to article 31 of the articles of association was a mistake for article 30." Neither he nor any of the other directors went into the witness box on the hearing of the petition. And accordingly I would start on the basis that the reference in the letter of October 7, 1925, to article 31 was a mistake, and that article 30 was the article under which the directors purported to act.
12. Turning, then, to article 30, I am unable to accept the contention of the company that this article should be read by itself. I think that articles 21, 23 and 30 must be read together, and that the transferee must show that he has a superior right or equity to that possessed by the company in respect of the debt due to it. Consequently, as stated in the provisional judgment of Mr. Justice Taraporewala, it has been held in Bradford Banking Company v. Briggs that where the articles of association of a company provided that the company should have a first and paramount lien and charge, available at law and in equity, upon every share for all debts due from the holder thereof, the company could not, in respect of moneys which become due from the shareholders to the company after notice of the deposit with the bank, claim priority over advances by the bank made after such notice, and that the principle of Hopkinson v. Rolt applied. And the judgment of Sir George Jessel in In re Stockton Malleable Iron Company may also be referred to in this connection.
13. It was contended that the present case is distinguishable because the present articles have been altered to meet the above decision. But in Mackereth v. Wigan Coal and Iron Company Limited Mr. Justice Peterson had to consider a case where articles 9 and 12 of the articles of association closely resembled article 23 and the first portion of article 21 in the present case. There it was held that articles of that nature do not protect a company which in the face of notice that a shareholder is not the beneficial owner of the share, makes advances or gives credit to the shareholder, and that consequently the company was wrong in asserting a lien. The argument of counsel (Mr. Tomlin, K.C., as he then was) is, I think, useful to refer to. There, after referring to s. 27 of the English Companies Act, 1908, which corresponds to s. 33 of the Indian Companies Act, 1913, he states (p. 298):—
"That section and articles of association to the articles of this company material to this case have been the subject of legal decisions, and the result of those decisions is that in disputes between third parties as to their rights inter se to shares, a company is not to be put in any worse position by reason of the fiduciary character of the registered holders, but in disputes between the company and other persons the company is subject to the ordinary rules of law and equity. The section and the articles have for their scope the regulation of the rights and duties of the company, but they have no connection with or reference to ordinary trading debts. In the present case the debt was incurred after the company had notice that the shares were held by executors and trustees. The principle of Bradford Banking Co. v. Briggs & Co. (supra p. 213) is directly applicable here. It is not sought to affect the defendant company with a trust, but when the company gave credit to James Hodgson in the course of ordinary trading it knew that these shares were not his property and it cannot in good conscience pay his personal debt out of it."
14. That argument was in effect accepted by Mr. Justice Peterson, who refers to the decision in Bradford Banking Company's case as follows (p. 302):—
"The effect of this decision is briefly stated by Stirling, L.J., in Rainford v. James Keith and Blackman Co. in these words: "Where the company in which the shares are held sees fit to deal with the shares for its own benefit, then that company is liable to be affected with notice of the interest of a third party."
15. So, here if the company thought fit to
deal with the agency firm and for that purpose to treat as security the shares
which the partners held in the company, then in my judgment the company would
be liable to the ordinary law of the land as regards further advances made
after notice, in accordance with the principles laid down in the Bradford
Banking Company's case. I recognise that if this was a case of immovable property,
we should be governed by ss. 79 and 80 of the Transfer of Property Act. See
Imperial Bank of
"It appears to me that the 16th is a mere supplement to the 7th, that is, they refer to the same thing. It is not to be supposed, as far as I can see, that they are independent articles in the sense that the members whose shares can be dealt with under the 7th are different from the members whose shares can be dealt with under the 16th. It would be monstrous if it were so. It appears to me that the 16th is a security for the 7th, so to say."
Then lower down he says (p. 103):—
"Then, as I read the 16th article, it is that they may decline to register that for which they have a lien under the 7th article. The 16th article says they may decline to register any transfer of shares by a man who is indebted to them. Why may they decline to register ? Because they have a lien. That seems to me the only reason why they may decline to register……… But is it reasonable to suppose the company intend to fetter a transfer when they have no lien ?"
16. In Palmer's Company Precedents, 12th Edn., published in 1922, Part I, Articles 14 and 30, at pp. 624 and 636, a further attempt appears to have been made to frame articles to get round the above decisions. But a comparison of those articles with those we have here will show that they are framed in very different terms and that incidentally they recognise the power of the Court to make an order as regards equitable rights.
17. If then the principle of the Bradford Banking Company's case is applicable here, as in my judgment it is, then, as the present indebtedness by the shareholders to the company arose after their agreement of mortgage in favour of Sir Shapurji Broacha, the question arises whether the company had notice of that agreement. In this respect the company relies on s. 229 of the Indian Contract Act, and on In re Hampshire Land Company and David Payne & Co., Limited, In re Young v. David Payne & Co., Limited to show that the knowledge of the directors, is not necessarily the knowledge of the company. That general principle may be conceded. On the other hand, if it is the duty of the director to disclose his knowledge to the company then that knowledge may be attributed to the company, as is shown in the above cases. Black burn, Low & Co. v. Vigors may also be referred to as showing the care required in imputing to a principal the knowledge of his agent. There the insurers of an overdue ship were held not to be affected by information acquired by their brokers but not communicated to them.
18. It is true that here no formal notice was given to the company as such by Sir Shapurji Broacha. But a limited liability company being merely a legal entity can only act by the agency of living persons. In the present case the only possible living persons were Sir Adamji Peerbhoy and his six sons, for they were the sole directors, agents and shareholders as well also as the only mortgagors of the 1990 shares. If then one regards the company as a separate legal entity, I think it was the duty of the agents of the company to bring to its notice the fact that they had already mortgaged the shares in respect of which the company was proposing to make new advances in respect of fresh transactions between itself and the agency firm. For instance, supposing the mortgagor had been beem some third party X, and the agents in their capacity as such knew that X had mortgaged the shares to some bank, then surely it would be the duty of the agents to tell the company of this mortgage before they caused the company to advance moneys to X in reliance in part on the security of these shares. If that is so, then, a fortiori, this would be the duty of the agents where they themselves were the borrowers.
19. There is also the additional circumstance here, as pointed out by Mr. Justice Taraporewala, that under clause 7 of the agreement. Exhibit I, the managing agents had agreed to procure the company itself to execute a mortgage of its property as security for the loan to them, and that they had there fore in this way agreed co give the company express notice of the agreement in question. In my judgment then, the company must be taken to have had notice of this agreement prior to the dates of the advances now relied on by the company.
20. It was next said that this was not a matter which could be determined under s. 38 of the Indian Companies Act and that the petitioners should be left to a separate suit, more especially as Mr. Dinshaw had threatened a suit to enforce his lien. But s. 38 is widely worded. At the most it is a matter of discretion for the Court whether in any particular case it will hear the petition or leave the parties to a separate suit. An express issue was raised on this point, and the learned Judge exercised his discretion by deciding to hear this petition. Under those circumstances, we do not think we ought to overrule him, and force the parties to begin de novo. Mr. Dinshaw's explanation as to why he did not bring a separate suit was because it would in effect be carried on at his own expense. There is the additional circumstance that a petition under s. 38 would be a speedier and cheaper process than an ordinary suit.
21. Nor do I think it essential under all the circumstances of the case that we should have before us all such shareholders as are not already parties to this petition. As regards the mortgagors or the representatives of the deceased mortgagors, it is not for them as mortgagors to oppose the mortgagee perfecting the security which they gave him, and which incidentally contemplated the transfers of the shares to the mortgagee and indeed gave a power of attorney, Exhibit C, for that purpose. Nor is there any suggestion that this mortgage has been repudiated. On the contrary, in pursuance of the agreement of March 9, 1912, formal mortgages of certain properties were granted to Sir Shapurji Broacha, and Exhibits L, O and K deal with certain subsequent transactions from 1922 to 1924 in connection therewith.
22. I would, therefore, hold that the petitioners are en titled to have their transfers registered despite articles 21, 23 and 30.
23. Next, turning to the alternative claim of the company, I have already pointed out that according to the affidavit of the chairman, the reference to article 31 was a mistake, and that the board were entitled to refuse a transfer because otherwise they would lose their lien under article 30. On that basis, therefore, it would appear that the board never exercised their powers under article 31 at all. If that is so, then the sub mission by the chairman in para. 19 of his affidavit that the directors have this right under article 31 would not be sufficient to justify their past action if in fact they did not act under article 31. Accordingly, it may well be that, as stated in the provisional judgment, this point was not pressed much before Mr. Justice Taraporewala by the company. In my judgment, then, the true view is that article 31 cannot now be relied on as the directors in fact did not act under it.
24. But even if they did, the company has yet another difficulty to face, viz., that their decision was not bona fide. The law on this point has been concisely stated by Lord Atkinson in Weinberger v. Inglis as follows (p. 626):—
……"Assuming that the Committee in this matter of reelection of a former member of the Stock Exchange stands in a position analogous to that of directors refusing to consent to the assignment by a shareholder of his shares to a transferee, what are the principles established by these last-mentioned authorities ? They are, it appears to me, the following : First, that directors refusing to consent to the transfer are not bound to state their reasons for so refusing. Second, that if they do not state their reasons it must, in the absence of all evidence to the contrary, be assumed that they have acted bona fide and honestly for the furtherance, in their belief, of the interests they were bound to protect: and thirdly, that in order to vitiate the exercise of their powers it must be shown by evidence that their action was arbitrary and capricious."
Or, as it is put in In re Gresham Life Assurance Society, Ex parte Penny by Lord Justice James (p. 419):—
"But in order to interfere……it must be made out that the directors have been acting from some improper motive, or arbitrarily and capriciously."
25. In the present case the chairman has stated the directors' reasons, namely, that they were justified in refusing the transfer of shares because that would amount to a waiver of the lien the company had thereon. It was not contended at the bar that that opinion was correct in law and it may be pointed out that in registering the transfer of the 1134 shares into the name of the Official Assignee, the directors wrote at the same time stating that this was without prejudice to the company's lien claimed on those shares. The only reason given, therefore, appears to depend on articles 21, 23 and 30 and not on article 31. They do not say in their resolutions or correspondence that they do not approve of the proposed transferees. They merely decline to register the transfers. The resolution, Exhibit No. 1, and the letter of September 21, 1925, for instance, merely state that the transfers are refused. The resolution of October 2, 1925, appeal Exhibit AA, is to the like effect. The position then appears to be this. If the company had a valid paramount lien they were entitled to refuse registration under articles 21, 23 and 30. If they had not such a lien they had nothing to waive. I need not, therefore, decide the question whether registration would effect a waiver of a prior lien. I notice, however, that in article 30 of Palmer's Company Precedents, 12th Edition, Part 1, at p. 636, a new proviso has been added to the effect that registration does effect a waiver in the absence of agreement to the contrary. But that proviso is not in the articles of association which we have to deal with here. Even, however, if it should be held that the directors have not stated their reasons, it is still open to the petitioners to show that their action was arbitrary and capricious, and should therefore be overruled by the Court. The onus is, I agree, strongly on the petitioners to prove this, but under all the circumstances of the case they have, in my opinion, discharged the onus.
26. The only suggestions put forward to us for thus defeating the rights of the holders of 199-200ths of the share capital is that thereby the interest of the holders of the remaining 1-200th might be protected ; and that Mr. Dinshaw was objected to because he was a mortgagee. I do not think that any reasonable and fair-minded directors would accept either suggestion. If these other few shareholders who are not actually before us are in some way to be damnified by the proposed registration, then I take it would still be open to them by proper proceedings to enforce their rights. But so far they have not done so, and, as at present advised, the damage to them, if any, would seem to be lacking in substance. On the evidence before us I have no doubt in my own mind that the present directors are the mere nominees of the Peerbhoy family and that the attitude they have adopted is not one in the interest of the company and its shareholders as a whole, but is one mainly with a view to defeat and delay the legitimate claims of the mortgagee and the Official Assignee. Consequently, in my judgment, they have acted from an improper motive, and also arbitrarily and capriciously within the test laid down in the above two cases. In re Coalport China Company and Bede Steam Shiping Company, Limited, In re are other cases in point.
27. In the result, therefore, I agree with the conclusion arrived at by the learned trial Judge. I also agree in sub stance with the facts and reasons as stated in his provisional judgment. Under these circumstances, it follows that in my judgment this appeal ought to be dismissed with costs.
28. I may add in conclusion that I regret the delay in delivering this judgment. It was due in part to certain heavy litigation arising under clause 12 of the Letters Patent to which Mr. Dinshaw was again a party, and which has only recently been concluded. But I am glad to say that now there is no judgment in this appellate Court which still awaits to be delivered.
Per Curiam. — Our order will be :
Appeal dismissed with costs ; the registration of the shares to be effected
within four days from today peremptorily, and the relative share-certificates
to be handed over to the petitioners within the same time.
Kemp, J. — This is a petition under the Indian Companies Act for rectification of the register. The circumstances giving rise to the petition are as follows :—The company known as the Matheran Steam Light Tramway Company, Limited, was registered with a capital of Rs. ten lacs divided into 2,000 shares of Rs. 500 each. It was a family company formed and registered by the late Sir Adamji Peerbhoy and his six sons. They held all the shares in the company and the six sons were directors of the company. The firm of Sir Adamji Peerbhoy and Sons were the agents of the company. On March 9, 1912, Sir Adamji Peerbhoy and his sons borrowed from the late Sir Shapurji Broacha rupees seven and a half lacs on the security of various immovable properties and on further security of 1990 shares in the company. The remaining 10 shares remained with Sir Adamji Peerbhoy and his sons to enable them to have the necessary qualifications as directors. The mortgagors handed over to Sir Shapurji certificates of the said 1990 shares with a power of attorney to execute transfers in favour of Sir Shapurji or any one on his behalf. Here it may be mentioned that by an agreement of even date, Rs. 50,000 were to be advanced to the company and by clause 7 of the agreement between Sir Adamji Peerbhoy and his sons and Sir Shapurji the borrowers undertook to execute a legal and proper mortgage of their property as well for the loan of rupees seven and a half lacs as for the loan of Rs. 50,000 to be made to the company. The second petitioner, Mr. F.E. Dinshaw, is the person in whom the right to the said loan and to the said securities is now vested. On March 9, 1924, Rs. 5,06,259-1-3 were due in respect of the loan and further interest from March 9, 1924. On February 19, 1925, by a deed of consolidation of the mortgage, the sum of rupees seven and a half lacs and other loans and all securities in respect of the same, were consolidated as one single debt and the amount due to the petitioner now exceeds twelve and a half lacs. Prior to March 9, 1912, Sir Adamji Peerbhoy & Sons had borrowed various sums of money from the company. They continued to borrow money after March 9, 1912, and by the application of the rule in Clayton's case the amounts in the accounts of the firm with the company prior to March 9, 1912, were paid off and a sum of rupees three lacs can be taken as having been advanced after March 9, 1912.
Sir Adamji died in 1913. His son Abdulhusein died in 1918. Peerbhoy became insolvent in 1920 but obtained his discharge. The other four sons became insolvent in 1924. Their estate vested in the Official Assignee. Before insolvency they nominated respondents Nos. 2 to 5 as new directors in their place. Respondent No. 5, it is to be noted, is the son Peerbhoy who had been insolvent in 1920. The result, therefore, is that whilst Mr. Dinshaw took no steps under the equitable mortgage, the equity of redemption so far as the sons Mahomedali, Karimbhoy, Ibrahim and Alibhoy are concerned, is vested in the Official Assignee. The 1990 shares, which were the subject-matter of the collateral security to Sir Shapurji, was made up of 1984 shares standing in the names of Sir Adamji and each of his six sons. In 1923 out of the 284 shares standing in the name of Mahomedali, one share was transferred into the name of Mr. F.E. Dinshaw and one share into the name of N.M. Raiji. It thus appeared that at the date of the petition, the situation in the company's register was as stated in paragraph 13 of the petition. Nos. 7 and 8 in that paragraph are the grandsons of Sir Adamji. Nos. 1 and 2 are dead. No. 3's whereabouts are said to be unknown. No. 4 is a grandson of Adamji, and the Official Assignee is on the register for 1,134 shares. He came on the register when the directors became insolvent. On August 28, 1925, Mr. Lang transferred 3 shares, one share each to Mr. Dinshaw K. Daji, a solicitor of the firm of Messrs. Payne and Company, to Mr. A.H. Wadia the constituted attorney of Mr. Dinshaw, and to Mr. S.S. Balsekar, Mr. F.E. Dinshaw's assistant. On August 28, 1925, the directors refused to transfer the shares into their names on the register. On October 2, 1925, Mr. Dinshaw applied for transfer of the remaining 834 shares standing in his own name, but the transfer was refused. Then the petitioners, Mr. Lang and Mr. Dinshaw, sent a requisition to the directors to call a general meeting to remove the present directors. But owing to the lack of a quorum no resolution could be passed at that meeting. As a matter of fact the nominees of the old directors constitute seven of the shareholders out of the eleven living shareholders now on the register, so that it is impossible to form a quorum under article 74 of the articles of association without their assistance.
In 1924, Mr. Dinshaw had filed a suit against the mortgagors and the company, being suit No. 2581 of 1224. In this suit it was held that he was an equitable mortgagee of the 1990 shares and was entitled at any time to call for a transfer. This petition was thereafter filed under the Indian Companies Act for rectifying the register and inserting therein the names of Mr. Dinshaw and Mr. Lang.
The learned Chamber Judge, Mr. Justice Taraporewala, held that on a construction of articles 21 and 30 of the articles of association, the company, before it can refuse to register a transfer under article 30, must have a paramount lien on the shares for money due to the company. It is to be noted that the company claimed that rupees three lacs were due to them in respect of advances made after March 9, 1912.
The material articles of association are article 21 which provides for the company having a first and paramount lien on shares for moneys due to it, article 23 by which the company is not bound to recognise any interest in the shares except that of the registered holder, article 30 under which the board may refuse to register a transfer whilst the shareholder is indebted to the company, and article 31 under which the board may decline to register a transfer if the transferee is not approved, nor is it obliged to give any reason. It appears that the respondents originally relied on article 31, but in their letter of October 7, 1925, they stated that article 31 was a mistake for article 30. They have also stated this in paragraph 14 of their affidavit in reply to the petition. The issues before the Chamber Judge, therefore, embodied the two questions as to whether the company had a paramount lien and whether the Court could go behind the company's resolution of August 28, 1925.
The cases in which the claim of a company under articles similar to 21 and 30 have come up for decision lay down that the company can claim no exemption from the ordinary law with reference to priority of equitable claims where a notice of the claim has been given. As was pointed out in Mackereth v. Wigan Coal and Iron Company, Limited (supra p. 213), the object of giving such a notice is not to give notice of a trust under an article corresponding to article 23 in this case, but "only to affect the company as a trader with the knowledge of the bank's interest." In that case the bank gave the company a notice of its equitable interest. In England even under a contract for further advances, such advances are postponed to an advance made by a third person of which notice is given. In India under the Transfer of Property Act as to immovable property this may not be so, where there is a maximum for the further advances stated. But so far as movable property is concerned, the same principle would, I take it, apply in India as in England.
The other cases which have been referred to by counsel for the petitioners are In re Stockton Malleable Iron Company (supra p. 213) which shows that articles corresponding, in the present case, to articles 21 and 30 must be linked together, and Bradford Banking Company v. Briggs (supra p. 213) per Lord Blackburn at p. 36. In fact, it appears that where any question of the priority of claims in such cases is concerned, the company cannot by making advances after they have notice of an equitable claim on the share, obtain priority for its advances. Ordinarily, therefore, if the matter before us was the question to be tried in an action. I would be inclined to hold that the company in this case had no paramount lien to Mr. Dinshaw provided that the company had notice of the mortgagee's interest prior to the date of the advances made by it. But Mr. Jinnah for the directors contends that the question before the Chamber Judge was merely the directors' right to refuse to register the transfer and that in such a proceeding the question of priority of one claim over another is not gone into, but all that is determined is the right of refusing the transfer. He maintains that article 30 stands alone and must not be read with article 21 and that any indebtedness to the company is enough to justify a refusal to transfer. He says that under article 21 the company has a lien, although not necessarily a lien paramount to that of the 3 mortgagor of these shares and that is sufficient under article 30 to justify the directors refusing to transfer and he says further that the decision in Ex parte Stringer, which was a petition in Chambers, was to that effect. He says further that Mr. F.E. Dinshaw has done nothing for twelve years and that his proper remedy is by a suit in which the question of priority of the company's and the mortgagee's claim can be decided. It is to be added that Mr. F.E. Dinshaw when he applied for transfer of the 834 shares to his own name obtained transfer forms signed by the executors of the late Sir Shapurji pursuant to the power of attorney given on the occasion of the mortgage of the 1990 shares. Therefore, Mr. F.E. Dinshaw would appear to be in the position of a legal mortgagee of these shares.
The objection is at the best merely one
of procedure. In Daniel's Chancery Practice, 8th Edition, at p. 1902, it is
stated that an application for rectification of the register of shareholders
under s. 32 of the Companies (Consolidation) Act, 1908, may be made by motion
or by originating summons instituted in the matter of the Act and in the matter
of the particular company. The making of an order under the section is in the
discretion of the Court, and where there is a conflict of evidence the order
many be refused without prejudice to the applicant's right to bring an action
for rectification. In the present case there is, so far as I can see, no
conflict of evidence and the mere fact that Mr. Dinshaw has delayed making his
application to the Court is not, in my opinion one which need preclude the
Judge from passing an order. The petition in the present case is headed in the
matter of the Indian Companies Act and in the matter of the Company. Section
32(3) of the English Act provides that any question relating to the title of
any party to the application may be decided on the originating summons or
motion. Here the question has developed into one purely of title. I, therefore,
think there is nothing in this objection. On the other points in the case I
agree with the conclusions arrived at
by the Chief Justice. I would dismiss the appeal with costs.
[1957] 27 COMP. CAS. 340 (PEPSU.)
v.
Hindsons (
CHOPRA
J.
MARCH
13, 1956
CHOPRA J. - This is a petition under section 162 of
the Indian Companies Act, 1913 to wind up the Hindsons (
The issued capital
is 2,500 shares of Rs. 100 each and the capital subscribed, or credited as
paid-up, is Rs. 1,24,000 consisting of 1,240 fully paid-up shares of Rs. 100
each.
The objects of the
company were manifold ; but of them the principal one was to carry on the
business in tractors and to run a workshop by acquiring and taking over the
assets and goodwill of a private concern, known as Hindson Automobiles,
According to the
agreement with the said firm, the company, besides paying in cash for the purchase
of its assets, allotted two hundred fully paid-up shares of Rs. 100 each to
each of its four promoters for the transfer of goodwill of the firm, valued at
Rs. 80,000. The same day, viz., 1st February, 1954, two hundred fully paid-up
shares were allotted to Shri Swarn J. Singh against cash payment of Rs. 20,000
and he was co-opted as a director. The five directors were thereafter appointed
to act as the company’s working directors, on a remuneration of Rs. 500 per
month each.
In the minutes of
1st January, 1955, fifty fully paid-up shares each were allotted to Shri Sat
Pal and his brother Mr. Raj Pal and hundred such shares were allotted to their
mother Shrimati Pritam Devi, against their loan of Rs. 20,000 already advanced
to the company. In the next meeting held on 9th January, 1955, Shri Sat Pal,
who was already acting as the company’s legal adviser on a remuneration of Rs.
200 per mensem, was also co-opted as a director. This appointment of his was
confirmed in a general meeting of the shareholders of the following day.
The total number of
directors thus came to six ; five of them were the working directors. For an
year or so, the affairs went on smoothly. In the middle of January, 1955, Fateh
Chand, petitioner, started a separate business of his own dealing with
International Tractors, in the name of Bir Trading Corporation,
In view of “the
direct competitive business” started by the petitioner, his resignation was
accepted and it was further resolved that “in accordance with his desire he
should be treated as an ordinary shareholder of the company.” The change in the
directorate was duly intimated to the Registrar on 24th February, 1955.
On 29th April,
1955, the petitioner addressed a letter to the company saying that he had
resigned merely from the office of a working director and that he still
continued to be its ordinary director. The company wrote back to say that the
idea was simply an after-thought and against actual facts and that the
petitioner had ceased to be a director from the day he resigned. This
accelerated the trouble that was brewing for some time and it rose to its
climax when, on 15th May, 1955, the directors decided to hold on extraordinary
general meeting for consideration of a resolution to amend the articles in
certain matters.
One of these was to
authorise the shareholders, in an ordinary or extraordinary general meeting, to
expropriate the shares of any member or members who carried on or proposed to
carry on any competitive business. This meeting was to be held on 9th July,
1955. In the nature of things, the petitioner took it as a move to expropriate
his shares and to bring about his total exclusion from the company and its
affairs.
The present
petition was the presented on 4th July, 1955, together with an application for
an interim order to restrain the company from holding the proposed meeting on
the said date. In reply to the summons, the respondent company denied that the
proposal was meant to expropriate the petitioner and further stated that they
had already decided not to hold the meeting on 9th July. The matter was
consequently dropped and the application dismissed.
The petitioner
relied upon clause (6) of section 162 of the Companies Act, and alleges that in
view of the present state of affairs it is just and equitable that the company
should be wound up. The circumstances relied upon are :
(i) Illegal allotment of shares to Shri
Sat Pal, Shri Raj Pal and Shrimati Pritam Devi, inasmuch as the mandatory
provisions of section 105C were not complied with.
(ii)
Unwarranted and wrongful exclusion
of the petitioner from the office of a director and the subsequent attempt to
expropriate his shares.
(iii)
The number of directors was reduced
to less than four, the minimum number provided by the articles-Shri Sat Pal did
not hold the necessary qualification, and Shri Swarn J. Singh had ceased to be
a director when he was not elected in the next following annual general
meeting.
(iv)
The director were recklessly wasting
the funds of the company “with a view to harm the interest of the petitioner
and to benefit themselves.”
Mr.
Tulli, learned counsel for the petitioner, started by asserting that the
company, though a limited one, was for all practical purposes nothing more than
a “domestic and family concern.” It was turned into a limited company mainly to
take over and run the business previously carried on in partnership by its four
promoters. The directors, who form the entire body of shareholders, are
inter-related. The capital of the company is so owned as to make the company in
substance a partnership.
It is, therefore,
urged that the circumstances which justify the dissolution of a partnership,
would apply to the exercise of discretion under the just and equitable clause
and to wind up the company. State of animosity precluding all reasonable hope
of reconciliation and friendly co-operation between the partners, justifiable
lack of confidence by one in the other partners and the total exclusion of one
partner from participation in the affairs of the partnership are generally regarded
as good grounds to put an end to the partnership. The same principles, it is
stressed, ought to apply to the present case and if any of those circumstances
are found to exist, the company should be wound up.
Mr. Kapur, learned
counsel for the respondent company, has not dispute as to the principles which
apply to the dissolution of a partnership and also to their application to a
limited company which by its very nature and constitution is no more than a
partnership. Counsel, however, contends that the respondent company does not
fall under that category and that, in any case, none of the circumstances
justifying its dissolution does exist. In view of the actual facts of the case,
I am inclined to think the contention is not without force.
In re Yenidje
Tobacco Co. Ltd. is the leading authority relied upon by Mr. Tulli in this
connexion. There, only two persons agreed to amalgamate their private business
and form a private limited company. They were the only shareholder and the
directors of the company. They fell out and a long drawn litigation was going
on between them. They were not even on speaking terms and complete deadlock
had, therefore, arisen. One director formed the quorum. In case of difference,
the matter was every time to be referred to arbitration. It was held that if
this were a case of partnership there would clearly be grounds for a
dissolution, and that the same principle ought to be applied where there was in
substance a partnership in the guise of a private company. LORD COZENS-HARDY
M.R. at page 431 observes :
“Is it possible to
say that it is not just and equitable that state of things should not be
allowed to continue, and that the court should not intervene and say this is
not what the parties contemplated by the arrangement into which they entered ?
They assumed, and it is the foundation of the whole of the agreement that was
made, that the two would act as reasonable men with reasonable courtesy and
reasonable conduct in every day towards each other, and arbitration was only to
be resorted to with regard to some particular dispute between the directors
which could not be determined in any other way. Certainly, having regard to the
fact that the only two directors will not speak to each other, and no business
which deserves the name of business in the affairs of the company can be
carried on, I think the company should not be allowed to continue.”
WARRINGTON L.J. in
his concurring judgment at page 435 observed as follows :
“I am prepared to
say that in a case like the present, where there are only two persons
interested, where there are no shareholders other than those who, where there
are no means of overruling by the action of a general meeting of shareholders
the trouble which is occasioned by the quarrels of the two directors and
shareholders, the company ought to be ought up if there exists such a ground as
would be sufficient for the dissolution of a private partnership at the suit of
one of the partners against the other. Such ground exists in the present one. I
think, therefore, that it is just and equitable that the company should be
wound up.”
In
The company,
although it had taken the form of a public company, was practically “a domestic
and family concern.” The preponderance of voting power lay with McLaren, and it
was impossible for Mrs. Loch, the petitioner, to obtain any relief by calling a
general meeting of the company. LORD SHAW at page 793 of his judgment quoted
the following passage from a
“But then this is
not a company that is formed by appeal to the public. It is what, for want of
better name, I may call a domestic company. The only real partners are the
three brothers of a family ; the other shareholders have only a nominal
interest for the purpose of complying with the provisions of the Act. In such a
case it is quite obvious that all the reasons that apply to the dissolution of
private companies, on the grounds of incompatibility between the views or
methods of the partners, would be applicable in terms to the division amongst
the shareholders of this company, and I agree with your Lordships that this is
a case in which it would be just and equitable that this company should be
wound up, and the partners allowed to take out their money and trade separately
if they please.”
In In re Davis and
Collett Ltd., the petitioner and the respondent held the capital of the company
substantially in equal shares. It was held that where the capital of a private
company is so owned as to make the company in substance a partnership and one
director has purported by means of irregularities to acquire complete control
of the company and to exclude the other director from the management of it may
be “just6 and equitable” within the meaning of the section that the company
should be wound up.
Great Indian Motor
Works Ltd. v. Chandi Das Nundy is the last decision relied upon by Mr. Tulli.
There, the entire body of shareholder consisted of the petitioner, his brother,
Mr. Kristo, three sons of Kristo and a first cousin of Kristo’s wife. The three
directors were the two brothers and the brother-in-law of Mr. Kristo. The whole
business of the company was being engineered for the benefit of Mr. Kristo who
held the majority. The company was not being run fairly for the benefit of its
shareholders. Principles for the dissolution of partnership were, therefore,
applied, and it was held that where two persons cannot agree and cannot carry
on business and also where one partner was acting dishonestly towards the other
as acting unfairly, the court will always wind upon the partnership.
Here, in this case,
the state of affairs is absolutely different. The respondent company can by no
means be regarded as “a domestic or family concern”. The company’s capital is
not distributed amongst the members of one and the same family. Some of the
shareholder are total strangers. Swarn J. Singh holds fully paid-up shares
worth of fully paid-up shares. Swarn J. Singh, if at all, may be distantly
related to the petitioner himself. Sat Pal or any other member of his family
has not been shown to bear any relationship with others. As against their
shares of Rs. 40,000 paid for in cash, it shall be remembered, the petitioner,
like other three promoters, holds no more than ten shares, besides the two
hundred shares allotted to him against the goodwill of the earlier partnership.
Even the four promoters, though previously they carried on business in
partnership, are not all inter- related. Out of them Fateh Chand petitioner and
Ram Lal are collaterals in the fourth or fifth degree. The former and the
latter’s brother are married to the sisters of Anand Kumar. Whatever relation
they may have, it is such as to place the rest of them in one group they may
have, it is not such as to place the rest of them in one group against the
petitioner. Moreover, Anand Kumar would be more interested in the petitioner
than in Ram Lal. Prem lal, the fourth promoter, is a Vaish (the others being
Kshatrias) and a total stranger.
With the exception
of Raj Pal and Shrimati Pritam Devi, all these shareholders were at one time
acting as directors. The management of the company also cannot, therefore, be
said to be, ever to have been in the hands of a particular director or set of
directors. Unless it be for some fault or action of the petitioner himself, the
rest of the directors are not shown to have any apparent or conceivable common
cause to form a party against the petitioner or to be antagonistic to him or
his interest.
If there is an
honest difference of views between the petitioner and the other directors, and
the petitioner, on that account, has lost confidence in them the view of the
majority must prevail ; and the petitioner can have no cause for any
justifiable complaint. His remedy would ordinarily lie in appealing to the
general body, which forms the domestic tribunal in case of a limited concern.
There is no
allegation, much less proof, of any misappropriation or malversation of funds
by the directors, or that any one of them, because of the preponderance of his
voting power, is managing the affairs of the company for his personal
advantage. The mere fact that the petitioner can be or is being out-voted by
the majority in the internal management of the company, or that he is being
singled out by the rest of the directors, ought not to be regarded a sufficient
ground to wind up the company under the just and equitable clause.
In Seethiah v.
Venkatasubbish, mere incompatability of good relations between two rival
factions in the directorate, in the absence of some other strong ground such as
sufficient for ordering winding up of the company under clause (6) of section
162. There was nothing particularly wrong with the management of the company,
except that the petitioners were holding views different from those held by the
majority in relation to the details of management. GOVINDA MENON J. in the
concluding portion of his judgment observes :
“When there is such
uanimity amongst the majority belongings to different communities, that by
itself is a reason, in the absence of any evidence of misappropriation or
malversation of funds by the management, to conclude that on account of
difference of views alone the company should not be wound up.”
There is yet
another difficulty in applying the rules of dissolution of partnership to this
case. It cannot be positively said that the petitioner is in nor way
responsible for creating the present situation. For the dissolution of a
partnership on the ground of justifiable lack of confidence it has to be shown
a partner, other than the partner suing, wilfully or persistently commits
breaches of agreements relating to the management of the affairs of the firm or
the conduct of its business, or otherwise so conducts himself in matters
relating to the business that it is not reasonably practicable for the other
partners to carry on the business in partnership with him. The petitioner
admits that he started a private business of his own at Patiala in the name of
Bir Trading Corporation on 18th January, 1955. It was then that he submitted
his resignation to the company on 27th January. His firm deals in tractors,
which is the principal business of the company as well. I do not agree with Mr.
Tulli that the business is not a competitive one because the two deal in
tractors of different make or imported from different manufacturers. The facts
disclose that the petitioner began to evidence dissatisfaction of the company’s
management only after he started his own similar business. Shri Anand Kumar, in
his affidavit, states that when tractors were required to be purchased by the
Municipal Committees of Patiala and Nabha the petitioner, as proprietor of Bir
Trading Corporation, submitted his tenders in direct competition with those
sent by the company.
Each of the
directors has further testified that four of the employees of the respondent
company were induced to leave their service and were employed by the petition
in his private concern. There are affidavits of three other employees to the
effect that they too were approached by the petitioner to give up their service
with the company and also to disclose certain secrets concerning the company’s
business.
Generally speaking
a director stands in fiduciary position to the company. Being a director and
therefore in a fiduciary relation to the company, he is always expected to
guard the company’s interest and surely not to utilise the position and
knowledge possessed by him in virtue of his office to the detriment of the
company’s interest and or his personal course the duty of its agents so to act
as best to promote the interests of the corporation whose affairs they are
conducting. Such agents have duties to discharge of a fiduciary nature towards
their principal. And it is a rule of universal application, that no one, having
such duties to discharge, shall be allowed to enter into engagements in which
he has, or can have, a personal interest conflicting, or which may conflict,
with the interests of those whom he is bound to protect.
It seems, the
petitioner realised the situation and submitted his resignation shortly after
he started his own business, but sometime later he changed his mind and
preferred to stick to his guns.
The main point
repeatedly stressed by Mr. Tulli is that the petitioner resignation was
intentionally misinterpreted so as to exclude him from the company’s
management. The contention is that the petitioner in fact meant to resign
merely from the office of a “working director’ and intended to continue as an
ordinary director. Article 26 authorises the board to appoint all or any of the
permanent directors to work whole-time or part-time for the business of the
company on such remuneration and conditions as the directors may decide.
Under this
articles, the four promoters and permanent directors of the company were
appointed as its working directors on a remuneration of Rs. 500 per mensem
each. On 31st March, 1954, Swarn J. Singh was also appointed a working
director. The petitioner sent in his resignation on 27th January, 1955. Let me
repeat, it says “Kindly consider me from today as a sleeping partner and
oblige.” On receipt of this resignation, the power of the petitioner to operate
upon the company’s bank account was withdrawn in the minutes of 1st February,
1955. The resignation itself was considered by the board in its next meeting on
13th February. The resignation was unanimously accepted and Shri Prem Pal was
authorised to communicate the decision to the “outgoing director”. The
resignation was regarded as one from the office of a director and not merely
from that of a working director, and it was accepted as such.
The words “sleeping
partner” could not be reasonably construed as “ordinary director.” A director,
even when he is not a working and paid director, is still a governing partner
and not a “sleeping partner”. On the other hand, “partner” may be taken as
synonymous to a shareholder who has not direct concern with the governance of
the company’s word “partner” could, therefore, be reasonably understood to mean
a shareholder. If the petitioner really meant something else, he could have
conveyed it in explicit terms. He could have plainly said that while ceasing to
be a working director he would continue to be a director.
In any case, the
language used in the letter was possible of the interpretation placed on it by
the board. The most that can be said is that that board committed an honest
mistake in interpreting the letter ; the action was not mala fide or based upon
fraudulent intention to oust the petitioner. The petitioner himself, in his
letter dated 29th April 1955, described it as an “error which obviously has
been due to some misunderstanding.”
The resignation
with the above interpretation, was accepted on 13th February, 1955. Statutory
information of the petitioner having ceased to be a director was filed with the
Registrar on 24th February. Entry No. 511 dated 15th February, in the company’s
despatch register, relates to the intimation of the decision sent to the
petitioner.
The petitioner says
he did not receive the intimation and that the came to know of the resolution
only on inspection of the records with the Registrar. He put forth his
interpretation of the resignation for the first time in his letter of 29th
April 1955. It is difficult to believe that the company’s letter was not
actually despatched and it did not reach the petitioner, or that the petitioner
did not come to know of the resolution much earlier. What I am inclined to
think is that the petitioner, for some reasons, changed his mind subsequently
and chose to take advantage of the inadvertent omission of sufficient clarity
in his letter. I cannot, therefore, arrive at the conclusion that it is
established that the petitioner was fraudulently or unreasonably excluded from
the directorate.
It is then
contended that no notice of the meetings held on 1st February and 13th
February, 1955, was given to the petitioner. I do not think that was at all
necessary after the petitioner’s resignation of 27th January. According to
article 18, a permanent director is to remain in office so long as he continues
to hold the necessary qualification or he does not himself voluntarily resign.
This clearly means that a director is entitled to relinquish his office at any
time he pleases and his resignation is not dependant upon its acceptance by the
company. The petitioner, therefore, his office as sons as he tendered his
resignation to the company.
Mr. Kapur has
referred to certain purchases, worth several thousands, made by the petitioner
on behalf of his private firm from the company between 34d February and 4th
April, 1955. A sum of Rs. 1,018-12-6 is shown to be due from the petitioner in
this account at the last date. The purchases and correctness of the statement
of account are not denied by the petitioner. The contention is that,
notwithstanding the resignation, the petitioner would have ceased to be a
director because of this having explicit consent of the directors, a director
of the company or the firm of which he is a partner or any partner of such
firm, or the private company of which he is member or director, shall not enter
into any contract for the sale, purchase or supply of goods and materials with
the company. Section 86 1 (h) further lays down that the office of a director
shall be vacated if he acts in contravention of section 86F. Undoubtedly, the
provision is mandatory and was introduced by the Amendment Act of 1936 to
safeguard the interest of the company against any possible misuse of his position
by a director. The consent of the directors cannot be a general one, it must be
with respect to the particular transaction which the director intends to enter
into.
There is not even a
suggestion that the purchases were made with the consent, express or implied,
of all the directors. I cannot agree with Mr. Tulli that section 86F is
confined in its application to contracts which are to be performed at some
future time, and that it does not apply to an individual sale or purchase, or
to a contract which is performed and completed the moment it is entered into.
Emphasis in this
connection is laid on the use of the plural “contracts” and the word “for” in
the phrase “shall not enter into any contracts for the sale, purchase for the
sale, purchase or supply of goods and materials with the company.” An agreement
enforceable by law is a contract. The agreement may be given effect to the
moment it is entered into or it may be executable at some future time. In
either case it will be a contract, if it is permissible by law. The plural
includes the singular as well, and its use does not in any way lead to the
interpretation placed on the section by Mr. Tulli.
Similarly, no
particular significance can be attached to the use of the word “for”.
Grammatically, this is the only preposition that could be appropriately used
for connecting the term “contract” with the three nouns that follow. In no way
does it signify that the section covers only those contracts which are
executory in nature, and not those which are executable at the time they are
entered into. I do not see any force in the argument that the word “of” would
have been used if the section was intended to include the latter type of
contracts as well. Even the use of the word “of” instead of “for”, in my view,
would not have made any difference or conveyed a different sense.
The continued
transactions between the petitioner and the company, even after the former’s
resignation, rather go to show that there was no serious antagonism between him
and the company’s working directors. The latter would not have agreed to supply
the goods for the petitioner’s competitive business, if they had formed into a
group to oust him.
The proposed
amendment in the articles, authorising the expropriation of competitive shareholder
or shareholders, is relied upon as an instance of oppressive attitude of the
majority towards the minority and is said to be directly intended for
application to the petitioner. At present, I need not go into the bona fides of
the directors in proposing the amendment or adjudicate upon the justification
or reasonableness of the amendment. The board of itself rescinded the
resolution and gave up the idea of holding the extraordinary general meeting.
It is next
contended that the allotment of shares to Mr. Sat Pal, Rah Pal and Shrimati
Pritam Devi was illegal inasmuch as the provisions of section 105C of the
Companies Act were not complied with, Section 105C runs as follows :
“Where the
directors decide to increase the capital of the company by the issue of further
shares such shall be offered to the members in proportion to the existing
shares held by each member (irrespective of class) and such offer shall be made
by notice specifying the number of shares to which the member is entitled, 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 receipt of an
intimation from the member to whom such notice is given that he declines to
accept the shares offered, the directors may dispose of the same in such manner
as they think most beneficial to the company.”
The question
whether the word “capital” in the above section means the authorised capital or
the subscribed capital of a company came up before me in S. Pritam Singh v.
Kotkapura Bus Service Ltd. It was held that the term “capital” in section 105C
means the company’s subscribed capital and, therefore, when the directors
decide to increase the subscribed capital by issuing further shares, the
section applied and it is obligatory for the directors to offer the shares to
the existing shareholders before allotting them to any other person. It is
further held that if the shares were not so offered, their allotment to others
would be irregular and hence invalid.
In Nanalal v.
Bombay Life Assurance Co. Ltd., the question as to the precise scope of section
105C was not finally decided because in their Lordships’ opinion, on any
interpretation of it, the provisions of the section were substantially complied
with. Their Lordships, however, favoured the view that section 105C becomes
applicable only when the directors decide to increase capital within the
authorised limit by issue of further shares. It is consequently urged that
before shares could be allotted to Mr. Pal and others the shares ought to have
been offered to the existing shareholders, and since that was done the
allotment was illegal and inoperative.
Mr. Kanpur, on
behalf of the respondent, in the first instances, taken up his stand on the
minutes of the first meeting of the board of 1st January, 1954, whereby shares
of the value of Rs. 2,50,000 (out of the authorised capital of Rs. 5,00,000)
were issued for subscription by the promoters, their relations and friends. In
the next meeting held on 25th January, 1954, the four promoters offered to take
ten shares each and the same were allotted to them.
According to the
learned counsel, the word “capital” in section 105C does not mean anything more
than the issued capital and the same having been one offered to the shareholders
it need not have been again offered to them when shares were allotted to Mr.
Sat Pal and others. Counsel, however, 1954, and before that there were no
shareholders in existence ; there could, therefore, be no question of an offer
of further shares to the existing shareholders.
Moreover, Mr. Kapur
has not been able to convince me to change my view that the word “capital” in
section 105C means the subscribed capital and that every time further shares
are issued they ought to be offered to the existing shareholders.
Mr. Kapur then
maintains that the provisions of section 105C were substantially complied with
inasmuch as all the existing shareholders were present in the meeting when
shares were unanimously allotted to Mr. Sat pal and others, and also that the
petitioner having once agreed to accept the allotment cannot now be allowed to
question its validity. The section authorises the directors to dispose of the
shares in such manner as they think most beneficial to the company after
existing members have declined to accept the shares offered to them. But if all
the existing members have themselves joined to make the allotment they should
be deemed to have declined to accept the shares of themselves.
The petitioner
takes up two alternative positions in this connection. He says he did not
attend the meeting of 1st February, and was not present when the shares were
allotted ; but if he did attend and was present he was not apprised of the fact
that he was entitled to those shares, or some of them, for himself.
The mainstay of the
petitioner is that he did not sign the minutes or note down his presence that
day. He, therefore, affirms that his name as one of the directors who
participated in the meeting was subsequently added in the minutes. The
assertion, however, is not supported by actual facts. Except for a couple of
meetings, he did never sign the minute-book in token of his presence. Every
time a note with respect to his presence was made by someone else ; the
petitioner does not deny to have attended any of those meetings.
Statutory
presumption of correctness attaches to the entries in books regularly
maintained by a limited company. It is for the person alleging the contrary to
prove it. The facts in the present case are that in the petition it was nowhere
alleged that the petitioner did not attend the meeting on 1st February. Even in
his reply affidavit submitted on 18th February, 1955, the petitioner did not
swear to that effect. A casual reference to it was, however, made in the
replication submitted by him that date.
On the other hand,
the other four directors who attended the meeting, in their affidavits
submitted much earlier, vouchsafe to the petitioner’s participation in the said
meeting. Moreover, the minutes were read out and confirmed (without any
objection) in the next meeting on 9th February. The presence of the petitioner
is noted, in the usual mode, in the minutes of this meeting. Neither in his
reply affidavit nor in his replication the petitioner did anywhere allege that
he did not in fact attend the meeting on 9th February. The inference,
therefore, is that the petitioner did participate in the meeting on 1st
February and that the shares were allotted with his consent.
As regards the
effect of it, Mr. Tulli contends that acquiescence cannot be presumed unless
knowledge of the irregularity or invalidity of the transaction could be brought
home to every one of the members who attended the meeting. Relying upon the
observations of their Lordships in Premila Devi v. Peoples Bank of Northern India
Ltd., the learned counsel maintains that there can be no ratification without
an intention to ratify, and there can be no intention to ratify an illegal act
without knowledge of the illegality.
It is correct that
in order to establish a case of ratification it is essential that the party
ratifying should be conscious of the excess of authority exercised by his
agent, and also that, in spite of this knowledge, the party consciously by an
overt act agreed to be bound by it. But the present is not a case of
ratification of something done by its agent or someone else on behalf of the
petitioner. It is in fact a case where the petitioner himself was a party to
the transaction, and therefore estoppel or waiver of his right (which he failed
to exercise) may be forcefully pleaded. To hold that the petitioner did not
acquiesce in the irregular mode in which the allotment was made would be giving
him an opportunity to do that which, in fact, would be a fraud upon those who
were admitted into the company as subscribes of its additional capital.
In any case, it is
not necessary for me to dwell on the point any further or to decide it finally.
The petitioner, if he feels aggrieved, has a more appropriate remedy
(application for rectification of the register of members) open to him. All
other members are agreed to an accept the allotment. It is not even alleged
that the allotment was made fraudulently or with a view to gain majority
against the petitioner. No present right of the petitioner seems to be
affected. He never was, nor is he now, anxious to get any more shares for
himself.
As a matter of fact
he is anxious to get rid of those he already has. The only question with which
I am here concerned is whether it is just and equitable to wind up the company,
and I have absolutely no doubt that it is not a ground which does lead to that
conclusion.
It is next urged
that the board is not properly constituted and that the number of its members
is reduced to less than the minimum. The contention that Shri Sat Pal had ceased
to be a director on 9th March, 1955, is unassailable. According to article 19,
a director must hold in his own name shares of the face value of Rs. 20,000.
Shri Sat Pal cannot be said to have ever attained that qualification. He could
not in that matter, take advantage of the shares standing in the name of his
brother or mother. He was appointed a director on 9th January, 1955. He ought
to have obtained the specified share qualification within two months of his
appointment, as required by section 85(1) of the Companies Act.
Section 86-1(a)
lays down that the office of a director shall be vacated if he fails to obtain
the share qualification necessary for his appointment within the time specified
in section 85(1). Shri Sat Pal, provides that a director shall vacate office on
the happening of some event the director automatically vacates office on the
happening of that event ; the board has no power to waive the event.
Consequently, Shri Sat Pal could not legally act as a directorate after that
date.
Section 85(2) lays
down the penalty that may be imposed upon the unqualified person who acts as a
penalty after the expiration of the specified period of two months. But with
that we are not at present concerned. Here, what we have to see is the effect
of his having so acted. Does it vitiate the proceedings of the board in which
he took part after 9th March, 1955 ? Section 86 of the Act says :
“The acts of a
director shall be valid notwithstanding any defect that may afterwards be
discovered in his appointment or qualification :
Provided that
nothing in this section shall be deemed to give validity to acts done by a
director after the appointment of such director has been shown to be invalid.”
It cannot be
seriously disputed that Shri Sat Pal was appointed, and he accepted that
appointment, under the mistaken belief that he was holding shares worth Rs.
20,000 jointly with his brother and mother. It is not even alleged that the
mistake was pointed out, or that the appointment was shown to be valid, at any
time before the present petition was presented on 4th July, 1955. Notice of the
petition was left at the company’s office on 6th July, 1955, and it was
published in the State Gazette on 16th July, 1955.
The minutes show
that the meeting that Shri Sat Pal attended was held on 7th July, 1955. The
only business transacted that day was to confirm the proceedings of the
previous meeting and to cancel the decision to hold the extraordinary general
meeting on 9th July. Acts bona fide done by a de facto director ought to be
regarded as valid, and that is only between the company and the outsiders but
also between the company and its members.
As regards Swarn J.
Singh, it is stated that he ceased to be a director when, after his appointment
on 1st February, 1954, he was not elected in the next following ordinary
general meeting on 25th June, 1955. Reliance in this connection is placed on
regulation 85 of Table A of the Companies Act. The regulation says :
“The director shall
have power at any time, and from time to time, to appoint a person as an
additional director who shall retire from office at the next following ordinary
general meeting, but shall be eligible for election by the company at that
meeting as an additional director.”
Minutes of 1st
February, 1954, while co-opting Swarn J.Singh as a director, make it clear that
“he shall hold office until removed by the directors or by the shareholders.”
This appointment of his was confirmed in a general meeting of the shareholders
held on 4th April, 1954.
Mr. Tulli, however,
stresses that this could have no effect, for, as provided by regulation 85,
Swarn J. Singh should be deemed to have retired on 25th June, 1955 when the
first ordinary general meeting of the company was held. Since he was not
elected in that meeting he ceased to be a director that day and could not act
as such thereafter. The petitioner had resigned. Swarn J.Singh ceased to be
director on 25th June, 1955, and Sat Pal had ceased to be a director much
earlier. This reduced the number of directors to three. Article 17 requires
“that until otherwise determined by the company in general meeting”, the number
of directors shall not be less than four. It is, therefore, urged that there
was no legally constituted board after 25th June, 1955, and that the same state
of affairs still continues.
Now, regulation 85
of Table ‘A’ in the First Schedule is not a compulsory regulation ; it is
within the competency of a company to adopt it with any modification. The
respondent company by its article I adopts the regulation contained in Table A,
so far as they are applicable to a private company, but expressly ,makes them
subject to the provisions contained in the articles. That leads one to find out
if the articles contain anything contrary to, or in modification of, regulation
85. Article 28 contains an analogous provision and it reads :
“The directors
shall have power from time to time, and at any time, to appoint any other
persons to be directors and no other than the person recommended by the
directors shall be elected as a director of the company.”
Obviously, the
article authorises the directors to make the appointment of a director without
any restriction or limitation as to the period of his appointment. To be more
precise, the article does not adopt the proviso that the director so appointed
“shall retire from office at the next following ordinary general meeting.”
That is the
modification with which the regulation is adopted. It authorised the board to
decide that the appointment of Swarn J.Singh as a director shall continue till
he is “removed by the directors or by the shareholders.” He would not,
therefore, be deemed to have retired from office at the next following ordinary
general meeting and did not stand in need of election by the company at that
meeting.
Let us assume that
Swarn J.Singh did cease to be a director on 25th June, 1955. The question still
remains, what is its effect. Does it vitiate or invalidate the proceedings in
which he took part thereafter ? Does it unavoidably lead to the conclusion that
there no longer exists a legally constituted board to manage the company’s
affairs ? As already observed, the answer to the first question in the negative
is afforded by section 86 of the Companies Act. It is not even suggested that
the legal complications were known to the directors or that Swarn J. Singh’s
appointment was, at any time earlier, shown to be invalid.
Regulation 89
provides for the contingency giving rise to the second question. The regulation
says :
“The continuing
directors may act notwithstanding any vacancy in their body, but if so long as
their number is reduced below the number fixed by or pursuant to the
regulations of the company as the necessary quorum of directors, the continuing
directors may act for the purpose of increasing the number of directors to that
number, or of summoning a general meeting of the company, but for no other
purpose.”
According to
article 32 of the company, until otherwise determined by the directors, two of
them form the quorum. Their number being still more than the necessary quorum,
the continuing directors, notwithstanding the vacancy, are legally entitled to
carry on the management. It is only where the number is reduced below the
necessary quorum that the directors are not competent to function for any
purpose other than those specified in the regulation.
I do not see force
in Mr. Tulli’s argument that since the number of the continuing directors has
gone blow the minimum number of four there is no legally constituted board and
therefore the regulation can have no application. What he precisely contends is
that you must have a board of four before there can be a quorum.
The learned
counsel, in this connection, forgets the significant distinction between the
cases where directors too few in number can and cannot act as continuing
directors. If there never existed a board sufficient in number, the continuing
clause (in Regulation 89) would be of no help in authorising the board to carry
on business. But where the board, which was originally competent to transact
business, is for any reason diminished to a number less than that provided for
by the articles, the continuing clause would apply and the remaining directors
would be competent to transact the company’s business.
The phrase
“notwithstanding any vacancy in their body” applies equally to a case where the
number of directors is reduced blow the minimum number. It is true that there
cannot be a quorum competent to act where the number of directors is not filled
up to the minimum number. But this is always subject to any contrary provision
in the articles of a company. That provision is made in this case by regulation
89, adopted by article I of the company’s articles of association.
Lastly, it is urged
that the company’s funds are being recklessly wasted. The instances relied upon
are :
“(i) Payment of Rs. 500 per mensem are
remuneration to each of the working directors ;
(ii) Rs. 200 per mensem paid to Sri Sat Pal,
legal adviser of the company ; and
(iii)
Rs. 1,000 paid for the year 1955,
towards premium for insurance against accident of the directors.”
The remunerations
were allowed and the expenses incurred when the petitioner was one of the
working directors, and with his approval and consent. He himself enjoyed their
benefit so long as he continued as a working director. He did never come
forward with an objection that the expenses were excessive or unnecessary. The
remuneration is now stated to be exorbitant and highly incommensurate with the
amount of business the company is handling and the profits that are being made
out of it.
The amount of
remuneration was unanimously settled by all the directors (of whom the
petitioner was one) and it was subsequently confirmed in a general meeting. The
directors and the shareholders were in full knowledge of the true state of
affairs and they were, therefore, in a position to judge and decide the
reasonableness of the remuneration. On the basis of the material on record, it
is not possible for me to hold that they had singularly erred or that their action
was not bona fide.
The grounds urged,
individually or collectively, in my opinion, are in no way sufficient to lead
to the irresistible conclusion that it is just and equitable to wind up the
company. The petition is being opposed by the shareholders, except the
petitioner. They all show confidence in the management of the company, desire
that they should be allowed to carry on the business on which they have jointly
and willingly embarked. Interest of the general body of shareholders is a
matter of primary consideration in such cases.
It may suit the
petitioner’s purpose, but I am not at all satisfies that the winding up order
will be to the advantage of the entire body of shareholders or the company’s
creditors, or that it is necessary to safeguard their interest. Some of the
shareholders have subscribed large sums to the capital of the company. Their
stake is much more than that of the petitioner, whose subscription in cash
towards the capital amounts only to Rs. 1,000.
I have no
hesitation to agree with Mr. Tulli that the ‘just and equitable clause” ought
not to be confined to circumstances ejusdem generis with those set out in the
foregoing clauses of section 162. But, wide as the powers are, they ought to be
exercised with great care and circumspection. There must be very strong grounds
for exercising the discretion, particularly at the instance of a shareholder
and against the unanimous view of all the rest of them. No such case, I am
sure, is made out by the petitioner.
I also do not see
any justification for making an order, under section 153C(5) (b), directing the
company or its members to purchase the petitioner’s shares. As already
observed, the facts do not justify the making of a winding up order under the
just and equitable clause. Nor has it been shown that the affairs of the
company are being conducted in a manner oppressive to some of its members.
Consequently, the alternative prayer has also to be rejected.
In the result the
application is dismissed with costs. Counsel’s fee shall be Rs. 200.
[1970] 40 COMP. CAS. 466
(MYS)
HIGH COURT OF
Yallamma Cotton, Woollen & Silk Mills Co. Ltd., In re
v.
A. NARAYANA
PAI J.
COMPANY APPLICATION NOS. 143 OF 1967
AND 20 OF 1968 IN COMPANY PETITION NO. 4 OF
1967
August 30, 1968
G. S. Ullal
and P. Venkataraman for the applicant.
B. Gopalaiah
for the respondent.
JUDGMENT
Narayana
Pai, J.—These are companion applications which raise
questions as to the nature and extent of the rights and powers claimed by the
Bank of Maharashtra Ltd., the applicant in Company Application No. 143 of 1967,
under or by virtue of certain deeds of mortgage of immovable properties and
hypothecation of movables executed in its favour by the company —Yallamma
Cotton, Woollen and Silk Mills Company Ltd.
There is
little or no controversy about the facts and circumstances necessary for the
determination of the points of law raised by the parties.
The company
encountered considerable financial difficulties early in the year 1966. In the
month of March, 1966, it was obliged to lay off its labour force. By about
September of that year, it had almost completely ceased working.
Early in
June, 1967, a creditor of the company presented to this court. Company Petition
No. 4 of 1967 for compulsory winding up of the company. After some adjournments
granted at the request of the company which was trying to secure financial
assistance from the Central Government, an order for compulsory winding up was
made on 5th October, 1967.
Pursuant to
the said order of winding up, the official liquidator of this court proceeded
to Davangere, where the office as well as the mills and other properties of the
company are situate, to take possession of all the properties and assets of the
company. Although he was able to secure the books of account, papers and
records of the company available in its office premises, the liquidator could
not reduce to possession the immovable properties, machinery and other
equipment of the company, for the reason that the possession thereof had
already been taken by the Bank of Maharashtra (hereinafter referred to as
"the bank") in apparent exercise of its powers as a mortgagee and
charge-holder of the immovable and movable properties of the company.
The
liquidator made a report to that effect which was filed into this court on 26th
October, 1967.
When the
report was first posted for orders before me, Mr. K. Srini-vasan took notice on
behalf of the bank, stated briefly the case of the bank and sought time to
place before me the documents and records relating to his client's rights and
to state clearly what attitude his clients propose to take vis-a-vis the
winding up proceedings.
On the next
date of hearing, viz., 10th November, 1967, Mr. Srinivasan filed several
documents to prove the rights claimed by his clients as mortgagees of the lands
and buildings and as hypothecatees of the movables including the machinery
belonging to the company. He also stated that his clients, who are secured
creditors, would prefer to stand outside the winding up proceedings and realise
or recover the amounts due to them by exercising the right of private sale
without the intervention of court both in regard to movables as well as the
immovables charged and mortgaged in their favour, which right he said was in
clear terms conferred upon his clients by the documents of mortgage and
hypothecation. He also presented Company Application No. 143 of 1967 by the
bank in which, after briefly setting out the rights claimed by it, the bank
prayed that it be permitted to remain outside the winding up proceedings and
enforce its rights.
On the said
date—10th November, 1967—I made an order recording the claims raised by the
bank and adjourned the matter to 24th November, 1967, for a fuller and complete
examination of the legal position and gave certain directions for the said
purpose. Among other things, 1 directed the filing of fuller affidavits by an
officer of the bank who was conversant with all the facts as well as the
ex-managing director of the company, setting out the circumstances in which the
bank took possession of the properties, and the preparation by the liquidator
of a full inventory of all the articles contained in the premises taken
possession of by the bank.
The above
directions were complied with, but on account of the other work of the court,
the matter could not be heard immediately and could be taken up for hearing
only on 12th January, 1968.
In the
meanwhile, the bank having engaged Mr. G. S. Ullal after the first adjournment
of November, 1967, Mr. K. Srinivasan retired from the case with my permission.
The main
question, which arose for immediate consideration and had to be determined
before any further steps could be taken in this winding up in respect of the
properties taken possession of by the bank, was whether the bank was right in
its contention that the mortgages executed in its favour by the company were
English mortgages as defined in the Transfer of Property Act and whether the
documents of mortgages contained clauses conferring on the bank the power of
private sale consistent with the provisions of the Transfer of Property Act in
that regard. In the course of the arguments, Mr. Sundaraswamy, appearing for
the petitioning-creditor, who argued
the general case on behalf of the unsecured creditors as well as the
liquidator, stated that in the light of his study of the papers, a further
question appeared to arise as to whether the mortgages claimed by the bank were
not invalid for non-compliance with the terms of section 293 of the Companies
Act, 1956. I observed that if any such objection was capable of being clearly
formulated, it was perhaps better to make it the subject of a separate
application by the liquidator setting out the case fully, and directed that if
any such application is filed, the same may be brought up for hearing along
with Application No. 143 of 1967 on the next date of hearing, viz., 2nd
February, 1968.
Just before
the said adjourned date, the liquidator filed Company Application No. 20 of
1968. The matter could not be taken up for hearing on 2nd February, 1968, and
had to be adjourned to 27th of that month.
To the said
application objections were filed by the bank on 23rd February, 1968. Among the
objections there was one to the effect:
"It is
also not clear from the judge's summons whether the application was posted
before court for first obtaining orders required by rule 7 of the said Rules.
It is submitted that these transgressions of the Rules, which are without
justification in this case, have caused embarrassment and harassment."
I pointed out
to Mr. Ullal that the objection was unmerited, that it seemed to ignore my
direction in open court that an application, if any, filed by the liquidator
should be brought up for hearing along with Company Application No. 143 of 1967
at the next date of hearing, viz., 2nd February, 1968, and that on the said
date having been made aware of the fact that Mr. Ullal had been served with a
copy of the judge's summons and report only on the previous day, I myself
suggested an adjournment to enable the bank to state its objections. Though Mr.
Ullal expressed his readiness to go on with the case the same day, it could not
be taken up for the reason that the examination of a witness in an election
petition which was then being heard by me could not be completed till late in
the evening, making the further adjournment of this matter quite inevitable.
When the above circumstances were pointed out by me, an affidavit by an officer
of the bank who was present at all hearings was later filed on 29th February,
1968, expressing apology and stating that the oral order for posting made by me
had unfortunately been forgotten. In view of this affidavit and in view of the
fact that an adjournment which became inevitable in the circumstances has
removed all cause for grievance, if any, nothing more need be said about this
objection.
Another
objection was that the subject-matter of Company Application No. 20 of 1968
could not have been properly brought before court by means of an application
but could only be made the subject of a regular suit, and that if the application has to be treated as a
suit, the proper court-fee as for a suit
should have been paid.
Before
proceeding to examine this objection, it is necessary now briefly to narrate
the undisputed facts. The said facts can be gathered from the further affidavit
on behalf of the bank filed on 23rd November, 1967, and the various documents
filed by the bank, both on 10th as well as on 23rd November, 1967.
For the
purpose of finding finance for its scheme of improvement and expansion of
business, the company appears to have approached the bank for financial
assistance late in 1961 or very early in 1962. The negotiations between the
company and the bank resulted in the bank agreeing to lend to the company seven
and a half lakhs of rupees to ten lakhs of rupees on the company agreeing to
secure due repayment of the same by mortgaging its immovable properties, viz.,
lands, mills, buildings, etc., and hypothecating all its machinery, vehicles,
tools, implements, etc., and also agreeing to certain further conditions
enabling the bank to keep a close watch over the working of the company and the
handling of its funds. On 15th January, 1962, two deeds were executed in favour
of the bank—exhibit R-15, a mortgage of lands and buildings for a principal sum
of two and a half lakhs of rupees and exhibit R-8, a deed of hypothecation of
movables for a principal sum of four and a half lakhs of rupees. The deed of
mortgage was registered with the Sub-Registrar,
The several
deeds set out certain terms for repayment of the loan and also clauses stating
the consequences of default. The company, according to the bank, having
committed some default in the matter of repayment, a demand notice appears to
have been served on the company. It is further stated in the bank's affidavit
that three electric motors which were part of the hypothecated properties were
sold without the consent of the bank. After some correspondence, the local
agent of the bank acting on behalf of the bank appears to have taken possession
of stores and spares on 15th November, 1966, and locked the main mill premises
of the company on 22nd January, 1967.
No attempt
has been made to deny the truth of the above facts by Amberkar, ex-managing
director of the company, in his affidavit filed into court on 24th November,
1967.
In the course
of the preparation of the inventory, directed by me in my order dated 10th
November, 1967, it was discovered that the mill premises locked by the bank
contained not merely machinery and spare parts said to have been hypothecated
to it but also several books, papers and records of the company and articles of
furniture belonging to the company which are admittedly not part of the
properties either mortgaged or hypothecated to the bank. The books and papers
have been taken possession of by the liquidator pursuant to my order of 10th
November, 1967. The articles of furniture are said to be still lying in the
mill premises locked and retained possession of by the bank.
In the light
of the pleadings in these two applications, the points that arise for
consideration at present are :
"1. Whether the liquidator's application No. 20
of 1968 is incompetent or unsustainable either because the liquidator should
have filed a suit or because the court fee should have been paid on it as for a
suit;
2. Is the bank entitled to sell the lands and
buildings, machinery, spares and parts mortgaged or hypothecated to it, without
the intervention of court ?
3. Is the bank entitled to retain possession
of the said properties, immovable and movable, for the purpose of exercising
the right of private sale claimed by it?
4. Are the mortgages and hypothecations
claimed by the bank invalid for contravention of the provisions of section 293
of the Companies Act?"
In support of
the contention formulated as Point No. 1 above, Mr. Ullal's argument is that
because the bank is a secured creditor entitled to stand outside the insolvency
and work out its rights in the normal way, any right or recourse which the
liquidator can claim or pursue against the bank on behalf of the company in
liquidation could only be by means of a regular suit, and that even if
it should be permissible to him to move the company court by means of an
application, such application should be regarded as a suit and the court-fee as
for a suit should be paid on it. He cites the ruling of this court in Official
Liquidator v. Muniswamy Achary .
The ruling cited by Mr. Ullal is distinguishable and
not applicable to the facts of this case. The said ruling dealt with a case
where the liquidator on behalf of the company had to recover from a third party
a debt due by the said third party to the company. Although upon an admission
made by such a third party in answer to a notice under section 477 of the
Companies Act, the company court is empowered to pass an order in the nature of
a decree, a disputed debt could be recovered only by means of either a regular
suit filed with the permission of the company court and tried either by the
ordinary civil court before which it is filed or by the company court on
withdrawing the same to its file, or by filing a suit before the company court
itself, pursuant to sub-section (2) of section 446 of the Companies Act. It is
with reference to such a matter that this court observed that, although the
proceeding is instituted in the form of an application under the Rules, it is
in substance a suit and that therefore court-fee should be calculated as for a
suit.
The position in the present case, however, is quite
different. The liquidator is not suing to recover any debt or to recover any
property belonging to the company. One of the consequences of making an order
for the winding up of any company expressly stated in sub-section (2) of section
456 is:
"All the property and effects of the company
shall be deemed to be in the custody of the court as from the date of the order
for the winding up of the company."
"Court", of course, by definition means the
company court which made the winding up order. Under sub-section (1) of the
same section, it is provided:
"Where a winding up order has been
made.........the liquidator......shall take into his custody or under his
control, all the property, effects and actionable claims to which the company is
or appears to be entitled."
Section 467 of the Act states, among other things:
".........the court.........shall cause the
assets of the company to be collected and applied in discharge of its
liabilities."
According to rule 232 of the Companies (Court) Rules,
1959, the duties imposed on the court by sub-section (1) of section 467 of the
Act with regard to the collection of the assets of the company and the
application thereof in discharge of the company's liabilities shall be
discharged by the official liquidator as an officer of the court, subject to
control of the court. Rule 233 states
that the official liquidator shall, for the purpose of acquiring and retaining
possession of the property of the company, be in the same position as if he
were a receiver of the property appointed by the court and that the court may
on his application enforce such acquisition or retention accordingly. Under
sub-section (4) of section 460, the liquidator is authorised to apply to the
court for a direction in relation to any particular matter arising in the
winding up.
The powers of
the winding up court under sub-section (2) of section 446 include the
jurisdiction to entertain and dispose of any question of priorities or any
other question whatsoever, whether of law or of fact, which may relate to or
arise in the course of winding up of a company, notwithstanding anything
contained in any other law for the time being in force.
The total
effect of all these provisions is that all property and assets of the company,
which has been ordered to be wound up, immediately come under the custody of
the winding up court and are, in the eye of law, property in custodia legis.
The official liquidator is in the position of a receiver appointed by the court
for the purpose of acquiring and retaining the possession of all property and
assets of the company, acting subject to and in accordance with the directions
from time to time given by the winding up court.
Even in the
case of properties of a company which are mortgaged or charged in favour of any
of its creditors, the creditor does not acquire rights which are exhaustive of
the entire title of the company in respect of the properties. The properties
continue to be the properties of the company, although by reason of a transfer
of some interest therein by way of security, the creditor is enabled by law to
enforce his security in the manner provided by law for the purpose of
recovering moneys due to him. Hence, even when a secured creditor wants to
exercise the option given to him by law to stand outside the insolvency and
work out his rights, it cannot be said that the winding up court is totally
powerless or has no jurisdiction whatever in respect of him or in respect of
the property over which he claims a certain right by way of security. In regard
to such properties, questions may and do often arise either in respect of
priorities or in respect of any other matter whatsoever, which may relate to
the winding up of the company's affairs.
In trying,
therefore, to reduce to his possession properties of the company, whether
mortgaged to third parties, or not, the liquidator is not trying to recover any
property from anybody; he is acting on behalf of the court into whose custody
the properties have already come by virtue of the winding up order. In the
event of any third party resisting or opposing or questioning his attempts to
reduce the property to his possession in the name of the court, if the
liquidator considers it necessary to approach the court for directions,
he is merely acting under sub-section (4) of section 460 of the Act and
invoking the powers of the court under section 446(2)(d) of the Act and rule
233 of the Companies (Court) Rules, 1959.
The clearest position therefore is that the
liquidator, in such circumstances, is not obliged to file a suit, nor is the
filing of a suit or an application in the nature of a suit before the winding
up court the only or the necessary way of invoking the jurisdiction of the
company court. The proper proceeding is undoubtedly an application made to the
winding up court, and the court-fee payable thereon is as for an application
and not as for a suit. The proper article applicable is article 11(u) of
Schedule II of the Mysore Court-fees and Suits Valuation Act, 1957.
This objection is therefore overruled.
Points Nos. 2 and 3 may be taken up together. While
dealing with the case under these points, I shall assume that the transactions
are not open to attack under section 293 of the Companies Act. My findings on
points Nos. 2 and 3 are subject to my finding on point No. 4 which I shall
discuss later.
The factum of the execution of these documents and
the borrowings by the company under the same from the bank have not been denied
by Amberkar, ex-managing director of the company. The truth of the transactions
therefore can be taken as established. Although it is not necessary for the
purpose of these applications to decide or determine the exact amount lent by
the bank and now remaining due by the company, (nor do I propose to go into
that question), it is clear that considerable amounts are due to the bank from
the company and that the documents charging the properties described in the
schedules to the respective documents have been executed by the company
represented by its directors in favour of the bank.
The questions raised by points Nos. 2 and 3 are
therefore questions which should be answered upon an interpretation of the
terms of the relative documents. It is enough to examine the terms of the two
documents dated 15th January, 1962—exhibit R-8 and exhibit R-15—because the
subsequent documents simply copy the same language.
The question relating to movables is simpler and
depends upon the terms of the hypothecation deed, exhibit R-8. Although the
language used appears to copy or follow the language ordinarily used in the
case of English mortgages of immovable properties, the substance of the
transaction and the effect of the document is clearly to create a hypothecation
of movables with power to convert it into a pledge by taking possession of the
hypothecated movables in certain circumstances. The operative clause No. 2
purports to assign absolutely to the lenders (bank) machinery, vehicles, tools,
implements and other paraphernalia lying in the mill premises of the company. It is expressly stated to be subject to
redemption by the borrowers (company). Apart from the various clauses intended
for the protection of the interest of the lenders including a clause for
providing that the deed shall constitute a continuing security for payment of
all sums due to the bank, the only clause which is of importance to the present
discussion is clause No. (6), which reads as follows:
"AND IT
IS HEREBY MUTUALLY AGREED AND DECLARED as follows :
The lenders
shall have power to sell the machinery, etc., hereby assigned and charged or
any of them, or to take possession of the same upon the happening of any of the
following events, that is to say:
(i) If payment of money hereby secured has been
demanded and the borrowers have made default for one month in paying the same.
(ii) If the borrowers shall pass resolution for
voluntarily winding up or an order for winding up is made by a court against
the borrowers or the borrowers suffer execution to issue against them to
enforce any judgment or order or shall suffer any distress to be levied on the
said machinery.
(iii) If the borrowers shall make default in
payment of the whole or any part of the sum due from them to lenders in respect
of any negotiable instrument.
(iv) If
the borrowers fail to observe any of the provisions hereof binding on
them."
The effect of
the said sixth clause taken along with the provision for continuing security is
clearly to create what is ordinarily known as a floating charge. The machinery
and movables which are charged in favour of the bank for securing the recovery
of moneys lent by it are left in the possession of the company, so that it may
work and earn money and repay the loans raised for the purpose of running the
business. It is only when certain contingencies arise as set out in clause (6)
that the bank as a lender becomes entitled to enforce its security by taking
possession of the goods and selling them for the purpose of recovering its
dues. One of the contingencies, it may be noted, is the making of an order for
winding up by a court against the company.
In the case
of hypothecation or pledges of movable goods, there is no doubt about the
creditor's right to take possession, to retain possession and to sell the goods
directly without the intervention of court for the purpose of recovering his dues.
The position in the case of a regular pledge completed by possession is
undoubted and set out in the relevant sections of the Contract Act.
Hypothecation is only an extended idea of a pledge, the creditor permitting the
debtor to retain possession either on behalf of or in trust for himself (the
creditor).
Hence, so far
as the movables actually covered by the hypothecation deeds are concerned,
there can be no doubt that the bank is entitled to retain possession and also
to exercise the right of private sale.
In this
regard, the only question is what are the articles actually covered by the
documents of hypothecation. Their general description I have already given,
viz., the machinery, vehicles, tools and implements and other paraphernalia.
All words, except the last word "paraphernalia", have a clearly
ascertainable meaning. "Paraphernalia", in the context, cannot, in my
opinion, mean to take in other than what may be clearly regarded as accessories
of the main machinery used for the manufacture of textiles. The description of
the articles in the schedule annexed to the hypothecation deeds also leads to
the same conclusion. Because the subsequent documents have merely copied the
language and the schedule of the first document, exhibit R-8, there appears to
have been some little difficulty in the matter of identifying a few items of
spares, tools or machine parts with the property subject to hypothecation. But
the liquidator has stated that all such items may reasonably be regarded as
falling within the scope of the hypothecation. It is equally admitted by the
bank that the articles of furniture found in the mill premises are not articles
covered by the hypothecation. Hence, I hold that, whereas the bank may retain
possession of all items of machinery, spares, machine parts, implements and
tools, as forming part of their security, it should deliver to the liquidator
all articles of furniture.
Regarding
immovable property, the case of the bank is that the relevant documents
evidence an English mortgage as defined in the Transfer of Property Act and
that they confer in clear terms on the banks the right of private sale without
the intervention of court. It is also stated that because it is an English
mortgage, the bank is entitled to take and retain possession.
Exhibit R-15
is the first such mortgage. Clause 2 thereof contains the main provision to the
effect that in consideration of the terms the mortgagors-company grant,
release, convey and assure unto the lenders' bank all the immovable property
described in the schedule, to hold the same subject to the proviso for
redemption. The provision for redemption is contained in clause 3, which reads:
"If upon
such demand as aforesaid the mortgagors and/or the sureties shall pay to the
lenders all moneys hereby covenanted to be paid, the lenders will at the
request of the mortgagors and/or the sureties duly reconvey the said land
hereby conveyed."
Then follows
a long clause containing provisions intended for the protection of the
interests of the lenders-bank. The first clause of the document contains a
personal covenant for repayment of money and clause 9(g) contains stipulations for repayment of
specified sums of moneys at specified intervals. Clause 5 is of importance from
the point of view of both the parties before me, particularly sub-clauses (a),
(e) and (i) thereof. Sub-clause (a) reads:
"(a) That it shall be lawful for the lenders at any time without any
further consent of the mortgagors and the sureties to sell or to concur with
any other person in selling the said land, hereditaments and premises or any
part thereof either by public auction or private contract with liberty also to
make such conditions or stipulations respecting title or evidence of title or
other matters as the lenders may deem proper with power to buy in the said land
hereditaments and premises at any sale by auction or to rescind or vary any
contract for sale and to resell the same without being answerable or
responsible for any loss or diminution occasioned thereby and with power also
to execute assurances and give effectual receipts for the purchase money and do
all other acts and things for completing the sale which the person or persons
exercising the power of sale shall think proper and the aforesaid power shall
be deemed to be a power to sell and concur in selling the mortgaged premises
without the intervention of the court within the meaning of section 69 of the
Transfer of Property Act, 1882."
Sub-clauses
(b), (c), (d) and (e) contain consequential or related conditions regarding the
right of sale. Sub-clause (f) reads as follows:
"That it
shall be lawful for the mortgagors to retain possession of and use the
mortgaged premises until the lenders shall be entitled to take possession
thereof under these presents."
Sub-clause
(i) reads as follows:
"That
over and above other provisions herein contained and without prejudice thereto
in the event of the mortgagors making any default in the repayment of the
mortgage debt hereby secured or failing to comply with any of the terms and
provisions of these presents the lenders shall have the right to take over the
management of the whole concern and business of the mortgagors as well as the
right to sell and realise all the properties and assets mortgaged to the
lenders hereunder and the mortgagors shall in such event forthwith on demand by
the lenders hand over charge and management of the whole of the business and
undertaking of its concern to the lenders and any transfer of any of the
properties and assets made by the lenders in exercise of any of the powers of
sale and realisation under the foregoing provisions shall vest in the
transferee all rights in or to the property or assets transferred as if the
sale had been made by the mortgagors themselves."
One other
matter which I must mention is that the executants of the mortgage deed are the
company itself described as the mortgagors and eight of its directors described
as the sureties. The personal covenant in clause 1is an undertaking by both the
company as well as the sureties to repay the money jointly and severally. With
reference to the said sureties, clause 12 seems to keep their liability alive
irrespective of whatever happens to the liability of the company itself and
prevents them from insisting upon the bank exhausting its remedies against the
company before proceeding against them.
An English
mortgage is defied in clause (e) of section 58 of the Transfer of Property Act
as follows:
"English
mortgage.—Where the mortgagor binds himself to repay the mortgage-money on a
certain date, and transfers the mortgaged property absolutely to the mortgagee,
but subject to a proviso that he will re-transfer it to the mortgagor upon
payment of the mortgage-money as agreed, the transaction is called an English
mortgage."
The clauses
of the document already copied or summarised by me clearly bring the
transaction within this definition. Nor has any serious attempt been made by
the liquidator or Mr. Sundaraswamy to argue the contrary.
Clause 5(a)
also expressly confers upon the bank, the mortgagee, the right of sale without
the intervention of court which is described to be such a right within the
meaning of section 69 of the Transfer of Property Act. The relevant portion of
section 69 reads as follows :
"(1) A mortgagee, or any person acting on his
behalf, shall, subject to the provisions of this section, have power to sell or
concur in selling the mortgaged property, or any part thereof, in default of
payment of the mortgage-money, without the intervention of the court, in the
following cases and in no others, namely:
(a) where the mortgage is an English
mortgage, and neither the mortgagor nor the mortgagee is a Hindu, Muhammadan or
Buddhist or a member of any other race, sect, tribe or class from time to time
specified in this behalf by the State Government in the Official Gazette."
The remaining
sub-sections of the section deal with the conditions and restrictions subject
to which the right is to be exercised.
Prima facie,
therefore, the bank has the right of private sale. I must, however, add that
the right described in the expression "with power to buy in the said land,
hereditaments and premises at any sale by auction or to rescind or vary any
contract for sale" cannot be relied upon to authorise the bank to buy the
mortgaged property for themselves—vide Mulraj Virji v. Pratapmal.
The argument
advanced against the right of private sale is that the refe rence to a
mortgagee as a Hindu, Muhammadan or Buddhist in clause (a) may suggest that the
right conferred by the section is a right which can be exercised only by a living person and not by
a fictitious person like an incorporated company. The argument is not
acceptable because the terms "Hindu, Muhammadan, Buddhist" are used
to describe a class which is excluded from the larger class of mortgagees, and
the term "mortgagee" is defined in section 58 as merely the
transferee mentioned in the main definition of a mortgage as a transferee of
interest in a specific immovable property for the purpose of securing the
payment of money advanced, etc. That term is large enough to include all
persons, living or fictitious, capable of bearing rights and liabilities.
Another argument based on the same exclusion contained in clause (a) of section
69(1) is that in exhibit R-15, the mortgagors are not only the company but also
the eight directors who have joined as sureties, all of whom are Hindus. This
again is an argument which cannot be accepted, because the property that is
transferred by way of mortgage is undoubtedly that of the company, which alone
can transfer it or an interest therein, and which alone can therefore be
described as a mortgagor who, according to section 58, is the transferor in a
transaction which amounts to a mortgage. The directors who joined merely as
sureties were not owners of any interest in the property and could not
therefore be described as transferors so as to become mortgagors within the
meaning of section 58.
As to the
bank's right to possession, it is clearly traceable to the nature of the
mortgage itself. It is an English mortgage, and by the very definition it is in
the nature of a conveyance or transfer of the mortgaged property absolutely to
the mortgagee; the redemption of the mortgage also is in the nature of a
proviso for re-transfer or reconveyance of the property to the mortgagor upon
discharge of the mortgage. Absolute transfer must therefore comprehend the
transfer of the right to possession also. In fact, a mortgagee under English
mortgage is entitled to immediate possession and is also entitled to retain
possession until he is repaid—vide Rukmini Kanta v. Baldeo Das and Lutchmiput Singh v. Land Mortgage Bank of
India Ltd.
In the
document exhibit R-15, it will be noticed, express provision is made to the
effect that it is lawful for the mortgagors to retain possession and use the
mortgaged properties until the bank becomes entitled to take possession under
the document. The right to take possession arises in the comply with any of the
terms of the document.
It is
admitted in this case that by virtue of the above provisions the company
retained possession of the lands and buildings notwithstanding the mortgage and
continued to use the same for the company's business until in exercise of the
rights claimed by the bank under the document the bank took possession of the
properties in January, 1967. The circumstances in which such possession was
taken as stated by the bank are not denied by Amberkar, ex-managing director.
In fact, Amberkar's affidavit expressly states that possession was taken by the
bank in his presence after preparing an inventory of the machinery and other
articles and handing over a copy thereof to him. Therefore, it is a case of
voluntary handing over possession by the company as mortgagor in recognition of
the mortgagee-bank's right to take possession or upon an admission that the
circumstances had arisen such as to entitle the bank to take possession.
Points Nos. 2
and 3 therefore are held in favour of the bank.
The question
raised by point No. 4 is not quite free from difficulty. But here again, the
relevant facts are not in dispute. The only controversy is in regard to
inferences properly available from the said facts and their legal effect.
Portions of
section 293 of the Companies Act which are relevant to the discussion are
clauses (a) and (d) of sub-section (1). They read as follows:
"(1) The board of directors of a public company, or
of a private company which is a subsidiary of a public company, shall not,
except with the consent of such public company or subsidiary in general
meeting,—
(a) sell, lease or otherwise dispose of the
whole, or substantially the whole, of the undertaking of the company, or where
the company owns more than one undertaking, of the whole, or substantially the
whole, of any such undertaking; ......
(d) borrow moneys after the commencement of
this Act, where the moneys to be borrowed, together with the moneys already
borrowed by the company (apart from temporary loans obtained from the company's
bankers in the ordinary course of business), will exceed the aggregate of the
paid up capital of the company and its free reserves, that is to say, reserves
not set apart for any specific purpose."
The facts are
the following :—On 27th September, 1961, the board of directors resolved to
raise loans under various accounts from the bank to the extent of ten lakhs of
rupees on the pledge of movable and mortgage of immovables. On 30th November,
1961, they resolved that similar loans may be raised to the extent of seven
lakhs of rupees with the approval of the company in general meeting as required
by section 293(1)(d) and subject to various conditions apparently agreed upon
between the bank and the company. On 11th January, 1962, an extraordinary
general meeting of the shareholders of the company was held at which the
following resolution was passed :
"Resolved
that the consent be and is hereby accorded to the board of directors of the
company under the provisions of section 293 of the Companies Act, 1956, that
the directors may borrow and continue to borrow rnoneys (apart from temporary
loans obtained from the company's
bankers in the ordinary
course of business) for and on behalf of the company up to Rs. 20,00,000
(twenty lakhs).
Resolved
further that the company ratifies and confirms the borrowings hitherto made in
excess of the limit prescribed by section 293(l)(d)of the Companies Act,
1956."
The general
body minutes book of the company is marked exhibit P-1, and the proceedings of
the said general meeting are written on pages 46 and 47 thereof (exhibit P-l
(a)). The resolution is at page 47. The notice calling the meeting was called
for from the files of the Registrar of Companies, Mysore, and marked exhibit
P-2. The explanatory statement as required by section 173 of the Companies Act
appended to the notice reads as follows.
"The company
started the production of yarn from cotton in January, 1961, with 3,300
spindles. The company has a licence to instal 12,000 spindles. The company
intends to instal the balance of 8,700 spindles in two stages. In the I stage
4,700 spindles will be installed by June, 1962. The installation of the
remaining 4,000 spindles will be taken up soon after the unit of 8,000 spindles
is set in regular working. The cost of installing and operating additional
8,700 spindles, 4,700 in the I stage and 4,000 in the II stage, is estimated to
be about Rs. 14,00,000. The paid up capital of the company to date is Rs.
5,74,570. The borrowing to this date amounts to Rs. 7,14,500. It is considered
that raising funds for the purposes of the proposed expansion of the company's
activities by way of subscription of more capital will not be convenient at
this stage. It is proposed therefore to raise funds by way of borrowing moneys
from various sources. The borrowings made to date as also the borrowings
required to be made hereafter will exceed the limits prescribed by section 293
of the Companies Act. It is therefore considered necessary to get the approval
of the shareholders to the borrowings proposed to be made as also to the
borrowings already made."
There was a
subsequent extraordinary general meeting of the company held on 24th May, 1962,
at which an amendment to the articles of association of the company was carried
out with a view to authorise the bank to appoint special directors to sit on
the board of directors of the company to protect its interests in view of large
loans made by it to the company. Exhibit P-3 produced from the records of the
Registrar of Companies is the notice convening the said meeting. The
explanatory statement under section 173 in regard to the said amendment
appended to the notice reads as follows :
"The
company has taken a loan of Rs. 7,00,000 from the Bank of Maharashtra Ltd. The
said bank requires as one of the conditions of advancing the loan that they
should have power to nominate two directors on the board of directors of this
company, who will be non-rotating and need not hold qualification shares of
directorship. It is, therefore, necessary to amend the articles of association of the company to confer on the
said bank the power to nominate two directors as long as any moneys due under
the loan advanced by them shall be outstanding and due. Accordingly the special
resolutions are proposed as set out in the notice."
The argument
strongly presented by Mr. Sundaraswamy is that although there are several
documents, some in the form of mortgages of immovable property and some in the
form of hypothecations of movables, the transaction in substance was a single
transaction under which the bank lent money against the security of all the
properties, both movable and immovable, belonging to the company, that the
provisions of the mortgage deed, particularly in clause 5(i), are such as to
empower the bank to take over the entire management of the business of the
company, that by other engagements or agreements entered into by the company
with the bank, the bank obtained the right to appoint special directors and
also an undertaking by the managing agents not to plead their agreement with
the company against the bank when occasion arises for the bank to take over the
management pursuant to the terms of the mortgage deed and that, therefore,
taken as a whole, the position is nothing short of a total disposal of the
whole undertaking of the company in favour of the bank. Such a transaction
resulting in such a disposal of the whole undertaking of the company, he
argues, could not be entered into without the consent of the company expressly
taken pursuant to clause (a) of sub-section (1) of section 293 of the Companies
Act. He points out, further, that in regard to these transactions the only
resolution of the general body of the shareholders of the company got passed
was the resolution of 11th January, 1962, exhibit P-1(a), and that the said
resolution is limited to clause (d) of subsection (1) of section 293, with the
result that the only consent of the company in the general meeting secured was
the consent for borrowing sums in excess of the paid up capital and reserves,
and not for the disposal of the whole undertaking of the company.
Mr. Ullal
answers that the transaction, whether it consists of more parts lthan one
independent of each other or as a single transaction, is no more than a
mortgage or a security and cannot therefore be regarded as a disposal of its
undertaking, meaning a parting away with its enterprise or its profit-earning
capacities. An undertaking, according to Webster's Dictionary, only means
something that is undertaken or a business, work or project which one engages
in or attempts, or an enterprise. The undertaking of the company in that sense
has not been, according to Mr. Ullal, parted with by the company under or by
virtue of the mortgages and hypothecations. He also suggests that the
resolution, exhibit P-1(a), should not be read in the limited way in which Mr.
Sundaraswamy wants to do or that, in any event, it must be held that there has been ratification of
all the transactions by the company agreeing to the amendment of the
articles of association under the resolution, exhibit P-1(b).
Mr.
Sundaraswamy contends in reply to Mr. Ullal that in view of the express words
of the language used in the resolution, exhibit P-1(a), there can be no doubt
that the attention of the company was confined to clause (d) of sub-section (1)
of section 293 and that the case of the acquiescence or ratification has not
only been not pleaded in the counter-affidavit of the bank but also is
incapable of being made out on the facts of this case, because there can never
be an acquiescence in law unless the party said to have acquiesced in a state
of affairs had done so with the full knowledge of the details thereof. He also
points out that even in the explanatory statements annexed to the notices,
exhibits P-2 and P-3, pointed attention of the shareholders was drawn to the
fact that the loans exceed the paid up capital and reserves of the company and
not to the effect of the transactions being an actual disposal of the whole
undertaking of the company.
If the case
were to rest exclusively on the ascertainable meaning or the legal effect of
the resolutions of the general body of shareholders, it would have been
somewhat difficult for the bank to make out that there has been at least a
substantial compliance with the provisions of section 293(1)(a) of the Act. The
meaning and effect of the notices convening the meetings and the resolutions
adopted at the said meetings, as interpreted and suggested by Mr. Sundaraswamy,
are not matters which can be easily discounted or contradicted.
It appears to
me, however, that the question of substance which is of greater importance and
which should receive greater attention is the question whether Mr. Sundaraswamy
is right in saying that the impugned transactions really amount to a disposal
of the whole or the substantial portion of the undertaking of the company.
The word
"undertaking" is not defined in the Act. One has, therefore,
necessarily to depend upon the dictionary meaning or such secondary meaning the
term might have acquired by commercial usage or long practice governing the
workings of and borrowings by companies.
The ordinary
dictionary meaning is what has already been referred to by me while summarising
Mr. Ullal's arguments. It is not in its real meaning anything which may be
described as a tangible piece of property like land, machinery or the
equipment; it is in actual effect an activity of man which in commercial or
business parlance means an activity engaged in with a view to earn profit.
Property, movable or immovable, used in the course of or for the purpose of
such business can more accurately be described as the tools of business or
undertaking, i.e., things or articles which are necessarily to be used to keep
the undertaking going or to assist the carrying on of the activities leading to
the earning of profits.
Mr.
Sundaraswamy has placed strong reliance on the observations of Giffard L.J. in
his judgment in the case of In re Panama, New Zealand and Australian Royal Mail
Company .
Dealing with certain floating charge, which used the term
"undertaking", his Lordship stated that the word
"undertaking" there used had reference to all the property of the
company not only existing on the date of the debenture but what might
afterwards become property of the company.
Now, to understand
the effect of the above judgment of Giffard L.J., and the principles derivable
therefrom, it is necessary to point out that the said judgment is a landmark in
the legal history of what are called floating charges in English company law.
Floating charge is a peculiar legal concept specially developed in English law
in consonance with the interests and successful working of manufacturing or
trading companies. Having regard to the nature and extent of the operations of
such companies, it was impossible to meet all their financial needs from out of
their paid up capital alone. They had necessarily to depend upon large finances
made available to them either by banks or other financiers. In fact, such
borrowings in course of time came to be called working capital as distinguished
from the paid up share capital. Most of the assets of such companies were fixed
assets like lands and buildings and were absolutely necessary for the
operations and activities of such companies. Banks or financiers who lent moneys
naturally looked for security for their loans. Essentially and fundamentally
the source of recovery was the profitable working of the companies. The working
of companies was impossible if they were deprived of their fixed assets like
land and machinery ; at the same time, such fixed assets were the only tangible
security which the companies could offer. It is in such circumstances that the
idea of a floating charge was developed whereby all the fixed assets of a
company as well as the goods in the process of manufacture and unsold
manufactured goods so long as they continued in the custody of the company were
wholly and totally mortgaged or hypothecated to the lender. But the company was
left free to use its fixed assets and machinery, and to sell goods manufactured
by them without any hindrance or interference by the lender so long as the
company worked and continued to make periodical repayments with interest on
portions of moneys borrowed by it, the lender being given and retaining the
ultimate power of taking possession of fixed assets and all available
properties, immovable and movable, as soon as the company committed default,
stopped working or went into liquidation. Technically, it was stated that at
that point of time the floating charge got fixed on the properties and the
lender became immediately entitled to realise his moneys from out of those
properties.
It is in the
light of this history of the concept of floating charges that the judgment of
Giffard L.J., cited above, should be read. I give below a sufficient portion of
his Lordship's judgment for a full understanding of the true legal position.
After stating that the company was empowered to execute mortgages as well as
issue debentures and that they could exercise both these powers by a single instrument,
his Lordship proceeded to describe the legal position in the following words :
"Accordingly
they did issue what they called a mortgage debenture, which was, in substance,
a bond, and a charge upon their property for the sum borrowed on bond. The form
of the instrument is not an assignment but a charge; the company charge the
undertaking, and all sums of money arising therefrom, and all estate, right, title,
and interest of the company therein, with payment of the principal sum and
interest. I asked in the course of the argument what could be the subject
matter of that charge, and the answer given was, that there were valuable
contracts, and that all that the charge was meant to cover was the income
arising from the business being carried on, and that it would not extend to
property, such as the ships and other property of that nature, which were
absolutely essential to the carrying on of the concern. I cannot accede to any
such proposition as that. I have no hesitation in saying that in this
particular case, and having regard to the state of this particular company, the
word 'undertaking' had reference to all the property of the company, not only
which existed at the date of the debenture, but which might afterwards become
the property of the company. And I take the object and meaning of the debenture
to be this, that the word ' undertaking ' necessarily infers that the company
will go on, and that the debenture-holder could not interfere until either the
interest which was due was unpaid, or until the period had arrived for the
payment of his principal, and that principal was unpaid. I think the meaning
and object of the security was this, that the company might go on during that
interval, and, furthermore, that during the interval the debenture-holder would
not be entitled to any account of mesne profits, or of any dealing with the
property of the company in the ordinary course of carrying on their business. I
do not refer to such things as sales or mortgages of property, but to the
ordinary application of funds which came into the hands of the company in the
usual course of business. I see no difficulty or inconvenience in giving that
effect to this instrument. But the moment the company comes to be wound up, and
the property has to be realised, that moment the rights of these parties,
beyond all question, attach.''
Now, it will
be noticed that the essence of the transaction is that the company is permitted
to retain the use of all its property and continue to engage in its
manufacturing or business activity and is not to be interfered with so long as
it continues to work and continues to make repayment in the manner agreed upon
between it and its lender. So long as this result is ensured and the company
continues to engage in its work, the form or language of the instruments under
which money is borrowed is of little or no consequence, and so long as such
position is assured, I do not think it can be rightly contended that the
company has parted with its undertaking or business or disposed of its
undertaking within the meaning of clause (a) of sub-section (1) of section 293.
All that it has done is, mortgaged all its properties for raising funds for its
working.
In the
documents with which we are now concerned, it will be seen that, although the
mortgage is drafted in the form of an English mortgage under which the
mortgagee is entitled to immediate possession of the property, the
mortgagor-company is permitted to continue in possession and the mortgagee-bank
is not to take possession of the properties until the company commits default
in observing the terms of the instrument. In the deed of hypothecation of
movables, the contingencies in which the bank can take possession of the
hypothecated properties are more elaborately enumerated and they include not
only defaults on the part of the company but also winding up, whether voluntary
or compulsory.
In actual
effect, therefore, the documents create what can rightly be described as a
floating charge or more accurately, the documents, properly understood, have
the same effect as a floating charge described above.
It cannot
therefore be contended that the company has disposed of the whole or any part
of its undertaking understood in the correct sense.
There is,
however, only one clause which appears to be out of tune with that I have
stated above, and that is clause 5(i) of the deed of mortgage, exhibit R-15.
The effect of that clause is to empower the bank not merely to take possession
as mortgagee for the purpose of realising its dues from out of the property
expressly given to it; as security but also to actually take over the
management of the business of the company. It appears to me that the said
clause is invalid, because to permit the bank to take over the management of
the company's business itself may be regarded as a disposal by the company of
the whole of its undertaking to the bank. But the invalidity of this one clause
in the document need not, in my opinion, be said to have a fatal effect on the
entire transaction itself. This clause alone can be struck down to the extent
it empowers the taking over of the management of the business of the company
without affecting the validity of the enforceability of the rest of the terms.
In actual event, the bank has not taken possession of the management; it has
simply taken over the mortgaged properties into its possession and that taking
of possession should be related in the normal course to a legal right properly and
lawfully exercisable by the bank, viz., the right to take possession for
the purpose of realising its securities
and recovering the moneys due to it from out of the properties expressly
mortgaged or charged in its favour.
My finding on
the 4th point therefore is that except to the extent clause 5(i) of exhibit
R-15 and the corresponding clause of exhibit R-34, which empower the bank to
take over the management of the business of the company, neither the mortgages
nor the hypothecations are invalid for contravention of clause (a) of
sub-section (1) of section 293 of the Companies Act, 1956, and that the said
offending clauses are alone invalid and unenforceable to the extent mentioned
above.
In the light
of my findings, I make the following common order on both these Applications
Nos. 143 of 1967 and 20 of 1968:
(1) The Bank of Maharashtra, the
applicant in Company Application No. 143 of 1967, is a mortgagee of the
immovable properties and hypothecatee of the movable properties of the company
described in exhibits R-8, R-15, R-21, R-31, R-34 and R-39, and that in
exercise of the rights and powers
conferred upon it by the said documents, it is entitled to take and retain
possession of the properties described in the said documents for the purpose of
recovering the moneys due to it by enforcing its security against the said
properties. It has also the power of selling the said properties without the
intervention of court for the purpose of recovering the moneys due to it in
accordance with and by complying with the provisions of the Transfer of
Property Act and the Contract Act governing the exercise of such power. The
bank will be accountable to the company in liquidation as a mortgagee in
possession, and if it exercises its power of sale without the intervention of
court, it will be accountable for the moneys realised by sale in accordance
with or in terms of sub-section (4) of section 69 of the Transfer of Property
Act.
(2) I
express no opinion as to the exact amount now due to the bank.
(3) The bank is directed to deliver all
articles of furniture belonging to the company now in its possession to the
official liquidator.
In both these
applications, the parties will bear their own costs.
andhra
pradesh high court
companies act
[2004] 55 scl 459 (ap)
HIGH COURT OF ANDHRA PRADESH
Irrigation Development Employees Association
v.
Government of Andhra Pradesh
B. SUDERSHAN REDDY AND K.C. BHANU, JJ.
W.A. NOs. 1039 OF 2002 AND 1594 OF 2003
MARCH
16, 2004
Section
291, read with section 36, of the Companies Act, 1956 - Directors-Powers of -
Appellants represented employees working in various categories in A.P. State
Irrigation Development Corporation Ltd. (Corporation) - State Govt. was only
stakeholder in Corporation - In order to improve performance of Corporation,
State Government issued an order to downsize cadre strength - Appellants filed
writ petitions against said order which was dismissed by Single Judge - Whether
since order issued by State Government was as shareholder of Corporation and
not in exercise of its power under article 162 of Constitution, principle of
administrative law could not be applied to test validity of governmental action
- Held, yes - Whether, therefore, impugned order issued by Government and
compliance thereof by board of directors could not be set aside either by
applying doctrine of ultra vires or rule against surrender of discretion and
abdication of duty - Held, yes - Whether to downsize cadre strength, since
Corporation had applied recognized reasonable procedure of ‘last come first go’
in each category of employees, it could not be said to be either irrational or
in violation of articles 14 and 16 of Constitution - Held, yes
Facts
The appellants
represented the employees working in various categories in the A.P. State
Irrigation Development Corporation Ltd. (Corporation). It was one of the State
level public enterprises and was wholly owned by the State Government. The
State Government was the only stakeholder in the Corporation. The Corporation
originally had 2541 employees. In order to initiate necessary corrective
measures to improve the performance of the Corporation, a decision had been
taken to downsize the cadre strength. So, the Corporation, implemented the
Voluntary Retirement Scheme. The option was exercised by 1593 employees, leaving
a balance of 948 employees. The Government, having reviewed the performance of
the Corporation again, decided that the cadre strength should be reduced to 404
employees. Hence, the Government vide G.O. Ms No. 50 dated 15-11-2001, issued
order to that effect. Against aforesaid order, appellants filed writ petitions
which were dismissed by the Single Judge.
On writ appeal
:
Held
The Corporation was a Government company registered under
the Companies Act, 1956, and had its own legal entity, distinct and separate
from the Government. The management of the affairs of the company and its
day-to-day affairs vested with the board of management. The board of directors
of the Corporation determined the staffing pattern. The staffing pattern was
under continuous review from time-to-time. The review was based upon the
requirement of staff which was need-based to undertake economically viable
projects. The Corporation sought for the Government’s approval from
time-to-time to float Voluntary Retirement Scheme to discharge surplus
manpower. The Corporation itself submitted proposals to further downsize the
cadre strength of the Corporation so as to make the organization economically
viable and also for its survival. At one stage, the Government had proposed the
cadre strength of respondent-Corporation at 281 employees but with the efforts
of the management of the Corporation, it was subsequently increased to 404
employees. These facts clearly highlighted that the board of directors of the
Corporation was actively involved in the decision-making process and the
proposals at every point of time emanated from the board of the Corporation
itself. [
Even under
article 90 of the articles of association, the Government was entrusted with
powers to approve the staffing pattern, rules for recruitment, promotions, pay
scales, allowances and, other payments, etc. The Government was entitled to
issue such directives or instructions as it thought fit (sic) in regard to
finances and the conduct of the businesses and affairs of the company and all
such directions issued were required to be complied with by the board of
directors. The width and amplitude of the power of the Government under article
90 was wide enough which included the power to issue directions with regard to
staffing pattern. The power to issue directions or instructions in regard to
the affairs of the company was wide enough to include the power to issue
directions to fix the cadre strength. The contention that under article 90, the
Government was entitled only to approve the proposals regarding staffing
pattern but could not issue directions was totally untenable. [
A reading of
sections 36(1) and 291(1) makes it clear that the board of directors of the
company are also bound to act in accordance with the memorandum and articles.
Therefore, the contention that article 90 contravened section 291 was totally
untenable and unsustainable. [
The public
law remedy available under article 226 of the Constitution of India cannot be
invoked to resolve issues regarding the validity of the articles of association
of a company, or about exercise of powers prescribed therein, since the
articles of association, do not contain the bye-laws of a co-operative society
and do not have the force of law. The doctrine of ultra vires has no
application to test the validity of an action under the memorandum and articles
of association of a company. The articles of association merely govern the
internal management, business or administration of a company. They may be binding
upon the persons affected by them but they do not have the force of statute.
The articles of association of a company incorporated under the Act have never
been held to have the force of law. [
The power
exercised by the Government, in the instant case, was as the shareholder of the
Corporation and not in exercise of its power under article 162 of the
Constitution. In that view of the matter, it would be impermissible to apply
the principles of administrative law in order to test the validity of the
Governmental action in the instant case. Article 14 of the Constitution cannot
be construed as a charter of judicial review of State’s actions and to call
upon the State to account for its action in its manifold activities by stating
reasons for such actions. The principles of administrative law, such as against
surrender of discretion and abdication of duty would apply in case of exercise
of power conferred by a statute or rules made thereunder or instruments, which
are statutory in their nature. The direction issued by the Government in its
capacity as a shareholder that the cadre strength of the Corporation be fixed
at 404 employees and the compliance thereof by the board of directors could not
be set aside either by applying the doctrine of ultra vires or rule against
surrender of discretion and abdication of duty. [
The instant case was a case where the decision and the
reasons for the decision could only be gathered by looking at the entire course
of events stretching over the period from the initiation of the proposal to
reduce the staff as recommended for restructuring by Committee to the taking of
the final decision impugned in the writ petition. In the instant case, neither
a statutory function nor a statutory provision was involved. Though the issue
relating to restructuring and the decision, bore public character but that
could only be settled after protractive decision, clarification and
consultation with all the interested persons. Therefore, the impugned
governmental Order could not be interfered with by applying the doctrine of
ultra vires, the rule against surrender or abdication of duty. The contention
was, accordingly, rejected. [Paras 23 and 24]
Policy decision and abolition of
posts
Reduction of cadre strength had resulted in abolition of
posts. Downsizing of the cadre strength in the Corporations is a part of the
restructuring process of State level public enterprises in order to improve
their performance, minimize public liability and thereby promote and advance
public interest. Therefore, the decision of the Government as well as that of
the Corporation was in the nature of policy decision. [
Policy decision resulting in
abolition of certain posts - Whether suffered from any Constitutional vice
The
respondent-Corporation was an instrumentality of the State within the meaning
of article 12. Its decisions were liable to be tested on the touchstone of
articles 14 and 16, i.e., as to whether the policy decision was taken in
violation of Part-III of the Constitution of India. The High Court is well
within its limits to declare the policy as unconstitutional. But it is clearly
well-settled that the High Court in exercise of the power of jurisdictional
review cannot embark upon an enquiry as to whether a particular policy is vice
or whether a better public policy can be evolved. The wisdom and advisability
of policy decisions, which are not in violation of Part-III of the Constitution
of India, are not amenable to judicial review. [
The right of
the State or of its instrumentality to change its policy decisions from
time-to-time under the changing circumstances cannot be disputed and it is an
integral part of democratic process. The High Court in exercise of its
jurisdiction under article 226 of the Constitution while considering the
validity of the Governmental policy cannot weigh the pros and cons of the
policy or scrutinise it and test the degree of its beneficial or equitable
disposition for the purpose of varying, modifying or annulling it, based on
even or sound reasoning. One of the inputs in formulating and reformulating the
Governmental policies may be availability or lack of resources. Since the purse
of the State is not under the control of the court, it will not transgress into
the field of policy decision. [
The impugned
court order itself provided details of budgetary allocations on the works
allotted to them for the past 60 years. It was estimated on the basis of
previous six years figures that the Corporation would be able to obtain and
execute the works worth only Rs. 65 crores and not beyond that. It was under
those circumstances, that the decision to downsize the cadre strength, to the
level of 404 employees was taken. There had been a drastic reduction in
execution and maintenance of tube-wells and bore-wells by the Corporation. On
account of high interest rates, the Corporation had stopped borrowing loans and
it was now totally dependent on budgetary support from the Government for
finance to execute the sanctioned schemes. Availability of large number of
administrative works on hand was a matter of no consequence. Unless budgetary
allocations were made and budgetary releases were made therefrom, the
sanctioned administration works could not be executed for lack of funds. The
factors that were taken into consideration by the respondents in formulating
policy decision to downsize the cadre strength could not be characterised as
arbitrary. The decision was neither arbitrary nor in violation of Part-III of
the Constitution of India. [
Principles of
Natural Justice
It is
well-settled that reduction of cadre strength and consequent abolition of posts
are matters of policy and principles of natural justice have no application at
all in such matters of policy. [
Be that as it
may, the decision of the Government as well as the Corporation was not taken
unilaterally without any process of consultation. More than one authority was
involved in the consultation process. The authorities had discussed various
aspects with the Corporation and the service associations separately. The
service associations representing the employees made written representations
requesting not to further downsize the cadre strength. It was not, as if, any
viable alternative proposal emanated from the associations and the same had not
been taken into consideration before formulating the impugned policy decision.
In the circumstances, there was no merit in the submission made by the
appellant that the policy decision was vitiated on account of non-compliance
with the principles of natural justice. [
writ of mandamus -
whether can be issued to compel state to provide more funds by way of
allocations
The
appellants in effect sought the intervention of the High Court to command the
State Legislature to provide more funds by way of budgetary
allocations/releases. [
It is
well-settled that the High Court in exercise of the power under article 226
cannot issue a writ of mandamus to make law. [
It is true
that the Corporation had been established to cater to certain functions of the
State which were in larger public interest as providing irrigation
infrastructural facilities is undoubtedly in larger public interest, but it is
subject to availability of financial resources and the priorities for which the
Legislature, in its wisdom, decides to allocate the funds. It is for the
Government to decide as to how it can utilize the available resources at its
command. The High Court in exercise of its jurisdiction under article 226
cannot compel the State to alter its priorities and utilise the available
resources either for a specified public purpose or vary or modify, the
priorities chosen by the State. [
For the
aforesaid reasons, it was not appropriate to interfere with the well considered
judgment of the Single Judge. [
The
downsizing of the cadre strength that had resulted in abolition of certain
posts did not suffer from any constitutional infirmities. The decision was not
violative of articles 14 and 16. The contentions raised in that regard were,
accordingly, rejected. The impugned order passed by the court was upheld. [
Identification of surplus employees - Whether it suffered
from any arbitrariness?
The impugned order gave the details of employees in
different cadres/categories constituting sanctioned strength of 404 employees
of the Corporation. Other than those cadres/categories, the remaining
cadres/categories had been abolished in their entirety. Therefore, the surplus
employees were required to be identified only from amongst the different
cadres/categories constituting the sanctioned strength of 404 employees. The
Corporation identified surplus employees by applying the general principle of
‘last come, first go in each category’ uniformly. The downsizing of the cadre
strength of Corporation was taken up as a matter of policy by the Government to
ensure the survival of the Corporation. Uniform methodology was adopted in
declaring surplus staff duly taking their date of entry into the cadre. [
Under section 25G of the Industrial Disputes Act, 1947, in
case of retrenchment, the employer is required to ordinarily retrench the
workman who was the last person to be employed in that category. It is true
that section 25G applies only to workmen but the principle ‘last come first go
in each category’ is a recognised reasonable procedure. The application of such
procedure in identifying the surplus employees cannot be said to be either
irrational or in violation of articles 14 and 16 of the Constitution. It was
explained that the emanated objective sought to be achieved under VR Scheme,
notified in the Corporation’s circular was to achieve the optimum level of
manpower in the Corporation with a desirable average age mix so as to cope with
the changing needs of the society and the organisation. It was under those
circumstances that the Corporation considered it appropriate to apply the
principle of ‘last come first go in each category’ to achieve the objective of
having a desirable age mix to cope with the changing needs. There was a
possibility of applying the procedure of ‘step’ down’ canvassed by the
appellants for identifying surplus employees, based on their total length of
service in the Corporation. Even such a procedure could have been a reasonable
procedure and may have satisfied the test laid down under articles 14 and 16.
But unless the Court came to the conclusion that the principle of ‘last come
first go in each category’ applied by the Corporation was arbitrary and in
violation of articles 14 and 16, no directions could be issued directing the
Corporation to adopt the procedure of ‘stepping down’ in substitution of the
adopted procedure. When there were two reasonable modes for identification of
the surplus employees available, the Corporation was entitled to choose one
such reasonable mode and in such a situation, the High Court in exercise of its
jurisdiction under article 226, could not compel the Corporation to adopt the
other mode which in its view may equally be reasonable and efficacious. [
The Corporation did not single out any employee for any
adverse treatment as such. It was not the case of the appellants that the
action of the Corporation in identifying the surplus employees was a colourable
exercise of power. Neither any post was created nor promotions effected with a
view to declare such promoted employees as surplusage. On the other hand, the
Corporation identified nearly 450 employees as surplus by uniformly applying
the principle of ‘last come first go in each category’ except in case of
employees belonging to scheduled castes and scheduled tribes category. [
For the aforesaid reasons, there was no infirmity in the
procedure followed for identification of surplus staff. The methodology adopted
and the procedure advised in that regard was neither arbitrary nor unreasonable
and, therefore, not hit by articles 14 and 16 as ‘last come first go’ is one of
the well-known reasonable rules adopted in cases of retrenchment of employees
consequent upon abolition of posts. [
The appellants further submitted that they were neither put
on notice nor they were given any opportunity of being heard prior to their
being identified as surplus by the Corporation and as such, the entire exercise
of identification was vitiated for the reason of non-compliance with the principles
of natural justice. So far as the employees in the workman category, who had
been identified as surplus and had not taken VR Scheme, were concerned, they
could only be retrenched in accordance with section 25N of the Industrial
Disputes Act, 1947. In that regard, it could be said that the rights of the
employees in the workmen category were so well protected that failure on the
part of the Corporation in giving them an opportunity of being heard at that
stage was of no consequence since they were not being retrenched straightaway
by the Corporation. [
It is well-settled that in all cases of violation of the
principles of natural justice, the court in exercise of its jurisdiction under
article 226, need not necessarily interfere and set at naught the action taken
unless the decision taken has resulted in any prejudice. [
On the facts and in the circumstances, no useful purpose
could have been served by putting the appellants on notice before the actual
identification of the surplusage. No real prejudice had been caused to the
appellants on account of not affording the opportunity to make representation.
The Corporation uniformly applied the rule of ‘last come first go in each
category’ in the process of identification of the surplusage. In the
circumstances, it was not possible to interfere with the decision of the
Corporation on the ground of infraction of rule of audi alteram partem. [
In the result, all the writ appeals were dismissed except
with regard to claim of the physically disabled employees in whose case, the
High Court having referred to the Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995,
considered it appropriate to direct the Corporation to examine the feasibility
of applying roster backwards. [
Cases referred to
Co-operative Central Bank Ltd. v. Additional Industrial Tribunal AIR 1970
SC 245 (para 20), LIC of India v. Escorts Ltd. AIR 1986 SC 1370 (para 21),
Rakesh Ranjan Verma v. State of Bihar AIR 1992 SC 1348 (Para 25), Poddar
Projects Ltd. v. A.P.S.E. Board AIR 1982 AP 189 (para 26), Balco Employees’
Union (Registered) v. Union of India [2002] (2) SCC 333/2002 AIR SC 350 (para
29), State of Punjab v. Ram Lubhaya Bagga AIR 1998 SC 1703 (para 30), Narmada
Bachao Andolan v. Union of India AIR 2000 SC 3751/(10) SCC 664 (para 30), Union
of India v. Tejram Parashramji Bombhate AIR 1992 SC 570 (para 30), M. Ramnatha
Pillai v. State of Kerala AIR 1973 SC 2641 (para 33), State of Himachal Pradesh
v. Umed Ram Sharma AIR 1986 SC 847 (para 46), Managing Director Uttar Pradesh
Warehousing Corpn. v. Vinay Narayan Vajpayee AIR 1980 SC 840 (para 61), A.L.
Kalra v. Project & Equipment Corpn. of India Ltd. AIR 1984 SC 1361 (para
61), Suraj Prakash Bhandari v. Union of India AIR 1986 SC 958 (para 65), State
of Haryana v. Des Raj Sangar AIR 1976 SC 1199 (para 65), Haryana Financial
Corpn. v. Jagadamba Oil Mills 2002 AIR SC 834/[2002] (3) SCC 496 (para 66),
Ashwani Kumar Singh v. U.P. Public Service Commission 2003 AIR SC 2661 (para
66), State of Orissa v. Sudansu Sekhar Misra AIR 1968 SC 647 (para 67), A.K.
Kraipak v. Union of India AIR 1970 SC 150 (para 75), Central Inland Water
Transport Corpn. v. Brojo Nath Ganguly AIR 1986 SC 1571 (para 75), Delhi
Transport Corpn. v. D.T.C. Mazdoor Congress AIR 1991 SC 101 (para 75), M.C.
Mehta v. Union of India AIR 1999 SC 2583 (para 84), Aligarh Muslim University
v. Mansoor Ali Khan AIR 2000 SC 2783 (para 85), State of Karnataka v. Mangalore
University Non-Teaching Employees’ Association [2002] (3) SCC 302/2002 AIR SC
1223 (para 86), G. Govinda Rajulu v. Andhra Pradesh State Construction Corpn.
Ltd. AIR 1987 SC 1801 (para 90), Management of Dandakaranya Project v. Workmen
through Rehabilitation Employees Union AIR 1997 SC 852 (para 92), Ajit Singh v.
State of
Vedula
Venkataramana, Nuty Ram Mohan Rao, A. Suryanarayana Murthy, S. Laxma Reddy,
V.R.S. Anjaneyalu and J. Ramachandra Rao for the Appellant. Ramesh
Ranganathan for the Respondent.
Judgment
B. Sudershan
Reddy. J. - Since in all these writ appeals and writ petitions the
subject-matter and the questions that arise for consideration are
inter-related, they may be disposed of by this common judgment.
W.A. No. 1039
of 2002
2. The unsuccessful
writ petitioners are the appellants in this writ appeal preferred against the
order passed in W.P. No. 24647 of 2001 dated June 4, 2002 holding that G.O. Ms.
No. 50, Public Enterprises (II) Department, dated November 15, 2001, does not
suffer from any illegality or legal infirmity.
3. The appellants
herein filed the writ petition invoking the extraordinary jurisdiction of this
Court under Article 226 of the Constitution of India, with a prayer to issue a
writ in the nature of mandamus declaring G.O. Ms. No. 50, Public Enterprises
(II) Department, dated November 15, 2001, as illegal and void.
4. The appellants
represent the employees working in various categories in the A.P. State
Irrigation Development Corporation Limited (for short ‘the Corporation’). The
Corporation is one of the State Level Public Enterprises and it is a wholly
owned A.P. Government Company, registered under the provisions of the Companies
Act, 1956. The primary objects of the Corporation are to survey, investigate,
construct, execute and carry out schemes and works of all kinds for the
exploitation of irrigation potential in the State and for maximum utilisation
of available water resources, to create irrigation facilities to the upland areas
through lift irrigation and ground water schemes. The paid up share capital of
the Corporation was at Rs. 117.22 crores as on March 31, 2001. The company is
being managed by its Board of Directors. That almost all the shares are held by
the State Government except Rs. 95,00,000 of share money held by the Government
of India. The State Government is the only stakeholder in the company. Article
90 of the Articles of Association of the Company enables the Government to
issue directions and instructions from time to time. Article 90 reads thus:
“Notwithstanding anything contained in any of
these articles, the Government may from time to time issue such directives or
instructions as they may think fit in regard to the finances and the conduct of
the business any affairs of the Company and the Directors shall duly comply
with and give effect to such Directives or instructions.
In particular the
Government will have the following powers. To call any information, approve
plans, Budgets, foreign collaborations, new business and activity, new projects
over and above the limits specified by the Government. Further the following
powers/acts are vested only in the Government to approve the staffing pattern,
rules for recruitment, promotions, pay scales, allowances and all other
payments.”
5. The Government of
Andhra Pradesh having decided to review the performance of State Level Public
Enterprises and in order to initiate necessary corrective measures to improve
their performance in the light of the changed policy perspectives constituted a
Committee with Sri K. Subrahmanyam, IAS (Retired), as Chairman. The Committee
examined the details of the working of State Level Public Enterprises including
the working of the 3rd respondent Corporation and submitted its recommendations.
The Government constituted a Cabinet Sub-Committee to examine in detail the
recommendations of the Committee after duly obtaining the views of the
administrative departments concerned. The Cabinet Sub-Committee having
considered the issue made its own recommendations in respect of the 3rd
respondent Corporation. The full details thereof are not required to be
noticed.
6. The Corporation
originally had 2541 employees. In the light of the recommendations of the
Subrahmanyam Committee and in order to implement the recommendations of the
Subrahmanyam Committee, a decision has been taken to downsize the cadre
strength. The Corporation has implemented Voluntary Retirement Scheme (for
short ‘VR Scheme’) in three phases, the options for which were exercised by
1593 employees, leaving a balance of 948 employees working in the Corporation.
7. The Government
once again reviewed the performance of the 3rd respondent Corporation in
August, 1999. It was found that there is a need to study the staff strength
with reference to the changed organization structure consequent on
implementation of VR Scheme. The Transaction and Financial Adviser,
Implementation Secretariat of the Public Enterprises Department, conducted the
study, submitted a report and recommended that the cadre strength of the 3rd
respondent-Corporation should be fixed at 404 employees. The matter was placed
before the Cabinet sub-Committee on Public Sector Undertakings and the Cabinet
Sub-Committee in its meeting held on September 22, 2001, having considered the
manpower study of the Corporation concurred with the recommendation that the
cadre strength of the respondent-corporation ought to be fixed as 404
employees. Based on the recommendations of the Cabinet Sub-Committee, the
Government vide G.O. Ms. No. 50 dated November 15, 2001 determined and
accordingly ordered the cadre strength of the Corporation as 404 employees as
detailed in the annexure appended to the said G.O. The appellants challenged
the same in the writ petition unsuccessfully.
8. Sri V.
Venkataramana, learned counsel, appearing on behalf of the appellants inter
alia contended that the Government of Andhra Pradesh has no power or authority
to issue the impugned G.O. downsizing the cadre strength to the level of 404
employees. The decision, if any, in this regard, if at all, could have been
taken only by Corporation. The Corporation on being a juristic person is
entitled to fix the cadre strength of the staff and staffing pattern. Being the
employer, such decision to be taken is in the exclusive domain of the
Corporation. Article 90 of the Memorandum of Articles of Association does not
empower the Government to issue any such directions downsizing the cadre
strength of the staff in the Corporation. The decision of the Government
amounts to interference in the affairs of the Corporation. The learned counsel
alternatively contended that there is no valid and tangible material available
on record in support of the decision taken by the Government. No relevant
factors went into consideration and therefore, the decision making process is
vitiated. The learned counsel proceeded to contend that even if the decision of
the Government is to be recorded, as a policy decision, the same is liable to
be tested on the touchstone of Article 14 of the Constitution of India. A
decision based on irrelevant consideration is an arbitrary decision and liable
to be struck down as violative of Article 14 of the Constitution of India.
9. Sri Ramesh
Ranganathan, learned Additional Advocate-General, contended that reduction of
cadre strength and consequent abolition of posts are matters of policy and the
High Court in exercise of the power of judicial review cannot embark upon an
enquiry as to whether the particular policy is wise or whether a public policy
can be evolved, unless such policy decisions violate Articles 14 and 16 of the
Constitution of India. The learned Additional Advocate-General contended that
the reasons are clearly and specifically stated and are evident from the
impugned G.O. itself. That on account of the accumulative loss, there was no
other option except to downsize the cadre strength of the staff. The power
exercised by the Government under Article 90 of the Memorandum of Articles of
Association, is as the shareholder of the Corporation and not in exercise of
its executive power under Article 162 of the Constitution of India. Article 90
of the Memorandum of Articles of Association of the Corporation empowers the
Government to approve the staffing pattern of the Corporation. In any event,
the proposals for downsizing of the cadre strength emanated from the
Corporation itself and the Corporation and members of the appellants’
association were actively involved before the impugned G.O. was issued.
10. We have elaborately
heard the learned counsel appearing on behalf of the appellants as well as the
learned Additional Advocate-General representing the State as well as the
Corporation. We have given our earnest and anxious consideration to the rival
submissions made during the course of hearing of this batch of appeals.
11. In order to
consider the submissions, it is just and necessary to notice a few facts about
which there is no dispute.
12. The impugned G.O.
dated November 15, 2001 itself reveals that the Corporation has been incurring
losses continuously over the years and that the accumulated loss as on March
31, 2001 stood at Rs. 27 crores, as on March 31, 2002 it was Rs. 38 crores and
as on March 31, 2003 it was Rs. 42.62 crores.
13. The accumulated
losses of the Corporation are on account of several factors and it would not be
possible for this Court to make a detailed enquiry notwithstanding the several
accusations made by the appellants against the respondent-Corporation holding
it exclusively responsible for the losses incurred by the Corporation. Each
blamed the other.
14. There does not
appear to be much dispute that the Corporation used to execute its schemes with
the financial assistance provided by the Government of A.P. and institutional
finance at a debt equity ratio of 1:3. The Government of Andhra Pradesh used to
release the share capital every year and in addition thereto, the Corporation
used to borrow loans from Nationalised Banks to meet its financial
requirements. The NABARD refinanced the said loans borrowed by the Corporation from
the commercial banks. The refinance facility by NABARD was stopped during 1988
and thereafter, the Corporation had to borrow loans directly from the
commercial banks at RBI specified interest rates. Due to high incidence of
interest, the 3rd respondent stopped borrowing loans and started exclusively
depending on the Government and District Agencies for funds to execute its
schemes. The fact remains that the Corporation, now is, totally dependent on
budgetary support from the Government for finance to execute the sanctioned
schemes. The details of the budget releases based on the works allotted by the
Government to the Corporation during the past three years are evident from the
impugned G.O. itself.
15. There is also no
dispute that the Corporation earlier used to execute and maintain lift
irrigation schemes, bore-wells and tube-wells. After closure of the A.P. Wells
Scheme, funded by
16. In the light of
background facts, we now proceed to consider the submissions made before us.
Whether the Government has no power or authority to issue the impugned
G.O.?
17. There cannot be any
dispute that the Corporation, a Government company registered under the
Companies Act, 1956, has its own legal entity, distinct and separate from the
Government. The management of the affairs of the company and its day-to-day
affairs vest with the Board of Management. The Board of Directors of the
Corporation determined staffing pattern at their 43rd meeting held on September
29, 1990. The staffing pattern was under continuous review from time to time.
The review was based upon the requirement of staff to be need based to
undertake economically viable projects. The Corporation sought for the
Government’s approval, from time to time to float V.R. Scheme to discharge
surplus manpower. The Corporation itself submitted proposals on January 6, 1991
to further downsize the cadre strength of the Corporation so as to make the
organisation economically viable and also for its survival. At one stage, the
Government has proposed the cadre strength of respondent-Corporation at 281
employees and with the efforts of the management of the Corporation, it was
subsequently increased to 404 employees. We have adverted to these facts in
order to highlight that the Board of Directors of the Corporation are actively
involved in the decision-making process and the proposals at every point of
time emanated from the Board of the Corporation itself.
18. That even under
Article 90 of the Memorandum of Articles of Association, the Government is
entrusted with powers to approve the staffing pattern, rules for recruitment,
promotions, pay scales, allowances and other payments etc. The Government is
entitled to issue such directives or instructions as it may think fit (sic) in
regard to finances and the conduct of the businesses and affairs of the company
and all such directions issued are required to be complied with by the Board of
Directors. The width and amplitude of the power of the Government under Article
90 of the Memorandum of Articles of Association is wide enough which includes
the power to issue directions with regard to staffing pattern. The power to
issue directions or instructions in regard to the affairs of the company is
wide enough to include the power to issue directions to fix the cadre strength.
The contention that under Article 90 of the Memorandum of Articles of
Association, the Government is entitled only to approve the proposals regarding
staffing pattern itself but cannot issue directions is totally untenable. The
general powers of the Board of Directors of a company under section 29(1) of
the Companies Act, 1956, are subject to the provisions of the Act.
19. Section 36(1) of
the Companies Act provides that the memorandum and articles shall, when
registered, bind the company and the members thereof to the same extent as if
they respectively had been signed by the company and by each member, and
contained covenants on its and his part to observe all the provisions of the
memorandum and of the articles. A reading of sections 36(1) and 291(1) of the
Companies Act, makes it clear that the Board of Directors of a Company are also
bound to act in accordance with the memorandum and articles. Therefore, the
contention that Article 90 of the Articles of Association contravenes section
291 of the Companies Act is totally untenable and unsustainable.
20. Be it as it may,
the public law remedy available under Article 226 of the Constitution of India
cannot be invoked to resolve the issues regarding the validity of the Articles
of Association of a Company, or exercise of powers prescribed therein, since
the Articles of Association, lacks the bye-laws of a Co-operative Society and
do not have the force of law. The doctrine of ultra vires has no application to
test the validity of an action under the Memorandum and Articles of Association
of a company. The Articles of Association merely govern the internal
management, business or administration of a company. They may be binding
between the persons affected by them but they do not have the force of statute.
The Articles of Association of a company incorporated under the Companies Act
have never been held to have the force of law. (See: Co-operative Central Bank
Ltd. v. Additional Industrial Tribunal AIR 1970 SC 245).
21. The power exercised
by the Government in the instant case is as the shareholder of the Corporation
and not in exercise of its power under Article 162 of the Constitution of
India. In that view of the matter, it would be impermissible to apply the
principles of Administrative Law in order to test the validity of the
Governmental action in the instant case. Article 14 of the Constitution of
India cannot be construed as a charter of judicial review of State actions and
to call upon the State of account for its action in its manifold activities by
stating reasons for the actions (See: L.I.C. of India v. Escorts Ltd. AIR 1986
SC 1370). The principles of Administrative law, such as against surrender of
discretion and abdication of duty would apply in case of exercise of power
conferred by a statute or rules made thereunder or instruments, which are
statutory in their nature. The direction issued, if any, by the Government in
its capacity as a shareholder that the cadre strength of the Corporation to be
fixed at 404 employees and the compliance thereof by the Board of Directors
cannot be set aside either by applying the Doctrine of ultra vires or rule
against surrender of discretion and abdication of duty.
22. This debate need
not detain us any further, since there is enough material available on record
revealing that the proposals emanated from the Board of Directors from time to
time to downsize the cadre strength of the Corporation and the Government
expressing its approval in exercise of its function under Article 90 of the
Memorandum of Articles of Association. The continuous interaction between the
Board of Directors of the Corporation and the Government is evident from the
record. That apart, the Board of Directors of the Corporation in its 132nd
Board meeting held on December 3, 2001 resolved to adopt the impugned G.O. The
Board also resolve to address the Government and seek permission to float VR
Scheme and also to request the Government or provide necessary advances before
floating VR Scheme to call back all its employees on deputation and
extraordinary leave.
23. This is a case
where the decision and the reasons for the decision can only be gathered by
looking at the entire course of events stretching over the period from the
initiation of the proposal to reduce the staff as recommended for restructuring
by Subrahmanyam Committee to the taking of the final decision impugned in the writ
petition. The case on hand is the one where neither a statutory function nor a
statutory provision is involved. The issue relating to restructuring and the
decision, no doubt, bears public character but which can only be settled after
protractive decision, clarification and consultation with all interested
persons.
24. Therefore, we are
not inclined to interfere with the impugned G.O. by applying the Doctrine of
ultra vires nor applying the rule against surrender or abdication of duty. The
contention is accordingly rejected.
25. The decision in
Rakesh Ranjan Verma v. State or Bihar, AIR 1992 SC 1348 upon which reliance has
been placed by the learned counsel for the appellants in support of the
contention that the Government could give direction only on policy matters and
not on day-to-day matters of administration such as determination of cadre
strength, in our considered opinion, is not applicable to the fact situation on
hand. In Rakesh Ranjan Verma’s case (supra), the provisions of section 78-A of
the Electricity (Supply) Act fell for interpretation. Section 78-A provides
that in discharge of its functions, the Electricity Board shall be guided by
such directions on questions of policy as may be issued by the Government from
time to time. Article 90 of the Articles of Association of the Corporation,
which empowers the Government of approve the staffing pattern of the
Corporation, is much wider in its scope and amplitude. We have already dealt
with the same. Rakesh Ranjan Verma’s case (supra) has no application to the
case on hand.
26. Similarly, the
decision of this Court in Poddar Projects Ltd. v. A.P.S.E. Board AIR 1982 AP
189, has also no application to the instant case in which it was held that the
directions issued by the State Government under section 78-A of the Electricity
(Supply) Act, are not intended to regulate the contractual relationship between
the Electricity Board and the consumers of electric energy supplied by it. The
State Government is empowered only to give directions on questions of policy in
general and not in relation to any particular consumer.
Policy decision and abolition of posts:
27. It is required to
appreciate that reduction of cadre strength had consequently resulted in
abolition of posts. We have already noticed that downsizing of the cadre
strength in the Corporation is a part of the restructuring process of State
Level Public enterprises in order to improve their performance, minimize public
liability and thereby promote and advance public interest. There cannot be any
difficulty to hold that the decision of the Government as well as the
Corporation is in the nature of policy decision. The policy decision is
traceable to the action plan of public enterprises reforms under the A.P.
Economic Reforms Project.
28. The question that
falls for consideration is whether the policy decision resulting in abolition
of certain posts suffered from any constitutional vice?
29. The respondent
Corporation is an instrumentality of the State within the meaning of Article 12
of the Constitution of India. Its decisions are liable to be tested on the
touchstone of Articles 14 and 16 of the Constitution of India i.e., the policy
decision taken in violation of Part-III of the Constitution of India. This
court will be well within its limits to declare the policy as unconstitutional.
But it is clearly well settled that this Court in exercise of the power of
jurisdictional review cannot embark upon an enquiry as to whether a particular
policy is vice or whether a better public policy can be evolved. The wisdom and
advisability of policy decisions, which are not in violation of Part-III of the
Constitution of India are not amenable to judicial review. In Balco Employees’
Union (Registered) v. Union of India [2002] (2) SCC 333 : the Supreme Court observed:
“91. In a democracy, it
is the prerogative of each elected Government to follow its own policy. Often a
change in Government may result in the shift in focus or change in economic
policies. Any such change may result in adversely affecting some vested
interests. Unless any illegality is committed in the execution of the policy or
the same is contrary to law or mala fide, a decision bringing about change
cannot per se be interfered with by the Court.”
30. The right of the
State or of its instrumentality to change its policy decisions from time to
time under the changing circumstances cannot be disputed and it is an integral
part of democratic process. This Court in exercise of its jurisdiction under
Article 226 of the Constitution of India, while considering the validity of the
Governmental policy cannot weigh the pros and cons of the policy or to
scrutinise it and test the degree of its beneficial or equitable disposition
for the purpose of varying, modifying or annulling it, based on even sound reasoning.
One of the inputs in formulating and reformulating the Governmental policies
may be availability or lack of resources. Since the purse of the State is not
under the control of the Court, it will not transgress into the field of policy
decision. It would be unnecessary to burden this judgment with various
authoritative pronouncements of the Supreme Court delineating the parameters of
judicial review in evaluating the policy decisions of the Government. (See:
State of Punjab v. Ram Lubhaya Bagga AIR 1998 SC 1703: 1998 (4) SCC 117,
Narmada Bachao Andolan v. Union of India AIR 2000 SC 3751 : 2000 (10) SCC 664
and Union of India v. Tejram Parashramji Bombhate AIR 1992 SC 570 : 1991 (3)
SCC 11.
31. We have noticed the
sequence of events ultimately that lead to the impugned decision of the
Government as well as the Corporation. The impugned G.O. itself provides
details of budgetary allocations on the works allotted to them, for the past 60
years. It was estimated, on the basis of previous six years figures that the
Corporation would be able to obtain and execute the works worth only Rs. 65
crores and not beyond that. It was under those circumstances, the decision to
downsize the cadre strength, for the break even point of execution of works of
Rs. 65 crores at the level of 404 employees was fixed. It is to be noted that
there has been a drastic reduction in execution and maintenance of tube-wells
and bore-wells by the Corporation. That on account of high interest rates, the
Corporation stopped borrowing loans and it is now totally depending on
budgetary support from the Government for finance to execute the sanctioned
schemes. That availability of large number of administrative works on hand is a
matter of no consequence. Unless budgetary allocations are made and budgetary
releases made therefrom and in the absence of budgetary release the sanctioned
administration works cannot be executed for lack of funds. These factors that
were taken into consideration by the respondents in formulating its policy
decision to downsize the cadre strength cannot be characterised as arbitrary.
The decision is neither arbitrary nor in violation of Part-III of the
Constitution of India, notwithstanding our reservations about the policy, we
cannot interfere with the same.
Principles of Natural Justice
32. It is very well
settled that reduction of cadre strength and consequent abolition of posts are
matters of policy and principles of natural justice have no application at all
in such matters of policy.
33. In M. Ramnatha
Pillai v. State of Kerala AIR 1973 SC 2641, the Supreme Court observed:
“The power to create or
abolish a post is not related to the Doctrine of Pleasure. It is a matter of
Government policy whether (sic) sovereign Government has this power in the
interest and necessity of internal administration. The creation of abolition of
post is dictated by policy decision, exigencies of circumstances and
administrative necessity. The creation, the continuance and the abolition of
post are all decided by the Government in the interest of administration and
general public......the abolition of post may have the consequence of
termination of service of a Government Servant. Such termination is not
dismissal or removal within the meaning of article 311 of the Constitution of
India. The opportunity of showing cause against the proposed penalty of
dismissal or removal does not therefore arise in the case of abolition of post.
The abolition of post is not a personal penalty against the Government
Servant.”
34. In Balco Employees Union (supra), the
Supreme Court observed :
“47. . . .Even though
the workers may have interest in the manner in which the company is conducting
its business, inasmuch as its policy decision may have an impact on the workers
rights, nevertheless it is an incidence of service for an employee to accept a
decision of the employer which has been honestly taken and which is not
contrary to law. Even a Government servant, having the protection of not only
Articles 14 and 16 of the Constitution but also of Article 311, has no absolute
right to remain in service. For example, apart from cases of disciplinary
action, the services of Government servants can be terminated if posts are
abolished. If such employee cannot make a grievance based on Part III of the
Constitution or Article 311 then it cannot stand to reason that like the
petitioners, non-Government employees working in a company which by reason of
judicial pronouncement may be regarded as a State for the purpose of Part III
of the Constitution, can claim a superior or a better right than a Government
servant and impugn its change of status. In taking of a policy decision in
economic matters at length, the principles of natural justice have no role to
play. While it is expected of a responsible employer to take all aspects into
consideration including welfare of the labour before taking any policy decision
that, by itself will not entitle the employees to demand a right of hearing or
consultation prior to the taking of the decision.” [Emphasis supplied]
35. The principle is so well settled and bears
no repetition.
36. Be that as it may,
the decision of the Government as well as the Corporation was not taken
unilaterally without any process of consultation. More than one authority is
involved in the consultation process. The authorities have discussed various
aspects with the Corporation and the service associations separately. The
service associations representing the employees made written representations
requesting not to further downsize the cadre strength. It is not, as if, any
viable alternative proposals emanated from the associations and the same has
not been taken into consideration before formulating the impugned policy
decision. In the circumstances, we find no merit in the submission made by the
learned counsel that the policy decision is vitiated on account of
non-compliance with the principles of natural justice.
Review of policy from time to time :
37. Sri S. Ramachander
Rao, learned senior counsel invited our attention to the statements made in the
earlier Governmental orders regarding the finality of VR Scheme and contended
that having made such a statement as to the finality of VR Scheme, it was not
open to the Government to review its earlier policy and once again downsize the
sanctioned cadre strength further.
38. We find no merit in
the submission. Such statements made in the G.Os. or before the Commissioner of
Labour would not disentitle the Govenrment and the Corporation from reviewing
their earlier policy. The policy decisions are not static and they keep on
evolving from time to time depending upon the exigencies of the situation. The
reasons are clearly evident from the impugned G.O. itself as to what are those
circumstances that necessitated the Government to review its earlier policy and
further downsize the sanctioned strength of the employees of the Corporation.
We have already adverted to each one of those reasons stated and it is
unnecessary to reiterate the same.
39. Reliance also has
been placed on letters addressed by the Chairman of the Corporation to the
Honourable Chief Minister in October, 2003, subsequent to the impugned judgment
on June 4, 2002 and June 25, 2003 in support of the contention that on account
of the availability of the work and administrative sanction, there is a need of
increasing the cadre strength above 404 employees. We cannot place any reliance
upon the letters stated to have been addressed by the Chairman of the
Corporation to the Honourable Chief Minister.
40. It is evident from
the averments made in the counter-affidvait that even after the impugned G.O.
was issued, the actual budgetary allocations and budgetary releases for
subsequent years show that the budgetary releases are far less than the
breakeven point of Rs. 65 crores, and Corporation is not able to earn
sufficient centage charges ot meet its establishment costs even at the downsize
cadre strength of 404 employees.
41. After the impugned
G.O. dated November 15, 2001 was issued, the actual budgetary allocations and
budgetary releases for subsequent releases are as under:
|
S.No. |
Year |
Budget |
|
|
|
Releases/Allotted
|
|
|
|
(Rs.
in crores) |
|
1. |
2001-02 |
51.08/70.82 |
|
2. |
2002-03 |
23.25/32.10 |
|
3. |
2003-04 |
35.62/52.550 |
|
|
(Upto end of February 2004) |
|
42. For the aforesaid
reasons, we do not find any merit in the contentions advanced by the learned
counsel.
43. We also do not find
any merit in the contention that relevant factors have not been taken into
consideration while formulating the policy to downsize the cadre strength. The
averments made in the counter-affidavit filed by the State as well as the
Corporation clearly reveal that relevant factors alone have been taken into
consideration. The availability of work and the administrative sanction
according to the learned counsel for the appellants are two important factors
that were never taken into consideration by the respondents in formulating
their policy to downsize the cadre strength. It needs no repetion that
availability of work and administrative sanction for those works is of no
consequence unless budgetary allocations are made and budgetary releases made
therefrom. The said sanctioned works cannot be executed for lack of funds. We
cannot ignore the fact that the Corporation having stopped borrowing loans is
now totally depending on budgetary support from the Government for finance to
execute the sanctioned schemes.
Whether a writ
of mandamus lies compelling the state to provide more funds by way of
allocations?
44. The appellants in
effect seek the intervention of this Court to command the State Legislature to
provide more funds by way of budgetary allocations/releases. Under Article
203(2) of the Constitution of India, estimates are required to be submitted in
the form of demands for grants in the Legislative Assembly, which has the power
to assent, or to refuse to assent to any such demand. That after grants under
Article 203 of the Constitution of India have been made by the Assembly, a Bill
is required to be introduced in the Legislative Assembly under Article 204(1)
of the Constitution of India, to provide for appropriation out of the
Consolidated Fund of the State and on the said Bill being passed it becomes the
“Appropriation Act”. Article 204(3) of the Constitution of India prohibits
withdrawal of money from the Consolidated Fund of the State except under
appropriation made by law passed in accordance with the provisions of Article
204. Thus budgetary allocation, made under the Appropriation Act, is law made
by the State Legislature and cannot be deviated from. The budgetary releases
from out of the allocations made under the Appropriate Act are once again
dependent on several factors, such as, actual receipt of estimated revenue,
expenditure required to be incurred for certain unforeseen contingencies etc.
These are also once again placed for approval of the Legislature and on being
passed becomes law as “Appropriation Act-II”. Thus, both the budgetary
allocations and budgetary releases are in effect to the laws made by the State
Legislature.
45. It is very well
settled that this Court in exercise of the power under Article 226 of the
Constitution of India, cannot issue a writ of mandamus to make law.
46. In State of
Himachal Pradesh v. Umed Ram Sharma AIR 1986 SC 847 : 1986 (2) SCC 68, the
Supreme Court held:
“.... that total
sanction of bill for a project is within the domain of the Legislature and the
executive has no power to exceed the total sanction without the consent or
assent of the Legislature and the Court cannot impinge upon that field of
Legislature. The executive, however, on the appreciation of the priorities can
determine the manner of priorities to be presented to the Legislature. The
Court cannot also, in our opinion, impinge upon the judgment of the executives
as to the priorities. [Emphasis supplied].”
47. Sri Nuty Ram Mohan
Rao, learned counsel for the appellants, contended that the issues that arise
for consideration in this case are not to be looked from the angle of profit
and loss incurred by the Corporation while discharging its functions conferred
in public interest. Public interest is the paramount consideration and the
activity of providing irrigation infrastructural facilities undertaken by the
Corporation must be allowed to carry on for which purposes the State is bound
to provide adequate resources. The contention was, if, those activities earlier
undertaken by the Corporation are allowed to go on, there would not be any need
to downsize the cadre strength. We find it difficult to accept the submissions
made by the learned counsel for the appellant. It is true, the Corporation has
been established to cater to certain functions of the State which are in larger
public interest as providing irrigation infrastructural facilities is
undoubtedly in larger public interest but it is subject to availability of
financial resources and the priorities in which the Legislature, in its wisdom,
decides to allocate the funds. It is for the Government to decide as to how
best it has to utilise the available resources at its command. We in exercise
of our jurisdiction under Article 226 of the Constitution of India, cannot
compel the State of alter its priorities and utilise the available resources
either for a specified public purpose or vary or modify, the priorities chosen
by the State. The argument is attractive but does not stand scrutiny.
48. For the aforesaid
reasons we are not persuaded to interfere with the well considered judgment, of
the learned single Judge.
49. The downsizing of
the cadre strength that had resulted in abolition of certain posts does not
suffer from any constitutional infirmities. The decision is not violative of
Articles 14 and 16 of the Constitution of India. We accordingly reject the
contentions raised in this regard. G.O. Ms. No. 50, dated November 15, 2001 is
accordingly upheld.
Writ Appeal No. 1594 of 2003 and Batch
50. In this batch of
cases, the appellants challenge the action of the Corporation in identifying
surplus employees and calling upon those identified surplus employees to
exercise their option for V.R. Scheme. The circular dated September 7, 2002 and
the notice dated September 7, 2002 issued by the Corporation are impugned on
various grounds. Both the proceedings have been issued consequent upon the
Government Orders vide G.O. Ms. No. 50 dated November 15, 2001 fixing the cadre
strength of the Corporation at 404 employees. Be it noted that the said G.O.
having been adopted by the Corporation decided itself to implement the same.
That after the Govenrment accorded approval to float the V.R. Scheme to
discharge the manpower, the entire matter has been placed once again before the
Board on its 138th meeting held on September 8, 2002 and the Board has decided
to float cadre-based V.R. Scheme to surplus identified employees. The Scheme is
known as “APSIDC Employees Voluntary Retirement Scheme-2002, Phase-V.d” for
identified surplus employees. As it evident from the impugned circular dated
September 7, 2002 the objective of the scheme is:
(a) to improve the performance of the
Corporation,
(b) to achieve the optimum level of manpower
in the Corporation with the desirable average age mix so as to cope up with the
changing needs of the society and the organisation,
(c) to provide for necessary adjustment in
the manpower through redeployment so that over all levels of skills and
productivity are improved,
(d) to compensate such manpower as may be
rendered surplus in restructuring or other exercise taken up by the
organisation.
51. The Scheme came
into force from September 9, 2002 and the applications received on or after the
said date but on or before September 30, 2002 alone were to be considered for
the financial package notified.
52. On the same day,
the Corporation issued notice dated September 7, 2002 to all of those employees
who have become surplus duly informing them that they were entitled to avail
the V.R. Scheme opportunity as per the scheme notified from September 9, 2002
to September 30, 2002 with a cut-off date as October 31, 2002. They were put on
further notice that in case one does not wish to avail the opportunity, the
Corporation will be constrained to take necessary steps to discharge the
surplus employees in accordance with the regulations in force. These
proceedings were impugned in the writ petitions.
Gist of submissions:
53. The main contention
advanced by the learned counsel appearing on behalf of the appellants relates
to the identification of the appellants as surplus staff.
54. Sri A.
Suryanarayana Murthy, learned counsel appearing on behalf of some of the
appellants lead the batch and made elaborate submissions attacking the impugned
decision of the Corporation. He contended that the procedure adopted for
identification of the appellants as surplus is totally arbitrary and
unreasonable as no discernible criteria has been adopted by the Corporation in
this regard. The unilateral decision of the Corporation without any prior
notice and hearing to the affected employees is liable to be set aside. The
learned counsel further contended that the identification of surplus staff must
be based on the principle of “stepping down”. If such principle is applied, the
employee who ranks last in the cadre in which he is presently working, will
become the senior most in the cadre to which he will be rolled down and thus
the Corporation would be in a position to retain senior employees with rich
experience. The learned counsel further contended that there is no rationale
behind the classification of the employees into surplus and non-surplus and
therefore the classification is not a valid classification. The learned counsel
further submitted that the Corporation ought to have first invited such of
those employees of the work charged establishment, who continued to work in the
provincial establishment, as surplus.
55. Sri Nuty Ram Mohan
Rao, learned counsel submitted that the identification of the appellants as
surplus is unscientific since it is not based on any material except the report
of the one-man committee. He reiterated the submission made by Sri A.
Suryanarayana Murthy that the Corporation ought to have applied the principle
of “roll back” or “stepping down”. Had the Corporation followed such rule, the
appellants would not have been identified as surplus. The learned counsel
further contended that the Corporation should have applied the reservation
roster in the reverse order for identification of surplus employees.
56. Sri. S. Laxma
Reddy, learned counsel for the appellants contended that the right to life
includes right to livelihood. The Corporation instead of identifying the
appellants as surplus ought to have exploited alternative avenues for making
the Corporation viable in order to retain the employees who are now found
surplus. The action of the Corporation resulted in infringement of fundamental
rights guaranteed under Article 21 of the Constitution of India.
57. Sri V.R.S.
Anjaneyulu, learned counsel, submitted that the method and manner in which the
employees have to be identified has not been spelt out and there are no
guidelines issued either by the Government or the Corporation for identifying
the surplus staff. The whole exercise undertaken by the Corporation is
arbitrary and unreasonable.
58. Sri J. Ramachandra
Rao, Learned counsel for the appellants, attacked the identification of the
appellants as surplus on the ground that the identification is unscientific.
The identification of surplus staff should be in accordance with the procedure
laid down under section 21-G of the Industrial Disputes Act, 1947.
59. The other counsel more or less adopted the
submissions.
60. Sri Ramesh
Ranganathan, learned Additional Advocate-General, appearing on behalf of the
respondents submitted that the writ petitions as filed by the appellants are
premature and liable to be dismissed. According to the learned Additional
Advocate-General, it is open for the identified surplus employees either to
accept the VR Scheme or reject it. The classification of employees in two
categories, viz., those to be retained in service and those identified as
surplus and offered VR Scheme is a reasonable classification and does not
violate Article 14 of the Constitution of India. The Classification is not
patently arbitrary as there is a definite object sought to be achieved by
making such classification.
61. Before we proceed
to examine the rival submissions, it is just and necessary to note that the
respondent Corporation is an instrumentality of the State Govenrment and hence,
is a State within the meaning of Article 12 of the Constitution of India for
the purposes of Part-III of the Constitution and that all its actions are
liable to be tested on the touchstone of Articles 14 and 16 of the Constitution
of India. It is well settled that Article 14 of the Constitution of India
strikes at arbitrariness in executive/administrative action because any action
that is arbitrary must necessarily involve the negation of equility. At the
same time, we are required to bear in mind that even if the Corporation is an
instrumentality of the State as comprehended in Article 12 of the Constitution,
yet the employees of the Corporation are not governed by Part-XIV of the
Constitution. The Supreme Court, took the view that there is no good reason
why, if Government is bound to observe the equality clauses of the Constitution
in the matter of employment and in its dealings with the employees, the
Corporations set up or owned by the Government should not be equally bound and
why, instead, such Corporations could become citadels of patronage and
arbitrary action. The independence and integrity of those employed in the
public sector should be secured as much as independence and integrity of civil servants.
The Supreme Court found that the distinction sought to be drawn between
protection of Part-XIV of the Constitution and Part-III has no significance
(See: Managing Director, Uttar Pradesh Warehousing Corpn. v. Vinay Narayan
Vajapayee AIR 1980 SC 840 and A.L. Kalra v. Project and Equipment Corpn. of
India Ltd. AIR 1984 SC 1361.
Identification of surplus employees- Whether it suffers from any
arbitrariness?
62. Annexure to G.O.
Ms. No. 50 dated November 15, 2001 gives the details of employees in different
cadres/categories constituting sanctioned strength of 404 employees of the
Corporation. Other than those cadres/categories, the remaining
cadres/categories have been abolished in their entirety. Therefore, the surplus
employees were required to be identified only from amongst the different
cadres/categories constituting the sanctioned strength of 404 employees. The
Corporation as is evident from the averments made in the counter-affidavit
identified surplus employees by applying the general principle of “last come,
first go in each category” uniformly. The downsizing the cadre strength of
Corporation was taken up as a matter of policy of the Government, to ensure the
survival of the Corporation, uniform methodology was adopted in declaring
surplus staff duly taking their date of entry into the cadre.
63. Under section 25-G
of the Industrial Disputes Act, 1947, in case of retrenchment the employer is
required to ordinarily retrench the workman who was the last person to be
employed in that category. It is true that section 25-G of the Industrial
Disputes Act 1947, applies only to workman but the principle “last come first
go in each category” is a recognised reasonable procedure. The application of
such procedure in identifying the surplus employees cannot be said to be either
irrational or in violation of Articles 14 and 16 of the Constitution of India.
It is explained that the emanated objective sought to be achieved under VR
Scheme, notified in the Corporation’s circular dated September 7, 2002 is to achieve
the optimum level of manpower in the Corporation with desirable average age mix
so as to cope with the changing needs of the society and the organisation. It
is under those circumstances the Corporation considered it appropriate to apply
the principle of “last come first go in each category” to achieve the objective
of having a desirable age mix to cope with the changing needs. There was a
possibility to apply the procedure of “step down” canvassed by the appellant
for identifying surplus employees, based on their total length of service in
the Corporation. Even such a procedure could have been reasonable procedure and
may have satisfied the test under Articles 14 and 16 of the Constitution of
India. But unless this Court comes to the conclusion that the principle of
“last come first go in each category” applied by the Corporation is arbitrary
and in violation of Articles 14 and 16 of the Constitution of India, no
directions can be issued directing the Corporation to adopt the procedure of
“stepping down” in substitution of the adopted procedure. When there are two
reasonable modes for identification of the surplus employees available, the
Corporation is entitled to choose one such reasonable mode and in such a
situation this Court in exercise of its jurisdiction under Article 226 of the
Constitution of India, cannot compel the Corporation to adopt the other mode
which in its view may equally be reasonable and efficacious.
“Stepping down” Procedure:
64. In the affidavit
filed in support of the writ petitions, it is asserted that “it is the
fundamental principle governing the service as and when reduction of posts and
persons are being reverted or retrenched, the seniority in substantive post has
to be taken into account for retention.” In the counter-affidavit, the
challenge is met by the State explaining that the Corporation identified
surplus employees in each category and served notices to individual employees
in the order of reverse seniority. That after promotion to higher categories
after fulfilling the service conditions prescribed for such promotions and
having served in the promoted category for a considerable length of time, the
petitioners cannot claim and seek reversion to the post from which they were
promoted several years ago. The lien on the feeder post comes to an end as soon
as they were promoted to the higher category and on completion of probation in
the promotion category. It is further stated in the counter-affidavit that the
contention of the petitioners that the total length of service has to be taken
into consideration while identifying the staff, is to be accepted the very
object and policy of issuing G.O. Ms. No. 50 dated November 15, 2001 would be
defeated, as persons working in lower categories alone would be liable to be
declared surplus by retaining the staff in higher categories which may not be
workable.
65. The learned counsel
for the appellants placed reliance on the judgments of the Supreme Court in
Suraj Prakash Bhandari v. Union of India AIR 1986 SC 958 and State of Haryana
v. Des Raj Sangar AIR 1976 SC 1199, in support of the contention that the step
down procedure is necessarily to be followed by the Corporation in all cases of
reduction in sanctioned strength and consequent abolition of posts. In our
considered opinion Suraj Prakash Bhandari’s case (supra) is not an authority
for the proposition that in every case of abolition of post consequent upon
reduction of sanctioned strength, employees working in a higher category should
be reverted to a lower category and retained by giving emoluments which they
were earlier drawing in the lower category. The Supreme Court having found that
an employee therein was singled out for adverse treatment, held that if the
action of the organisation, in promoting the said employee and declaring him as
surplus was to be accepted, then it would arm the employer with a new weapon to
promote an employee after creating a new post, abolish it after some time and
relieve him from duties on the plea of surplusage. But we are required to notice
that the Corporation in the instant case did not single out any employee for
any adverse treatment as such. It is not the case of the appellants that the
action of the Corporation in identifying the surplus employees is a colourable
exercise of power. Neither any post was created nor promotions effected with a
view to declare such promoted employees as surplusage. On the other hand, the
Corporation identified nearly 450 employees as surplus by uniformly applying
the principle of “last come first go in each category” except in case employees
belonging to Scheduled Castes and Scheduled Tribes category.
66. The observations of
the Courts are not to be read as “Euclid’s theorems” nor as provisions of the
statute. These observations must be read in the context in which they appear.
The judgments of Courts are not to be construed as statute. [See: Haryana
Financial Corpn. v. Jagadamba Oil Mills 2002 (3) SCC 496 and Ashwani Kumar
Singh v. U.P. Public Service Commission AIR 2003 SC 2661].
67. In Des Raj Sangar’s
case (supra) the Supreme Court observed that whether a post should be retained
or abolished is essentially a matter for the Government to decide. As long as
such decision of the Government is taken in good faith, the same cannot be set
aside by the Court. It is not open to the Court to go behind the wisdom of the
decisions and substitute its own opinion for that of the Government on the
point as to whether a post should or should not be abolished. In the said case,
however, the Supreme Court on interpreting the Punjab Civil Service Rules held
that “Abolition of the post of Panchayati Raj Election Officer, his services
should not have been terminated, the said rules provided that in the absence of
written request by the employee concerned, the lien on the post permanently
held by him cannot be terminated. On the abolition of the higher post and in
the absence of a written request of an employee to terminate his lien on the
lower permanent post, the lien automatically gets revived and the employee was
entitled to be reverted to the lower post.” No similar rule as in the Punjab
Civil Services Rule exist in the Corporation and as such the decision in Des
Raj Sangar’s case (supra) also does not have any application. We need to remind
ourselves the well-known principle of law that a decision is only an authority
for what it actually decides but what is of a decision in its ratio and neither
observation found therein nor what logically follows from the various
observations made in it. It is not a profitable task to extract a sentence here
and there and build upon it. (See: State of Orissa v. Sudansu Sekhar Misra AIR
1968 SC 647).
68. For the aforesaid
reasons we do not find any infirmity in the procedure followed for
identification of surplus staff. The methodology adopted and the procedure
devised in that regard is neither arbitrary nor unreasonable and therefore not
hit by Articles 14 and 16 of the Constitution. “Last come first go” is one of
the well-known reasonable rules adopted in cases of retrenchment of employees
consequent upon abolition of posts.
Employees promoted from work charged establishment category:
69. The learned counsel
for the appellants contended that the procedure adopted by the Corporation in
retaining the employees not borne in the cadre and identifying those who are
borne in the cadre of surplus is wholly arbitrary and offends the equality
clause enshrined in Article 14 of the Constitution of India. The appellants
were originally appointed in the Corporation as Typists. That in terms of Staff
Regulations Chapter-X Item-10 of the Corporation they were converted as Junior
Assistants vide proceedings of the Corporation dated December 10, 1990. The
provisional seniority list of Assistants as on November 1, 2001 was
communicated to all the concerned vide the Corporation proceedings dated
December 6, 2001 and December 14, 2001 requiring the employees to submit their
objections, if any, within 20 days from the date of the order. It is evident
from the record that the employees from the work charged establishments, who
were promoted as Junior Assistants, prior to conversion of the appellants, from
the posts of Typist to the posts of Junior Assistant, were placed higher in the
provisional seniority list, as also in the provisional seniority lists for the
previous years. There is no dispute that the regulations of the Corporation
provides for promotion of employees in the work charged establishment, to the
category of Junior Assistants. The promotions were effected by the Corporation
much prior to conversion of the appellants from the category of Typists of the
category of Junior Assistants. Those promotions remained unchallenged.
70. However, the
contention was that the Government had not approved the proposals for
regularisation and conversion of employees in the work charged establishment to
the provincialised category and in such view of the matter those erstwhile
employees of the work charged establishment ought to have been identified as
surplus and not the appellants. In these proceedings, we cannot go into the
question relating to the inter se seniority between the erstwhile employees of
the work charged establishment and the appellants. The proceedings relied on by
the appellants are of the years of 1991 and 1992, more than a decade ago. In
these proceedings, the appellants cannot be permitted to canvass the
correctness of those proceedings in a collateral manner and contend that they
ought to be treated as seniors and retained in service by duly declaring the
erstwhile employees of the work charged establishment as surplusage. The
erstwhile employees of the work charged establishment who were promoted much
prior to conversion of the appellants from the category of Typists and from the
category of Junior Assistants are not impleaded as respondents in these
proceedings.
71. We find no merit in the contention and the
same is accordingly rejected.
Violation of Principles of Natural Justice:
72. The learned counsel
for the appellants submitted that the appellants were neither put on notice nor
they were given any opportunity of being heard prior to their being identified
as surplus by the Corporation and as such the entire exercise of identification
is vitiated for the reason of non-compliance with the principles of natural
justice.
73. So far as the
employees, in the workmen category, who have been identified as surplus and
have not taken VR Scheme are concerned they can only be retrenched in
accordance with section 25-N of the Industrial Disputes Act, 1947. The prior
permission of the appropriate Government or the specified authority as the case
may be is a mandatory requirement inasmuch as and in the absence of such
permission no workmen employed in industrial establishment who had been in
continuous service for not less than one year under an employer shall be
retrenched. The application for permission is required to be made by the
employer in the prescribed manner stating clearly the reasons for the intended
retrenchment and a copy of such application shall also be served simultaneously
on the workmen concerned in the prescribed manner. The Government or the
specified authority after giving a reasonable opportunity of being heard to the
employer and the workmen and the persons interested in such retrenchment may by
order for reasons recorded in writing grant or refuse to grant such permission
as prayed for by the employer. The rights of the employees in the workmen
category are so well protected and failure on the part of the Corporation in
giving them an opportunity of being heard at this stage is of no consequence
since they are not being retrenched straightaway by the Corporation at this
stage.
74. The
plea that the entire exercise of identification is vitiated for non-compliance
with the principles of natural justice is only available to the identified surplus
employees in the non-workmen category, who have not taken VR Scheme.
75. The
learned counsel for the appellants in support of their submission placed
reliance upon the decision of the Supreme Court in A.K. Kraipak v. Union of
India AIR 1970 SC 150 : 1969 (2) SCC 262, Central Inland Water Transport Corpn.
v. Brojo Nath Ganguly AIR 1986 SC 1571 : 1986 (3) SCC 156 and Delhi Transport
Corpn. v. D.T.C. Mazdoor Congress AIR 1991 SC 101.
76. In
A.K. Kraipak’s case (supra), the Supreme Court observed, “the aim of the rules
of natural justice is to secure justice or to put it communicatively to prevent
miscarriage of justice. These rules can operate only in areas not covered by
any law validly made. They do not supplant the law of the land but supplement it.
The rules of natural justice are not embodied rules. What particular rule of a
natural justice should apply to a given case must depend to a great extent on
the facts and circumstances of that case, the framework of the law under which
the enquiry is held and the Constitution of the Tribunal or body of persons
appointed for that purpose. Whenever a complaint is made before a Court that
some principle of natural justice had been contravened the Court has to decide
whether the observance of that rule was necessary for a just decision on the
facts of that case.”
77. In
Central Inland Water Transport Corpn. Ltd.’s case (supra) the Supreme Court
struck down clause (i) of Rule 9 of the Rules of the Corporation as void under
section 23 of the Contract Act as being opposed to public policy and is also
ultra vires Article 14 of the Constitution of India that to the extent that it
confers upon the Corporation, the right to terminate the employment of a
permanent employee by giving him three months’ notice in writing or by paying
him the equivalent of three months’ basic pay and Dearness Allowances in lieu
of such notice in that, besides being arbitrary and unreasonable it wholly
ignores audi alteram partem rule. Rule 9(i) of the Rules of the Corporation was
characterised as “the Henry VIII Clause”. It conferred absolute and arbitrary
power upon the Corporation. The Court held that Rule 9(i) is not covered by any
situation, which would justify the total exclusion of the audi alteram partem
rule.
78. In
Delhi Transport Corpn.’s case (supra). Regulation 9(b) of the Delhi Road
Transport Authority (Conditions of Appointment and Service) Regulations, 1952,
which conferred arbitrary uncanalised, unbridled, unrestricted power to
terminate the services of a permanent employee without recording any reasons
for the same and without adhering to the principles of natural justice and
equality before the law was declared void. The Supreme Court took the view that
conferment of power with wide discretion without any guidelines, without any
just, fair or reasonable procedure is constitutionally anathema to Articles 14,
16(1), 19(1)(g) and 21 of the Constitution of India.
79. We
fail to see what relevance those decisions have to the case before us. No such
regulation, which empowered identification of the surplusage, is in question
before us.
80. The
question that falls for consideration is whether the observance of rule of audi
alteram partem was necessary for a just decision, on the facts of the case?
81. We
have noted the sequence of events right from the stage of G.O. Ms. No. 50 dated
November 15, 2001, ordering the cadre strength of the Corporation for 404
employees as detailed in the annexure thereto. We have also noted that the
Corporation adopted uniform procedure of “last come first go in each category”
and found the same to be a reasonable procedure. In such view of the matter
nothing further remains to be decided by the Corporation at this stage. No real
prejudice, therefore said to have been caused to the appellants, on account of
the failure on the part of the Corporation in giving them an opportunity of
being heard before identifying them as surplus. It is, by now, well settled
that in all cases of violation of the principle of natural justice, the Court
in exercise of its jurisdiction under Article 226 of the Constitution of India,
need not necessarily interfere and set at naught the action taken unless the
decision taken had resulted in any prejudice.
82. The
test is whether the observance of the rule of audi alteram partem was necessary
for a just decision?
83. It
is true that all decisions against an individual, which involve adverse civil
consequences must be in accordance with the principles of natural justice but
whether any particular principle of natural justice would be applicable to a
particular situation has to be judged in the light of the facts and
circumstances of each particular case. “The rules of natural justice are
flexible and cannot be put on in rigid formula.” In order to sustain a
complaint of violation of principles of natural justice, it has to be pleaded
and established that prejudice has been caused to the party concerned.
84. In
M.C. Mehta v. Union of India AIR 1999 SC 2583 the Supreme Court observed that
“if on the admitted or indisputable factual position, only one conclusion is
possible and permissible, the Court need not issue a writ merely because there
has been a violation of the principles of natural justice.”
85. In
Aligarh Muslim University v. Mansoor Ali Khan AIR 2000 SC 2783 : 2000 (7)
SCC 529, the Supreme Court reiterated its earlier view that the principle that
in addition to breach of natural justice, prejudice also must be proved. “That
not mere violation of natural justice but de facto prejudice (other than
non-issue of notice) had to be proved”.
86. In
State of Karnataka v. Mangalore University Non-Teaching Employees’ Association
2002 (3) SCC 302, the Supreme Court having found that in a case where the
payment already made is sought to be recovered, thereby visiting the employees
with adverse monetary consequences, the affected employees should have been put
on notice and their objections called for, but refused to interfere in the
matter on the ground that in all cases of violation of principles of natural
justice the Court need not necessarily interfere and set at naught the action
taken.
87. It is held that
Mangalore University Non-Teaching Employees’ Association’s case (supra):
“11.
...But, it is by now well settled that in all cases of violation of the
principles of natural justice the Court exercising jurisdiction under Article
226 of the Constitution need not necessarily interfere and set at naught the
action taken. The genesis of the action contemplated the reasons thereof and
the reasonable possibility of prejudice are some of the factors which weigh
with the Court in considering the effect of violation of the principles of
natural justice. When undisputably the action taken is within the parameters of
the rules governing the payment of HRA and CCA and moreover the university authorities
themselves espoused the cause of employees while corresponding with the
Government, it is difficult to visualize any real prejudice to the respondents
on account of not affording the opportunity to make representation...” (P. 885)
88. On the facts and in
the circumstances, we find that no useful purpose could have been served by
putting the appellants on notice before the actual identification of the
surplusage. No real prejudice has been caused to the appellants on account of
not affording the opportunity to make representation. The Corporation uniformly
applied the rule of “last come first go in each category” in the process of
identification of the surplusage. In the circumstances it is not possible to
interfere with the decision of the Corporation on the ground of infraction of
rule of audi alteram partem.
Subsidiary contentions:
89. Now we shall
proceed to examine some subsidiary contentions urged by each one of the
counsel.
Residual employees of A.P. State Construction Corporation:
90. The residual
employees of the A.P. State Construction Corporation Limited, were absorbed
into the services of the Corporation pursuant to G.O. Ms. No. 87 dated March
26, 1993 which itself has been issued pursuant to the directions of the Supreme
Court in G. Govinda Rajulu v. Andrha Pradesh State Construction Corpn. Ltd. AIR
1987 SC 1801 : 1986 Suppl. SCC 651, wherein the Supreme Court had directed that
the employees of the A.P. State Construction Corporation whose services were
sought to be terminated on account of the closure of the Corporation shall be
continued in service on the same terms and conditions either in the Government
Department or in the Government Corporations. They were accordingly absorbed by
the Corporation and pursuant thereto they became its employees, having accepted
the service conditions, rules and regulations as applicable to the regular
employees of the Corporation. Their absorption itself was subject to certain
terms and conditions in G.O. Ms. No. 87 dated March 26, 1993, according to which
they were required to take the last rank in the category in which they were
working.
91. In our considered
opinion, the claim of the residual employees of A.P. State Corporation cannot
be put on higher pedestal than that of the regular employees of the respondent
Corporation. They are among the employees identified as surplus on application
of the principles of “last come first go in each category”. They were required
to take the last rank in the category when they were absorbed into Corporation
under G.O. Ms. No. 87 dated March 26, 1993. We find no merit in their
submission.
92. In Management of
Dandakaranya Project v. Workmen through Rehabilitation Employees Union AIR 1997
SC 852 : 1997 (2) SCC 296 : the Supreme Court while referring to G. Govinda Rajulu’s
case (supra) observed that “in the said case neither there has been any
discussion on any question of law nor any circumstances have been indicated
under which the direction was given. The being the position the aforesaid
decision cannot be of universal application in all cases where there has been a
closure of the project which resulted in termination of the employees.” The
judgment of the Supreme Court in G. Govinda Rajulu’s case (supra), in no manner
helps the contention urged on their behalf.
Women employees and those appointed on compassionate grounds:
93. The appellants
contended that since they are women, they are entitled for quota of 33-1/3% and
applying roster backwards, they should be retained in the service to the extent
of the their quota. Suffice it to notice that none of those women (appellants)
were appointed in the Corporation under any quota. As such the question of
application roster backwards for women categories does not arise. Similarly an
employee appointed on compassionate grounds is not entitled to claim any
preferential claim vis-a-vis the other employees. Their claim cannot be over
and above the regular employees. We find no merit in their claims.
The claim of
employees belonging to Backward Classes and categorisation of Scheduled Castes:
94. The
appellants who (sic) belong to other Backward Classes (OBC) category claim that
they are entitled for similar protection as given to Scheduled Castes and
Scheduled Tribes employees and that the roster backwards should be applied in
their case also. It is required to notice that the Corporation even in case of
Scheduled Castes and Scheduled Tribes employees did not apply the roster
backwards but the learned single Judge issued such directions directing the
respondent-Corporation to consider the cases of Scheduled Castes and Scheduled
Tribes employees by applying the roster backwards while identifying surplus
Scheduled Castes and Scheduled Tribes employees. The learned single Judge found
that the Corporation as well as the Government failed to apply their mind and
did not take into consideration the provisions of Constitution of India
conferring special protection to the Scheduled Castes and Scheduled Tribes. The
Constitution mandates the State to accord favourable treatment to them. Having
regard to the special constitutional protection provided by Articles 15,
16(4)(a) of the Constitution of India to the employees belonging to the
Scheduled Castes and Scheduled Tribes, the learned single Judge directed the
Corporation to re-examine the matter and consider the feasibility of applying
the reservation roster backwards in respect of the employees belonging to the
Scheduled Castes and Scheduled Tribes in identification of surplus employees to
whom VR Scheme is to be offered. The learned single Judge held such policy
would receive the constitutional approval of providing adequate representation
to the Scheduled Castes and Scheduled Tribes in the service of the Corporation.
We are in complete agreement with the view taken by the learned single Judge.
95. It
is very well settled and needs no reiteration that the Scheduled Castes are the
most backward of the Backward Classes, it is for that reason, the learned
single Judge thought it fit to issue directions in the manner referred to
herein above. The OBC employees cannot therefore equate themselves with
employees belonging to the Schedule Castes and Scheduled Tribes. Their claim is
based upon Article 16(4) of the Constitution of India which is enabling
provision as held by the Supreme Court in Ajit Singh v. State of Punjab AIR
1999 SC 3471 : 1999(7) SCC 209 and Raees Ahmad v. State of U.P. AIR 2000 SC 583
: 2000 (1) SCC 432. In the circumstances, no mandamus can be issued directing
the Corporation to apply roster backwards even in case of employees belonging
to Backward Classes. Employees belonging to Backward Classes cannot, as a
matter of right, claim that they should also be given the benefit of
application of roster backwards, similar to that of Scheduled Castes and
Scheduled Tribes.
96. Similarly, the
contention that the A.P. Scheduled Castes (Rationalisation of Reservation) Act,
2000, applied and by so applying roster it should be ensured that Scheduled
Caste employees in their respective categories are retained in service is
untenable and unsustainable. It is needless to observe that the
appellants/petitioners were appointed much prior to the said Act coming into
force and were not given the benefits of categorisation at the time of their
appointment and promotion since the said Act came into force only with effect
from December 9, 1999. We find no merit in the contention.
Employees in the work charged establishment:
97. Pursuant to G.O.
Ms. No. 50 dated November 15, 2001 the work charged establishment has been
abolished in its entirety. The reduction of sanctioned strength under G.O. Ms.
No. 50 dated November 15, 2001, once found to be valid, the claim of the
appellants/employees in the work charged establishment cannot be considered. No
relief can be granted to them.
Employees sent on deputation:
98. The contention that
since the appellants/petitioners were working in other organisations, they
should be promoted to work in the place at which they are presently working and
should not be counted as employees of the respondent-Corporation while admitting
its sanctioned strength of 404 employees is totally untenable and
unsustainable. The submission is totally misconceived. It is needless to
observe that the employees hold a lien on their post in the parent department
and are liable to be repatriated at any time and such of those employees who
are on deputation, continue to hold the lien on their post in the parent
department. The Corporation while determining the sanctioned strength had
rightly taken the number of employees on deputation into account, as those on
deputation have no vested right to continue on deputation forever.
Abolition of Intermediate Post and Abolition of single Post of Computer
Operator:
99. That as a policy
measure in the process of restructuring, the Corporation abolished intermediate
post in the cadre of Deputy Manager and Hydrologists/Geophysicists. The
complaint is that while the cadres of Managers and Assistant Managers are being
retained, the intermediate post of Deputy Manager has been abolished.
Similarly, while the cadres of Senior Hydrologists and Senior Geophysicists and
Assistant Hydrologists and Assistant Geophysicists has been retained, the
intermediate post of Hydrologists/Geophysicists has been abolished. In the
counter-affidavit it is explained that there was duplication in the work
discharged by the Deputy Managers/Hydrologists/Geophysicists. The Corporation
was of the opinion that these intermediary posts could be abolished and the
work assigned earlier to the employees in those categories could easily be distributed
among the employees in the higher and lower cadres. There is a rational basis
for taking such a view in the matters. The decision cannot be said to be an
arbitrary one. We find no merit in the claim.
100. Likewise the single
post of Computer Operator has been abolished since it has become redundant for
the reason that most of the employees in the Corporation have been trained on
computers. The policy decision behind the abolition of the single post of
computer is self-evident. We cannot interfere with such policy decision, which
is supported by valid reasons.
The claim of
Employees declared Surplus consequent upon abolition of Roster Backwards in the
case of Scheduled Castes and Scheduled Tribes:
101. That placing
reliance upon G.O.Ms. No. 121 dated October 31, 1991, the petitioners contend
that instead of applying roster backwards, the identified surplus Scheduled
Castes and Scheduled Tribes employees ought to have been retained in service by
creating the required supernumerary posts. We have noticed that the Corporation
applied roster backwards in case of Scheduled Castes and Scheduled Tribes
employees on the directions of this Court. The Corporation itself did not apply
the roster backwards on its own.
102. Be it as it may,
G.O. No. 121 dated October 31, 1991, admitted is applicable to Government
Departments only and does not have universal application. The Corporation did
not adopt the said G.O. and therefore it has no application to the employees of
the Corporation.
103. That apart the very
scheme and policy of reduction in sanctioned strength and consequent abolition
of posts is to ensure self-sustenance, and survival of the Corporation. The
creation of supernumerary posts would be counter-productive as employees to
that extent of supernumerary posts created would exceed the sanctioned strength
of 404 employees which would in turn be in violation of G.O. Ms. No. 50 dated
November 15, 2001. Hence, we find no merit in the claim.
Absorption in Government Departments:
104. The Corporation as a
legal entity distinct and separate from the Government and the employees of the
Corporation are not Government employees. They are not entitled to seek
absorption in Government Departments. No such directions can be issued by this
Court in exercise of its judicial review jurisdiction.
Physically Handicapped:
105. The
Persons with Disabilities (Equal Opportunities, Protection of Rights and Full
Participation) Act, 1995, has been enacted to give effect to the proclamation
on the full participation and equality of the people with disabilities in the
Asian and Pacific region. The Economic and Social Commission for Asian and
Pacific convened a meeting to launch the Asian and Pacific Decade of the
disabled persons 1993-2002 at Beijing on December 1 to 5, 1992. The meeting
adopted the proclamation on the full participation and equality of people with
disabilities in the Asian and Pacific Region. India is a signatory to the said
proclamation. The Parliament having considered it necessary to implement the
aforesaid proclamation enacted the Act.
106. Section
33 of the Act, mandates that every Government shall appoint in every
establishment such percentage of vacancies not less than three per cent for
persons or class of persons with disability of which one per cent each shall be
reserved for persons suffering from—
(i) blindness
or low vision;
(ii) hearing
impairment;
(iii) locomotor disability or cerebral palsy; in the posts
identified for each disability.
107. The
claim of these employees is that some of them were appointed under physically
handicapped quota, certain others contend that they acquired physical
disabilities while in service. The Act itself has been enacted in order to
ensure the full participation and equality of people with disabilities. The Act
is special in its nature. The rights of the persons with the disabilities are
required to be protected. The persons with the disabilities constitute
themselves into a separate class. In our considered opinion, the Corporation is
required to consider whether it is required to deviate from application of rule
of “last come first go in each category” and apply the roster backwards in the
case of physically disabled employees and apply the same in similar manner as
in the case of Scheduled Castes and Scheduled Tribes employees. We accordingly
consider it appropriate to direct the respondent-Corporation to examine the
feasibility of applying the roster backwards in the case of physically disabled
employees and take an appropriate decision as expeditiously as possible.
Validity of Staff Regulation 21:
108. The
Regulation 21 of Andhra Pradesh State Irrigation Development Corporation
Limited Staff Regulations enables the Corporation to terminate the services of
employees by giving three months notice. The constitutional validity of the
regulation is challenged. The Regulation according to the petitioners is
arbitrary, illegal and in violation of section 23 of the Indian Contract Act.
Reliance has been placed on the judgments of the Supreme Court in Central
Inland Water Transport Corpn. (supra) and Delhi Transport Corpn.’s cases
(supra).
109. That so far the
Corporation did not invoke Regulation 21 of the Regulations and terminated the
services of any of its employees. The termination of services of identified
surplus employees is not discharge simpliciter, but is a consequence of
abolition of posts. At any rate, it is unnecessary to go into the said
question, as it does not arise for consideration in this batch of cases. It is
very well settled that this Court under Article 226 of the Constitution of
India, would not adjudicate academic issues. The question raised is left open
for the present. We are not inclined at this stage to go into the said question
relating to the constitutional validity of Regulation 21 of the Regulations.
110. In the result, all
the writ appeals and writ petitions are accordingly dismissed except with
regard to the claim of the physically disabled employees whose cases are
required to be reconsidered in the light of the directions aforementioned. No
order as to costs.
[1994] 79 COMP. CAS. 346
(BOM)
HIGH COURT OF
v.
U. B. Ltd.
B. N.
SRIKRISHNA J.
Notice of Motion No.
Nil of 1991 in Suit Lodging No. 3874 of 1991.
DECEMBER 5 AND 6, 1991
J.I.
Mehta, Virendra Tulzapurhar for the plaintiffs.
K.S. Cooper,
I.M. Chagla, G.E. Vahanvati, A.K. Desai and V. Shroff for the defendant.
B.N.
Srikrishna J.—By this notice
of motion, the plaintiffs have sought an injunction to restrain the first
defendants from in any manner disposing of, alienating, transferring,
encumbering or selling 10,712 shares of the company, known as "Kissan
Products Ltd." and 3,600 equity shares of Merryweather Limited. There is
also a prayer that the first defendant-company be directed to carry out certain
acts as detailed in prayer (c), pending the hearing and final disposal of the
suit. The suit is for specific performance of an agreement dated July 31, 1991,
between the plaintiffs and the first defendants.
The first
defendants hold 10,712 equity shares of the face value of Rs. 100 each,
comprising 67% of the paid-up and subscribed capital of Kissan Products Ltd.
(hereinafter referred to as "the KPL") and 3,600 equity shares of the
face value of Rs. 100 each, comprising 90% of the paid-up equity share capital
of Merryweather Limited (hereinafter called "the MW"). The balance of
400 equity shares, comprising 10% of the paid-up equity capital of MW is held
by another company, Herbertsons Ltd. (hereinafter called "the HL").
HL is a subsidiary of the first defendants. HL owns and controls a food
division comprising a plant situate at Bhandup in
By the
agreement dated July 31, 1991, the first defendants agreed to sell their 'food
division' to the plaintiffs. The sale was to be achieved in the following
manner :
(i) The first defendants undertook to
transfer to KPL 100% shareholding of MW held by them and their subsidiary, HL.
(ii) The first defendants also undertook
to transfer to KPL the food division of HL, including the Bhandup plant as a
going concern, free from all liens, charges and encumbrances.
(iii) After the aforesaid had been
achieved, the first defendants agreed to sell to the plaintiffs, as incidental
to the sale of the "food business" of the first defendants, 10,712
equity shares of KPL of the face value of Rs. 100 each, fully paid up.
The said
shares of KPL were agreed to be sold on spot delivery basis for a consideration
of Rs. 6,85,00,000. The consideration amount was to be adjusted by increase or
decrease in the net worth of KPL at the effective date over the net worth as on
March 31, 1989. The effective date was defined as the date on which the
transfer of the said shares to the plaintiffs would be effected.
The
plaintiffs paid a sum of Rs. 3,42,50,000, prior to the execution of the
agreement, as and by way of earnest money. The agreement acknowledges the
receipt of such earnest money and also provides that one nominee of the
plaintiffs would be inducted on the boards of KPL and MW, to facilitate
understanding the business for eventual take over of the management. This has
actually been done, and one nominee of the plaintiffs, Pranab Barua, has been
appointed as additional director of KPL on August 19, 1991, and subsequently
elected as a director at the annual general meeting held on September 26, 1991.
Detailed
manner of ascertaining the net worth, as at the effective date, is provided for
in the agreement. The agreement also provides for the complete list of the
trade marks owned by KPL, MW and HL. It is specifically agreed by clause 8
that, pending the completion of the final details, the first defendants would
ensure that such trade marks are kept alive, renewed and protected, and no
rights or liens accrue in respect of the trade marks in favour of any third
party.
Clause 9 of
the agreement provides that, in the interregnum between the date of the
agreement and the completion of the sale and purchase of the shares, the first
defendants shall ensure and procure that KPL, MW and Bhandup plant shall not do
any of the several acts or deeds specified in sub-clauses (a) to (g), except
with the previous written consent of the plaintiffs. Sub-clause (f), inter
alia, refers to the passing of any resolution by the members in general meeting
or making any alteration in the memorandum or articles of association. The
whole purpose of clause 9 appears to be that, pending the finalisation of the
transaction and actual sale of the shares contemplated by clause 1 of the
agreement, the first defendants would ensure that the two other companies
concerned, KPL and MW, would do nothing which would change the control of the
said companies or affect their value or net worth.
Clause 10
provides for transfer of management control of KPL only on completion of the transaction
as a whole, viz., transfer of the shares after receipt of statutory approvals,
wherever required. Simultaneously with the completion of the sale, transfer and
delivery of their shares is also agreed. After transfer of the shares, the
first defendants undertook to procure the resignation of the directors of KPL
and MW, who represented or were the nominees of the first defendants, as the
plaintiffs may require.
Clause 11(a)
provides for payment of the balance of the total purchase price within the
expiry of 30 days after all the approvals required for effecting the sale,
transfer and delivery of the shares to the plaintiffs have been completed. The
balance of the total purchase price was to be adjusted by the increase or
decrease in the net worth of KPL, as detailed in clause 2.
Clause 11(b)
provides that the first defendants shall arrange for KPL to transfer the 10%
equity shares in NBFPL held by KPL to another company nominated by the first
defendants to ensure severance of KPL connection with NBFPL before the
effective date or within such extended date as mutually agreed.
Clause 11(c)
provides that, if the plaintiffs commit a default in complying with the
provisions of clause 11(a) or of any of their other obligations under the
agreement, the first defendants shall be entitled to forfeit the earnest money
paid by the plaintiffs.
Clause 11(d)
provides that, if the first defendants commit a default (other than due to
non-receipt of Government approvals) in complying with the terms and conditions
of the agreement, the earnest money paid by the plaintiffs should be refunded
with interest at 16% per annum.
Clause 11(e)
stipulates that, if the required statutory provisions for effecting ultimate
transfer of the shares by the first defendants to the plaintiffs are denied,
within a period of 9 months from the date of the agreement, the earnest money
paid by the plaintiffs shall become due and refundable immediately without any
interest accruing thereupon. If, however, the approvals/clearances from
Government or other statutory bodies, as the case may be, are denied so as to
make the deal incapable of being put through, the earnest money shall become
due and refundable immediately with simple interest calculated at 9% per annum
from the date of expiry of the period of 9 months from the date of realisation
and credit to the account of the first defendants of the said money.
As stated
hereinbefore, after the signing of the said agreement and receipt of the
earnest money, the first defendants partly performed their obligations and one
Pranab Barua, an employee of the plaintiffs, was inducted on to the board of
KPL, as a director. The first defendants also represented to the plaintiffs
that they were arranging for necessary applications in Form 37-1 of section 269UC
of the Income-tax Act for securing the transfer of the Bhandup factory from HL
to KPL. The plaintiffs were also informed by the first defendants that they had
applied for and obtained necessary approval from the Central Government under
the Monopolies and Restrictive Trade Practices Act for transfer of shares of MW
to KPL, which approval was also got renewed. Meetings were held from time to
time between the plaintiffs and the first defendants embodied in the agreement
and to effectuate all things necessary to implement the agreement.
The fact of
the impending transfer of the food division by the first defendants to the
plaintiffs was reported widely in the newspapers and was also the subject of
announcements made by the chairman of the first defendants in press statements.
On November
13, 1991, the first defendants addressed a letter to the plaintiffs, in which
the agreement of July 31, 1991, was confirmed and information was provided that
the incremental net worth of KPL stood altered to Rs. 88,652,082 as at March
31, 1991, after incorporation of NBFPL shares. The first defendants formally
confirmed that the purchase consideration would be Rs. 88,652,082 (which was
subject to a further adjustment for the increase in net worth up to the
transaction date) and that it stood apportioned as below :
|
|
Rs. |
|
For MFPL
(sic) shares |
16,00,000 |
|
Take over
of Bhandup |
6,30,00,000 |
|
For KPL
Shares |
2,40,52,082 |
|
|
8,86,52,082 |
The said
letter also enclosed a "repositioned balance-sheet after KPL's take over
of Bhandup Factory (from HL) and shares of NBFPL" along with certain
annexures. The said letter, read with its annexures, makes it clear as to what
is the total consideration and the apportionment thereof.
Some time in
the third week of November, 1991, the plaintiffs learnt that the first
defendants were negotiating with another company, Nestle India Ltd., for
transfer or sale of the food business and transfer of 10,712 shares of KPL to
them as incidental thereto. This information appears to have been conveyed to
the plaintiffs by Nestle India Ltd. In order to set their mind at rest, the
plaintiffs addressed a letter dated November 21, 1991, to the managing director
of Nestle India Ltd., pointing out the circumstances under which an
agreement had been entered into between themselves and the first defendants for
sale of the food division and the transfer of the shares of KPL as incidental
thereto. In the said letter, the plaintiffs put Nestle India Ltd. on notice
that any agreement for the proposed sale of shares of KPL by the first
defendants would be in breach of contract, and that the plaintiffs intended to
enforce their rights, including the right of specific performance of the
contract, if necessary, through recourse to the due process of law.
The plaintiffs also addressed a letter dated November
27, 1991, to the first defendants, in which they put the facts on record as to
their fulfilling their obligations under the agreement of July 31, 1991, and
indicated that an amount of Rs. 2,57,50,000 had already been paid to the first
defendants in part performance of the agreement and the balance of Rs.
85,00,000, as agreed, was to be held as deposit in terms of the first
defendants' letter dated July 18, 1991, till necessary permissions were
obtained from the concerned authorities. The plaintiffs pointed out that,
despite the agreement and the confirmation of the first defendants, as
contained in their letter dated November 13, 1991, the plaintiffs had learnt
that the first defendants had been carrying on negotiations with Nestle India
Ltd., in breach of the agreement dated July 31, 1991, entered into with them.
The plaintiffs called upon the first defendants to stop any such negotiation
with any third party and to confirm that the first defendants will carry out
their obligations under the agreement dated July 31, 1991. Unless such
confirmation was received within 48 hours of the receipt of the notice, the
plaintiffs threatened that they would be adopting appropriate legal proceedings
to enforce the agreement at the first defendants' costs and consequences. The
only reply elicited to this was the letter dated November 28, 1991, from the
secretary to the vice president of the first defendants, which merely stated
that the said executive was "not available in the office" and was
likely to attend the office in the next week. Upon his return to office, a
reply was promised.
The plaintiffs filed the present suit on November 29,
1991, and have taken out a draft notice of motion for interim reliefs.
When the notice of motion was moved for ad interim
reliefs in terms of the draft on December 2,1991, the first defendants appeared
and opposed ad interim reliefs being granted on several grounds. The first
defendants also placed reliance on a letter dated December 2, 1991, from the
first defendants, addressed to the plaintiffs, alleged to have been despatched
by registered post acknowledgment due, in which the first defendants had taken up the stand that, on the basis of
legal advice received, they were of the view that the agreement dated July 31,
1991, was illegal and void ab initio, and, therefore, there was no question of
any breach of the same on their part. They also stated that though they were
not liable to make any payment of interest for the amount of Rs. 2,57,50,000
held by them, they deemed it fit, fair and just that the plaintiffs should be
compensated by payment of interest at the rate of 16% per annum, which was the
highest rate which could possibly be claimed by the plaintiffs, even if there
was a breach, which they denied. The said letter purportedly enclosed two
cheques dated December 2, 1991, for the amount indicated therein. In court, a
copy of the notice from the advocate of the first defendants to the advocates
of the plaintiffs, dated December 2, 1991, enclosing the xerox copy of the
first defendants' letter dated December 2, 1991, was also handed over to the
plaintiffs' advocates.
The ad
interim reliefs sought by the plaintiffs are strongly and vehemently opposed by
Mr. Cooper, learned counsel appearing for the first defendants, on the
following grounds :
(i) The agreement is illegal and
unenforceable, as it is contrary to section 293(1)(a) of the Companies Act.
(ii) It is also illegal and
unenforceable, as it is in breach of the provisions of section 372 of the
Companies Act.
(iii) The contract itself indicates the
consequences which would follow the first defendants' failure to perform their
obligations. These were specifically enumerated in clause 11 of the agreement
which did not include or reserve the right of specific performance. Hence, the
parties contemplated that, in the event of a breach, even if there was one, all
that would ensue was the refund of the deposited earnest money with appropriate
interest, as indicated in clause 11, and no specific performance was contemplated.
(iv) The contract is vague and incapable
of being enforced, as the consideration to be paid, the purchase price of
shares agreed to be sold, was never finalised.
(v) Any specific performance of the
agreement would amount to a direct interference in the management and internal
affairs of KPL, HL and MW, which are neither parties to the agreement, nor to
the suit.
(vi) There is not even an averment, much
less any material, to show that, though not parties to the contract, KPL, HL
and MW had consented to or confirmed the transaction embodied in the
agreement dated July 31, 1991.
(vii) The
agreement is illegal, as it is contrary to the provisions of sections 13 and 16
of the Securities Contracts (Regulation) Act, 1956.
(viii) The
suit for specific performance, at least at this stage, is untenable, as the
conditions requisite for complying with section 372 of the Companies Act have
not been fulfilled, and, therefore', the contract cannot be specifically
enforced at this point of time, and, hence, no interim relief should be
granted.
The first contention is that, under section
293(1)(a), the board of directors of the first defendants, a public company, is
prohibited from selling, leasing or otherwise disposing of the whole, or
substantially the whole of the undertaking of the company and, hence, the
agreement was ultra vires powers of the board of directors of the first
defendants. It is contended that the plaint makes it clear that what is agreed
to be sold is the "food division" of the first defendants and, hence,
what is agreed to be sold to the plaintiffs is a substantial part of the first
defendants' undertaking. There is no consent obtained to this sale from the
first defendant-company in general meeting. Hence, the agreement is clearly
prohibited under section 293(1)(a), as what has been agreed to was completely
beyond the pale of the powers of the board of directors of the first
defendants.
Mr. Cooper placed reliance on D. N. Banerji v. P. R.
Mukherjee, AIR 1953 SC 58 and Secretary, Madras Gymkhana Club Employees' Union
v. Management of the Gymkhana Club, AIR 1968 SC 554, in support of his
contention that the expression "undertaking" used in section
293(1)(a) is not necessarily limited to some property or asset but would extend
to a distinct business activity. Reliance was also placed on the judgments of
the Mysore High Court in Yallamma Cotton, Woollen and Silk Mills Co. Ltd., In
re : Bank of Maharashtra v. Official Liquidator, Mysore High Court [1970] 40
Comp Cas 466 and International Cotton Corporation (P) Ltd. v. Bank of Maharashtra [1970] 40 Comp Cas 1154
in support of this contention.
Banerji's
case, AIR 1953 SC 58, was one arising under the Industrial Disputes Act, and
the Supreme Court was concerned therein with the interpretation to be given to
the expression "industry" as used in section 2(j) of the said Act. In
connection with the interpretation to be put upon the said expression, and,
while dealing with the expression "undertaking", which is a part of
the said statutory definition, the Supreme Court observed that the words
"undertaking" used in the first part of the definition, and
"industrial occupation or avocation" used in the second part
obviously mean much more than what is ordinarily understood by trade or
business, and that the definition was apparently intended to include within its
scope what might not strictly be called a trade or business venture. In Madras
Gymkhana Club, AIR 1968 SC 554, the Supreme Court was once again concerned with
the connotation of the expression "industry", as used in section 2(j)
of the Industrial Disputes Act, and the Supreme Court commented upon the
juxtaposition of the words "business, trade, undertaking, manufacture or
calling of employer" in the collocation of words in the definition. In my
view, neither of these authorities is of help in deciding the question that has
been argued. In any event, both the authorities were concerned with the meaning
of the expression "undertaking" as used in the definition of
"industry" under section 2(j) of the Industrial Disputes Act. It is a
trite principle of interpretation of statutes that the interpretation given to
a word or expression used in one statute may be of no avail while interpreting
the same expression in another statute, unless the two statutes are in pari
materia. The provisions of section 2(j) of the Industrial Disputes Act are not
in pari materia with the provisions of section 293(1)(a) of the Companies Act,
1956, nor are the objects of the two statutes identical or similar.
Although the
two Mysore judgments relied upon by Mr. Cooper were both cases which arose
under the Companies Act and, perhaps, could be said to be nearer home, these
judgments are also not of much use in resolving the controversy that has been
thrown up. In Yallamma Cotton's case [1970] 40 Comp Cas 466, a learned single
judge of the Mysore High Court was concerned with a situation where the
official liquidator of the company in liquidation had impugned the action of
the creditor bank in taking possession of certain assets of the company in
apparent exercise of its power as a mortgagee and charge-holder of the
immovable and movable properties of the company. The mortgage had been created
by the ex-director of the company. It was argued for the liquidator that the
mortgage was beyond the powers of the board of directors under section
293(1)(b), and further that taking into possession the mortgaged property
amounted to an act which was specifically prohibited by section 293(1)(a) as
beyond the scope of the power of the board of directors, without ratification
by the company in general-meeting. In this context, the learned single judge
referred to the word "undertaking" used in clause (a) of subsection
(1) of section 293, and, as the said word was not defined in the Act, placing
reliance upon the dictionary definition, the learned single judge observed (at
page 485) :
"It is
not in its real meaning anything which may be described as a tangible piece of
property like land, machinery or the equivalent ; it is in actual effect an
activity of man which in commercial or business parlance means an activity
engaged in with a view to earn profit. Property, movable or immovable, used in
the course of or for the purpose of such business can more accurately be
described as the tools of business or undertaking, i.e., things or articles
which are necessarily to be used to keep the undertaking going or to assist the
carrying on of the activities leading to the earning of profits."
The matter
was carried in appeal and, in the decision reported at page 1154 of the same
volume, the appeal Bench upheld the findings of the learned judge and, while
doing so, it also took note of the fact that the expression
"undertaking" as used in section 293(1)(a) of the Companies Act has
not been defined. The appeal court, therefore, fell back upon the meaning of
the said word contained in dictionaries, and observed (at page 1157) :
"The
business or undertaking of the company must be distinguished from the
properties belonging to the company. In this case, it is only the properties
belonging to the company that have been dealt with by the board of directors
under the deeds of hypothecation and mortgage in favour of the bank. Hence, the
learned company judge was right in holding that no part of the undertaking of
the company was disposed of in favour of the bank."
In my view,
neither of these judgments is of much assistance. In the present case, it is
the contention of Mr. Mehta, learned counsel appearing for the plaintiffs, that
section 293(1)(a) is not attracted at all, even if one goes by the meaning
given to the word "undertaking" in the authorities cited. He contends
that, in order to attract section 293(1)(a) to the agreement relied upon by the
plaintiffs, it would have to be shown that, by the agreement, the board of
directors of the first defendant-company had sold, leased or otherwise disposed
of the whole or substantially the whole of the undertaking of the first
defendant-company and that, too, without the consent of the first
defendant-company in general meeting.
It is urged
by learned counsel for the plaintiffs that the agreement is merely an agreement
for sale of a specified number of shares of the first defendant. The agreement
neither contemplates nor requires the first defendants to sell a substantial
part of any of their undertakings. Prima facie, this contention appears to be
correct. Notwithstanding the fact that, both in the agreement and in the
plaint, there has been use of expression like sale of "food business"
of the seller to the purchaser and there has been reference to the seller's
"food business" carried on through KPL and HL, prima facie, I am of
the view that the agreement merely contemplates sale of the controlling shares
of KPL. The sale of shares, whatever be their number, even if it amounts to a
transfer of the controlling interest of a company, cannot be equated to the
sale of any part of the "undertaking" so as to come within the
mischief of section 293(1)(a). The argument of the first defendants leaves me,
prima facie, unimpressed.
The next
contention of Mr. Cooper is that the contract is incapable of being
specifically performed, inasmuch as the consideration for the sale of the
shares from the first defendants to the plaintiffs and for transfer to KPL of
the food division of HL (i.e., the Bhandup plant) has been left unspecified.
The contract is, therefore, vague and, hence, unenforceable, in the submission
of learned counsel. In the first place, we are not really concerned with the
transfer of the Bhandup plant to KPL as that is an arrangement contemplated
between KPL and HL. So far as the sale of KPL's 100% shareholding of MW held by
the first defendants and their subsidiary and HL is concerned, taking into
consideration the confirmation made by the first defendants' letter dated
November 13, 1991, and the annexure thereto, it is not possible to accept, at
this stage at least, that the consideration for the various acts is vague. As a
matter of fact, the first defendants themselves have indicated in the said
letter the apportionment or the total consideration which is indicated at Rs.
88,652,082. In the face of this document, prima facie, the contention cannot be
accepted.
The next
argument urged for the first defendants is that KPL, HL and MW are neither
parties to the agreement, nor to the present suit, and, therefore, the court
cannot give any interim relief which would amount to compelling them to do any
of the various acts contemplated under the instant agreement. In my view, this
argument is misconceived. The plaintiffs are not seeking any direction against KPL,
HL or MW. All that the plaintiffs contend in the plaint is that the first
defendants, with open eyes and with presumable knowledge as to their
controlling power in the said three companies, entered into an agreement with
the plaintiffs for sale of the specified number of shares and also for transfer
of the food division (Bhandup plant) of KPL to HL. This was envisaged, so that
it would result in the control of the food manufacturing plant ultimately
landing into the hands of the plaintiffs. The plaintiffs are only seeking a
direction against the first defendants that they be required to perform what
had been undertaken as their obligations under the agreement and that the first
defendants be restrained from doing anything that is inconsistent with the terms
of the agreement or likely to defeat the rights of the plaintiffs thereunder.
It is next
contended that a reading of the contract would indicate that the parties have
themselves contemplated that, in the event of breach of the contract, the
consequence to ensue would only be that of refund of the earnest money with the
stipulated interest on the happening of different contingencies. The terms of
clause 11 are highlighted in this regard. It is also urged that there is
nowhere a stipulation in the contract that the remedies provided under the
contract in the event of a breach by the defendants are to be without prejudice
to any other right that the plaintiffs may have in law. Ergo, the agreement was
not intended to be specifically performed, is the submission of the plaintiffs.
This argument also does not appeal. There is nothing in the contract which
expressly precludes or bars the plaintiffs from seeking specific performance of
the agreement. Merely because return of earnest money deposited and interest are
provided for, it is not possible, at this stage, to come to the conclusion that
the parties did not contemplate that the contract should not be specifically
performed at the instance of either party. The fact that there is absence of a
stipulation that the refund of deposit and interest was without prejudice to
other rights makes no difference whatsoever, in my view, so long as there is no
express stipulation that the contract was not intended to be specifically
performed.
It is then
argued that the contract is illegal, being in contravention of section 372 of
the Companies Act, and, therefore, incapable of being enforced. It is submitted
that section 372, as amended by the 1988 Act, was intended to put restrictions
upon intercorporate investment. Subsection (1) of section 372 prohibits
acquisition of shares by way of subscription, purchase or otherwise or for its
benefit or in its account the shares of any other body corporate, except to the
extent and except in accordance with the restrictions and conditions specified
in the section. Sub-section (2) permits the board of directors of an investing
company to invest in the shares of any other body corporate up to such
percentage of its subscribed equity shares or the aggregate of the paid up
equity and preference share capital of such other body corporate, whichever is
less, as may be prescribed. The percentage prescribed for the purpose of
subsection (2) of section 372 is 25 per cent., as indicated in the notification
issued by the Central Government. It is not disputed by the plaintiffs that the
purchase of the number of shares, as specified in the agreement, would
definitely exceed the percentage prescribed under sub-section (2). What is,
however, urged for the plaintiffs is that the prohibition contemplated under
sub-section (4) of section 372 does not apply at the stage of an agreement. If
at all, it becomes applicable only at the time of investment in the shares of
the other body corporate. Sub-section (4) of section 372 provides that
investing company shall not make any investment in the shares of any other body
corporate in excess of the percentage specified in sub-section (2) and the
provisos thereto, unless an investment is sanctioned by a resolution of the
investing company in general meeting and unless previously approved by the
Central Government. That there is not in existence a resolution of the
plaintiffs at the general meeting to sanction the investment contemplated by
the agreement and that such investment has not been approved by the Central Government
previous to the signing of the agreement is not disputed. It is, however, urged
that the section itself is inapplicable at this stage and that the plaintiffs
are perfectly capable of complying with the section when the time for
investment comes. The time for investment would arise after all the steps
contemplated under the agreement are taken, and the period for getting approval
is envisaged as a period of 9 months. The plaintiffs urge that, till such
period is over, it is not open to the defendants to assume that the plaintiffs
would be incapable of complying with the two conditions requisite under
sub-section (4) of section 372. It was, therefore, argued that there has been
no contravention of section 372. Prima facie, I am inclined to accept the contention
of the plaintiffs. What is prohibited by sub-section (4) is
"investment" and not "agreement to invest". Prima facie,
the prohibition would arise at the time of investment, if the two conditions
stipulated in sub-section (4), viz., resolution of the investing company and
previous approval of the Central Government, are not obtained. Their absence at
this point of time does not render the contract illegal, void or incapable of
being enforced, as contended for the first defendants.
The next
contention of the first defendants is that the contract, in order to be
performed, depends on the volition of third parties like KPL, HL and MW, and,
therefore, it cannot be specifically performed. That this is an argument of
desperation is obvious. It is inconceivable that seasoned businessmen would
enter into contracts for transfer of shares and for transfer of assets of
companies in which they hold controlling interest, unless they knew that they
were capable of fulfilling the terms of the contract. The argument put forward
is only a ruse to back out of the binding terms of the contract, for
obvious reasons. In support of this contention, reliance was placed by Mr.
Cooper on a judgment of a Division Bench of the Calcutta High Court in East
Indian Produce Ltd. v. Naresh Acharya Bhaduri [1988] 64 Comp Cas 259. It is
true that the prayer that was sought in the said case was somewhat similar and
the court did observe that the relief sought could not be granted, as the
performance of the contract depended on the volition of other parties. What is,
however, ignored is the radical difference in the facts of the
The last contention urged for the first defendants
was that the contract was illegal, as it is hit by the provisions of the
Securities Contracts (Regulation) Act, 1956. It is pointed out that the Central
Government is empowered, under section 13 of the said Act, to apply the said
section by a notification in the Official Gazette, and, upon such declaration,
every contract in the State or area which is entered into after the date of
such notification, otherwise than between members of a recognised stock
exchange, in such State or area or through or with such member, is rendered
illegal. Similar are the provisions of section 16. It is not disputed that such notifications, both under sections
13 and 16, have been issued. Mr. Cooper contended that the only exception to
the operation of section 13 would be a spot delivery contract as defined in
clause (i) of section 2, but the agreement in question was not a spot delivery
contract.
Section 2(i)
defines a "spot delivery contract" as meaning a contract which
provides for the actual delivery of securities and the payment of a price
therefor either on the same day as the date of the contract or on the next day.
The contract with the plaintiffs, though styled as a spot delivery contract,
contemplates payment of the purchase price within a period of 30 days of the
completion of the transaction, and, therefore, is not a "spot delivery
contract" within the meaning of section 2(i), according to Mr. Cooper.
This submission appears to be correct. Mr. Mehta does not seriously dispute, at
this stage at least, that the agreement may not amount to a spot delivery
contract. He, therefore, does not seek the escape hatch provided by section 18.
He contends that the provisions of the Act itself are not applicable to the
present agreement, inasmuch as the agreement is for transfer of shares of a
public limited company, the shares of which are not listed on the stock
exchange.
Mr. Mehta
emphasised the definition of "securities" contained in clause (h) of
section 2, and urged that the expression "other marketable
securities" used in the definition would supply colour to the construction
to be put on the word "shares" used therein. In his submission, the
Act is intended to govern large transactions in the known market, viz., stock
exchange. The detailed provisions of sections 13 and 16 shed considerable light
on this aspect of the matter, as they invest the Central Government with the
power of assessing the situation in the stock exchange and taking remedial
action by way of the declarations contemplated therein. In his submission, the
Act was not intended to apply to a private transaction between parties in
respect of shares which were not "marketable", meaning thereby not
sold on the stock exchange. He relies upon the judgment of the learned single
judge of this court (Mrs. Manohar J.) in Norman J. Hamilton v. Umedbhai S.
Patel [1979] 49 Comp Cas 1 and the judgment of the appeal court, confirming the
said judgment, Dahiben Umedbhai Patel v. Norman J. Hamilton [1985] 57 Comp Cas
700.
Mr. Mehta
submits that though the issue which the court was concerned with in both the
said judgments was whether transfer of shares of a private limited company by a
private treaty fell within the mischief of this Act, both the judgments of the
learned single judge and the appellate court have approached the matter on
principle and rejected the argument that the concept of
"marketability" and "saleability" must necessarily
converge. It is urged that both the judgments have, after an analysis of the
historical background in which the statute was enacted, taken the view that the
Act was intended to govern transactions in the market, i.e., stock exchange,
and not intended to apply to transfer of shares of a private limited company,
not listed on the stock exchange, if such transfer was by a private treaty.
Though Mr. Cooper, in fairness, himself pointed out the observations in these
judgments and attempted to pre-empt the impression that the reading of the
general observations might create, I am still left unconvinced by the argument
of Mr. Cooper, at this prima facie stage at least. In my prima facie view, both
judgments point out that the object of the Act was to control operations on
stock exchange. Both judgments have looked at the mischief in existence
hitherto which was sought to be suppressed, the Gorwalla Committee's
recommendations, the objects clause of the Bill, and made observations which,
though made in connection with transactions by private treaty of shares of a
private limited company, are equally applicable to similar transactions of
shares of a public limited company unlisted on the stock exchange. In my view,
at least at this prima facie stage, it is not possible to accede to the
submission of Mr. Cooper that these judgments have no relevance or application
to a transaction of transfer of shares of a public limited company, unlisted on
the stock exchange, by private treaty. On the contrary, my prima facie view of
these two judgments accords with the submission of Mr. Mehta. I am of the prima
facie view that a transaction of shares of a public limited company, unlisted
on the stock exchange, is not intended to be governed by this Act.
Mr. Cooper
strongly relied on the judgment of the Division Bench of the Calcutta High
Court in East Indian Produce Ltd. [1988] 64 Comp Cas 259 on this issue also.
The Calcutta High Court relied on an earlier judgment of the same High Court in
B.K. Holdings (P) Ltd. v. Prem Chand Jute Mills [1983] 53 Comp Cas 367. At that
stage, the judgment of Mrs. Manohar J. was cited before the learned single
judge of the Calcutta High Court. He seemed to take the view that the decision
of Mrs. Manohar J. in Norman J. Hamilton v. Umedbhai S. Patel [1979] 49 Comp
Cas 1, must be confined to a situation of transfer of shares of a private
limited company. So far as the decision of the Division Bench of the Calcutta
High Court in East Indian Produce Ltd. [1988] 64 Comp Cas 259 is concerned, it
seems to follow the earlier judgment in B.K. Holdings. With great respect to
the learned Judges of the Calcutta High Court, who decided the aforesaid two
cases, even if the matter were not res integra, I would be inclined to disagree
with their observations made therein. However, in the view I have taken of the
judgments of the learned single judge and the appeal judgment of our court, I
consider myself bound to take the view that the Securities Contracts (Regulation)
Act, 1956, is not intended to regulate private transactions in shares of public
limited companies, not listed on the stock exchange. This contention also,
therefore, fails.
During the
course of the arguments, two facts were brought to my notice. First, on
November 29, 1991, a suit, being S.C. Suit No. 8927 of 1991, was filed by a
shareholder of HL in the
Second, a
suit was filed in the Court of the City Civil Judge of Bangalore by two shareholders
of the first defendant-company to restrain them from completing the sale and
acting in pursuance thereof. A motion was also taken out for interim relief, on
which no order has been passed.
Referring to
these developments, Mr. Mehta strongly contended that these were shareholders
who were put up by the first defendants and their subsidiary with a view to
wriggle out of the binding agreement. The fact that, on the date the suit was
filed by the plaintiffs (i.e., November 29, 1991), an order of injunction was
sought from the Bombay City Civil Court by the shareholder of HL, and the
Bangalore suit, do, prima facie, support, to some extent at least, the
contention of Mr. Mehta that these were evasive tactics of the first defendants
to wriggle out of a binding bargain, on second thoughts.
The suit is
not frivolous and raises serious issues which require trial.
Looking at
the matter from all aspects, I am of the view that the plaintiffs have made out
a prima facie case for grant of ad interim reliefs. The balance of convenience
is in favour of granting the ad interim reliefs.
P.C. : Leave
granted under rule 147/148 of the High Court of Judicature at
Upon the plaintiffs undertaking, through counsel, to
pay to the first defendants such sum by way of damages as the court may award
as compensation for loss or prejudice sustained, in the event of the plaintiffs
failing in the suit :—
(a) Ad
interim order in terms of prayer (b) in the draft notice of motion.
(b) Pending
the hearing and disposal of the notice of motion, the first defendants, by
themselves or through their servants and agents, are restrained from doing
anything or taking any steps which would be contrary to or inconsistent with
the fulfilment of their obligations under the agreement dated July 31, 1991,
and prejudicial to the rights of the plaintiffs thereunder.
Leave to amend the plaint. The amendment to be
carried out during the course of the day.
Motion made returnable on January 13, 1992.
Certified copy to be expedited.
[1985] 58 COMP. CAS. 772 (
HIGH COURT OF
v.
Andhra Steel Corporation Ltd.
SABYASACHI MUKHARJI AND SUHAS CHANDRA SEN,
JJ.
Appeal
No. 312 of 1981 in Company Application No. 193 of 1980 and Company Petition No.
221 of 1977
JUNE 2, 1982
Somenath Chatterjee, Pratap Chatterji and Anindya
Mitra for the Appellant.
R.C. Nag, Ahin Chaudhury, R.C. Deb, Mrs. U. Mukherji,
S.B. Mukherji, P.C. Sen, H.K. Mitra, Dipankar Gupta, S. Pal and P. Chowdhury
for the Respondent.
Sabyasachi Mukharji, J.—This appeal arises out
of the orders passed and judgments delivered in several matters on August
21,1981. The points involved are interesting and rather novel but these are not
many. An order for sale of certain assets of Andhra Steel Corporation Ltd. has
given rise to this appeal. Andhra Steel Corporation Ltd., hereinafter referred
to as "the said company", is controlled by the Mittal family. Sri
B.C. Mittal was the grandfather of the present applicant/appellant. Sri B.C.
Mittal had five sons, namely, Mohanlal Mittal, I.S. Mittal, D.L. Mittal, C.L.
Mittal and R.K. Mittal. The wife of Sree B.C. Mittal had died some time back.
Different members of the Mittal family held substantial blocks of shares in the
said company. M.L. Mittal and his sons and daughters hold substantial shares
but altogether they are in minority. On or about May 13, 1977, M.L. Mittal had
made an application under ss. 397 and 398 of the Companies Act, 1956, being
Company Petition No. 221 of 1977 complaining about alleged mismanagement of the
affairs of the company by his four brothers. Sri B.C. Mittal was an old man and
had died recently. He was bedridden after an attack of paralysis for a long
time. It is the case of M.L. Mittal and his sons in the present
applicants/appellants that he was also mentally infirm and was undergoing shock
treatment. In the application made by M.L. Mittal under ss. 397 and 398 of the
Companies Act, 1956, in order to make up 10% shareholding, the present
appellants being sons and daughters of M.L. Mittal supported M.L. Mittal and
their supporting affidavit was annexed to the main s. 397 and s. 398
application. These facts have to be borne in mind in order to consider one of
the main contentions involved in this appeal.
In the application under ss. 397 and 398 of the
Companies Act, Mohanlal Mittal had complained about mismanagement of the
affairs of the company by his brothers, Indra Sen Mittal, Damodar Lal Mittal,
Chaganlal Mittal and R.K. Mittal. In the said application, an order was passed
on May 25, 1977, for convening an extraordinary general meeting of the company
for the purpose of election of the directors under the chairmanship of Sri M.N.
Sen, Barrister-at-Law. An extraordinary general meeting was duly held. In the
said election, six representatives from various financial institutions were
unanimously elected as directors of the company and six other persons were
elected on contest. Sri K.R. Gopivallabha Iyengar, a retired judge of the
Karnataka High Court, was appointed chairman of the Committee of Management.
The learned trial judge had initially appointed a
Committee of Management and after some proceedings, the matter went up before a
Division Bench of this court and by an order dated July 26, 1977, the Division
Bench, inter alia, ordered as follows :
"THE
COURT : The operation of the order passed by the learned trial judge
will remain stayed and the following 10 persons who were declared to have been
elected as directors by the learned trial judge and the other two persons named
below, i.e., the following 12 persons, will, however, constitute the Committee
of Management until further orders."
Thereafter, the names of the twelve persons were
mentioned in the said order. Some of these persons resigned and were
substiutted. At the time relevant for the present appeal, the Committee of
Management consisted of the following:
"1. MR.K.R. Gopivallabha Iyengar—Chairman
2. Mr.
Srinivasa Shastri, I.A.S.—managing director, Andhra Pradesh State Financial
Corporation,
3. Mr. B.C. Narayan—director, K. S. F. C.
4. Mr. M.V. Mani—nominee of K. S. I. D. C.
5. Mr. K.J. George—secretary, Govt. of India (retired)
6. Mr. S.P. Banerjee—advocate, Calcutta High Court.
7. Mr. T. Ramachandra Rao—advocate, Andhra Pradesh High Court.
8. Mr. I.S. Sevak—area manager, Bank of India, Karnataka.
9. Mr. T. Krishnappa—general manager, Mysore Iron and Steel Ltd.
10. Mr. H.R. Srinivash—chartered accountant.
11. Mr. B.C. Mittal
12. Mr. I.S. Mittal."
The present appeal arises out of an application made
by Pramod Kumar Mittal, a shareholder of Andhra Steel Corporation Ltd. and a
son of Mohanlal Mittal, for restraining the Committee of Management of the
company from acting on the basis of or in furtherance of or giving any effect
to the terms of settlement which were proposed to be filed in Suit No. 295 of
1977 in any manner whatsoever. There was a further prayer for Pramod Kumar
Mittal to be added as a party to the Company Petition No. 221 of 1977 (Mohanlal Mittal v. Andhra Steel Corporation Ltd.)
This application was made by Pramod Kumar Mittal and also by his two
brothers, Laxmi Niwas Mittal and Vinod and Kumar Mittal, and the married
sister, Smt. Saroj Mittal (Rataria). The applicants together with their father,
Mohanlal Mittal, held 10% of the share capital of the Andhra Steel Corporation
Ltd. As mentioned hereinbefore, Mohanlal Mittal had made an application under
ss. 397 and 398 of the Companies Act, 1956, and that application was made with the
consent of the present applicants.
The company had three units for production of steel,
one at Dankuni, one at Vizagapatnam and one at
In this appeal, questions have arisen as to the
competency of the Committee of Management to enter into the proposed terms of
settlement, the conduct of the Committee of Management and also the scope and
effect of the terms of settlement.
It was the allegation of M.L. Mittal and his sons,
the present appellants, that Sri B.C. Mittal was at all material times mentally
and physically incapable of acting as a member and taking part in the affairs
of the said company. Sri S.P. Banerjee is a practising advocate of this hon'ble
court and lives in
It is the allegation of the appellant that while the
Dankuni factory which was near Howrah in West Bengal had remained closed since
December, 1976, at that time there was a boom in the steel industry from 1978
which continued, according to the appellants, till about 1980. On this aspect,
the appellant had relied on certain statements made by Indrasen Mittal in the
affidavit-in-opposition.
It is further the case of the appellant that Sri K.R.
Gopivallabha Iyengar, who was the chairman of the Committee of Management
appointed by the court and who is a retired judge of the Karnataka High Court
had also taken a partisan attitude and was openly supporting, according to the
appellants, the acts and decision of I.S. Mittal. The appellants have alleged
that the Committee of Management had not published any report of balance-sheets
and profit and loss accounts for the years 1977-78, 1978-79 and 1979-80 or of
any account dealing with the said company after their appointment. It is,
therefore, their allegations that the affairs of the committee had been kept
secret by the Committee of Management from the general shareholders of the
company. The appellant further alleged that no accounts had been filed before
the court. It is further the allegations of the appellants that Sri I.S. Mittal
and his brothers, D.L. Mittal, C.L. Mittal and R.K. Mittal, are in control of
another company, namely, Southern Steelmet Ltd., having its office in
The Dankuni unit of the said company is comprised of electric
steel melting furnace with an installed capacity of 18,000 tonnes per annum and
rolling mills with a capacity of 18,000 tonnes per annum. The factory at
Dankuni is comprised of an area of 6 acres of land with building and stores.
The allegation is that Indra Sen Mittal is in effect trying to make a benami
purchase of the Dankuni unit of the company as will be evident from the facts
of this case as brought out in the affidavits.
In this connection, it would also be relevant to
refer to some of the allegations and/or submissions made in the affidavit of
Indrasen Mittal affirmed on or about November, 1980, to the application out of
which this appeal arises. After setting out the circumstances under which the
Committee of Management came to function and after reiterating that the said
Committee of Management had functioned with ability, diligence and bona fide,
it has been stated by the same deponent that though he admitted that the
condition of the steel industries had improved in the country between 1978-79
and 1979-80, there were many companies producing steel in this country which
were running at loss. It has been further stated that the Dankuni unit had
remained closed since December, 1976. It is further the averment that with the
effort of the Committee of Management and through the untiring efforts of the
deponent and his younger brothers, Damodarlal Mittal and Chhagan Lal Mittal,
the company's units at
It has been alleged on behalf of respondents, the
Committee of Management, that the Andhra Steel Corporation Ltd. started
negotiation with the Bank of India and Dana Bank for settlement of the disputes
and arrived at a settlement which has given rise to the present litigation.
It has been further alleged by the Committee of
Management that the company was incurring a loss of Rs. 3 lakhs per month for
maintaining the Dankuni plant which was a closed unit since 1976 and the
company after due deliberations decided to sell the said unit to cut down loss
and also to pay off the loans taken by the company. On or about January 16,
1976, the company's plants at Dankuni, Vizagapatnam and
On February 5, 1979, an advertisement was published
in two newspapers, the Business Standard and the Economic Times, inviting
offers for sale of the steel plant at Dankuni. In the advertisement, it was
mentioned that a mini steel plant near
On or about March 10,1979, an offer was made by Shiv
Kumar Agarwalla to purchase the said plant at Rs. 2.15 crores.
Following this offer, some negotiations took place by
and between the two aforesaid banks, Andhra Steel Corporation and Shiv Kumar
Agarwalla. This resulted in a composite agreement between the two banks, Andhra
Steel Corporation and Shiv Kumar Agarwalla and Grand Steel and Alloys Ltd., a
company floated by Shiv Kumar Agarwalla for purchasing the aforesaid steel
plant. A sum of Rs. 10.5 lakhs was deposited with the Bank of India on May 22,
1980, by Grand Steel and Alloys Ltd., by a pay order of Indian Overseas Bank in
favour of Bank of India for this purpose.
On or about August 22, 1981, Bank of India as
plaintiff in Suit No. 295 of 1977 (See AIR 1982 Cal 57) and as one of the
defendants in the Extraordinary Suit No. 1 of 1980 having a charge in respect
of the company's plant and machinery at Dankuni made an application before T.
K. Basu J. for, inter alia, the following order :
(a) Suit
No. 295 of 1977 (Bank of
(b) Grand
Steel and Alloys Ltd. be added as party defendant in its suit/or in
Extraordinary Suit No. 1 of 1980 and/or both after passing an order of
consolidation of the two suits ;
(c) The
agreement or compromise evidenced by the said terms of settlement be recorded
and a decree be passed in accordance therewith ;
At the time when the said terms of settlement were
sought to be filed in court, respondent No. 1, Pramod Kumar Mittal, objected to
the same and stated through his counsel that he was in a position to find a
buyer of the Dankuni unit of the company for Rs. 2 crores 30 lakhs. T. K. Basu
J. recorded the statement made on behalf of Pramod Kumar Mittal and directed
that a formal application be made for recording the said compromise and filing
the terms of settlement. Before such application for recording the compromise
was made, Purna Investment Ltd., a shareholder of the Andhra Steel Corporation
Ltd., made an application in Suit No. 295 of 1977(See AIR 1982 Cal 57), for
leave to intervene in the said suit and to be added as a party thereto and for
leave to oppose the filing of the terms of settlement in the said suit.
Pramod Kumar Mittal on behalf of himself and on
behalf of Vinod Kumar and Lakshmi Niwas Mittal and Smt. Saroj Ratoria made an
application in the proceedings under ss. 397 and 398 of the Companies Act,
1956, then pending for, inter alia, an order of injunction restraining the
Committee of Management of the Andhra Steel Corporation Ltd. from compromising
the said suits and filing the said terms of settlement. A prayer was also made
in the said application for removal of the Committee of Management. An order
was made restraining the Committee of Management from filing the terms of
settlement in the said suit until disposal of the application.
The application made by the Bank of India for putting
in terms of settlement as well as the company petition came up for hearing
before Salil K. Roy Chowdhury, J., After hearing the matters for several days,
judgment was reserved and on August 21, 1981, Salil K. Roy Chowdhury, J., was
pleased to dismiss the application made by Pramod Kumar Mittal for being added
as a party in Company Petition No. 221 of 1977 and the prayer for injunction
restraining the Committee of Management from filing the said terms of
settlement was also refused by His Lordship. The application by Purna
Investment Ltd. for being added as a party to Suit No. 295 of 1977 was also
dismissed. The application filed by the Bank of India, however, succeeded. An
order was made for consolidation of Suit No. 295 of 1977 and Extraordinary Suit
No. 1 of 1980 and leave was granted to file the said terms of settlement in
court and the compromise embodied in the said terms of settlement was recorded.
Thereafter, Salil K. Roy Chowdhury, J., was pleased to direct that Suit No. 295
of 1977 and Extraordinary Suit No. 1 of 1980 were to be treated as on the day's
list and passed a decree in accordance with the terms of settlement. The suit
was dismissed as against the defendants who were not parties to the said terms
of settlement.
After the learned judge passed the impugned order,
there was an oral application for stay of the operation of the order which the
learned trial judge did not grant. Thereupon, before the Division Bench, an
oral application was made on August 21, 1981, for stay of the operation of the
order of the learned trial judge so far as delivery of the Dankuni Steel Plant
was concerned. It was orally submitted that in between the time, that is to
say, when the learned trial judge delivered the judgment on August 21, 1981, at
about l.20 p.m. and the matter was mentioned before the Division Bench on the
same day at about 2.10 in the afternoon, delivery had taken place. On enquiry,
it was revealed that the key of the steel plant had only been delivered to the advocate
on record of the purchaser and actual physical possession had not taken place.
On that, the learned advocate for the purchaser was appointed to be the
receiver of the key and was directed not to part with the possession until
further orders of this court. The said order has continued. As we have
mentioned before, Bank of India had a charge in respect of all movables and
hypothecation in its favour of all the plants. The company had also mortgaged
its Dankuni plant comprising of the lands, buildings and machinery in favour of
Dena Bank.
After the appeal was preferred and in the course of
hearing of the stay petition before the Division Bench, the appellant produced
Calcutta Hardware Supply Agency and Dwarka Prasad Chowdhury who were willing to
purchase the plant at Dankuni for Rs. 2,45,00,000 and as a token of the bona
fide intention had produced certain cheques and certain letters of guarantee
from the bank.
In support of this appeal, it was contended, firstly,
that the contract, that is to say, the terms of settlement by which the
agreement was entered into, was beyond the competence of the Committee of
Management and, therefore, there could not have been any valid agreement
between the parties and, as such, there could not have been any terms of settlement.
In order to appreciate this contention, it would be necessary to refer to the
argument advanced before us. It was contended that the Committee of Management
was appointed to discharge the function of and was in place and stead of the
board of directors of the company. Therefore, it was submitted that the
Committee of Management had to function under the same restriction as the board
of directors of a company had. In this connection, reference was made to the
provisions of s. 293 of the Companies Act, 1956, the relevant portion of which
is set out as under :
"293. Restrictions on powers of board.—(1) The
board of directors of a public company, or of a private company which is a
subsidiary of a public company, shall not, except with the consent of such
public company or subsidiary in general meeting (underlined by us),—
(a) sell,
lease or otherwise dispose of the whole, or substantially the whole, of the
undertaking of the company, or where the company owns more than one
undertaking, of the whole, or substantially the whole, of any such undertaking
;...............
(2) Nothing
contained in clause (a) of sub-section (I) shall affect—
(a) the title of a buyer or other person who buys or takes a lease of any such undertaking as is referred to in that clause, in good faith and after exercising due care and caution ; or
(b) the selling or leasing of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing."
The other sub-sections are not necessary for our
present purpose. We may incidentally while on these provisions note that s. 293
appears in Chapter II of Part VI of the Act which deals with the constitution
of the board of directors generally and under the group of sections dealing
with the board's power and restrictions thereon. There are certain sections,
namely, s. 291, which deals with the general power of the board of directors of
the company, section 292 deals with certain powers to be exercised only at
board meetings and s. 293 is headed as " Restriction on powers of the
board". Section 293A, which is not relevant for our present purpose, deals
with the prohibition regarding making of political contributions and s. 293B
deals with the power of the board and other persons to make contributions to
the National Defence Fund, etc. The point that is emphasised is that the board
is to function on behalf of the company in a specified manner and under certain
specified conditions and are under specified restrictions. The Committee of
Management, it was, inter alia, contended, could not have greater power unless
specifically conferred by the court in the order appointing the Committee of
Management giving it such unrestricted powers. It was more or less the common
case that no such specified special powers had specifically been given to the
Committee of Management in the instant case by the court appointing or
confirming the order of appointment of the Committee of the Management. It was
also contended that, in the alternative, if it was contended that the Committee
of Management was like a special officer or a receiver of the assets of the
company, then such a receiver could not sell off the undertakings of the
company unless in the order appointing the Committee of Management there was
such specified and enumerated power, which, it was submitted, was absent in the
instant case. Arguments were made which we shall presently note as to whether
such a Committee of Management could be treated as a receiver and whether such
leave was necessary in the instant case, A question was canvassed before us
that a particular unit of a company could not be considered to be an
undertaking, of the company in terms of s. 293(1)(a) of the Act. A closed unit,
it was submitted, could not be treated as an undertaking as it is understood,
We have mentioned hereinbefore that it was the common case that no specific
leave had been obtained from the court entertaining the company's petition
under ss. 397 and 398 of the Companies Act in the instant case. It was further
urged that though the learned judge who was exercising and disposing of the
several matters under the Companies Act as well as the suit which was assigned
to the particular learned trial judge who was disposing of this company's
petition, these orders could only be passed in separate and independent
jurisdiction.
The next point that was urged before us was that the
agreement for sale upon which the terms of settlements were passed was not a bona
fide transaction. In support of this submission, several points were urged,
namely, that the advertisement was not proper and valid, secondly, there was
absence of the minutes of the meeting of the Committee of Management regarding
the sale of these units, thirdly, the relationship between Indersen Mittal and
the real buyer, Shiv Kumar Agarwalla, fourthly, the paid-up capital of the
purchaser was insignificant, fifthly, there was no valuation report placed
before the learned trial judge, sixthly, there was no mention of the date of
the agreement, that is to say, when the alleged agreement was alleged to have
been entered into and, lastly, because of certain subsequent facts, that is to
say, the emergence of a purchaser who was willing to offer at a higher price
prim facie would indicate that the unit was being sold at a lesser value. We
hall have to refer in detail to certain facts in examining these several
contentions It was then contended that the decree was bad because the agreement
upon which the decree was passed was not a registered document and, as such,
could not be taken note of and looked at.
Apart from disputing these submissions, it was urged
on behalf of the respondents that the appellants had no locus standi to make
this application in the first instance and/or to prefer this appeal. It was,
secondly, submitted that the decree having been passed in accordance with the
terms of settlement, no relief could at this stage be granted in favour of the
appellants. Incidentally, it was also submitted that the terms of settlement
have been given effect to in respect of several other matters and cannot now be
impugned piecemeal.
In this case, indisputably, as there had not been any
sanction or leave obtained for entering into the terms of settlement pursuant
to which the decree was passed in favour of the Union Bank of India, it is
necessary to consider the contention whether either under s. 293 of the
Companies Act, which we have set out hereinbefore, sanction was required or
whether any leave to compromise was necessary in view of the fact that the
Committee of Management appointed by the court was in the position of a
receiver which required the leave of the court or sanction of the court before
entering into the compromise. We have set out s. 293 of the Companies Act. We
have also set out the terms of the order dated July 26, 1977, whereby the court
had empowered the Committee of Management to function. The question, therefore,
is, are the transactions entered into by the Committee of Management, transactions
entered into by the board of directors or receiver or officers of the court ?
It is quite clear in view of the terms used in s. 293 that s. 293 in terms
cannot have any application to the facts and circumstances of this case. The
Committee of Management was not the board of directors of the company. The
board of directors of the company had to perform several functions ; it cannot
be envisaged that the Committee of Management was functioning as the board of
directors. The board of directors had to perform several other functions which
could not be expected to be performed by the Committee of Management appointed
by the court. In this connection, reference was made to s. 161 of the Companies
Act which enjoins filing of certain returns indicating the names of the
directors, etc., or s. 169, which also enjoined calling of extraordinary
general meeting of the board of directors on certain conditions specially
sub-s. (9) of s. 169 about the reasonable expenses incurred by the
requisitionists in connection with the holding of the meeting. Similarly, s.
215 of the Act required authentication of balance-sheet in certain manner by
the board of directors and s. 217, specially sub-s. (4). In this connection,
about the Committee of Management, reference may be made to certain decisions
in aid of the proposition that, in any event, s. 293 could only apply to a
voluntary sale and not to a sale or transfer which takes place by operation of
law in pursuance of a decree at the instance of a charge-holder in enforcement
of its rights. When a Committee of Management sells, it sells, it was
contended, by the authority of the appointment by the court and, therefore, the
acts of the Committee of Management would not come within the purview of the
limitations of the board of directors under s. 293 of the Act. In this
connection, reliance was placed; on certain observations in the case of Krishna
Das Nandy v. Bidhan Chandra Roy, AIR 1959 Cal 181, at paragraph 42, though the
said observations were made in the context of facts which were entirely
different. Our attention was also drawn to certain observations of the Supreme
Court in the case of Sailendra Narayan
Bhanja Deo v. State of Orissa, AIR 1956 SC 346. We are of the opinion
that the said decision is not of much relevance in the present case.
It was contended that in the scheme of s. 293 and in
the context of the other provisions of the statute, compliance with the said
provisions of s. 293 could not be made by the Committee of Management. It is
necessary to consider whether in view of the facts of this case and the
provisions of the Companies Act, leave or prior sanction or direction of the
court was required for entering into the terms which would entail sale or
transfer of any of the units or undertaking of the company. In this connection,
it was suggested that if any leave was necessary, such leave had to be obtained
from the court exercising jurisdiction under ss. 397 and 398 of the Companies
Act, namely, the court functioning as the company court; such leave, it was
urged, could not be inferred by the permission of the suit court to file the
terms of settlement and passing a decree there upon. It was stressed that the
fact that by a fortuitous combination of circumstances, the same learned judge
was exercising company jurisdiction and suit jurisdiction could not obviate the
necessity of such leave. It was further stressed that in this case as there had
been no direction or sanction obtained from the court prior to entering into
the transactions or agreeing to the terms of settlement, the subsequent
commission of the court to file the terms of settlement, would not cure the
defect because it was urged that the act of the Committee of Management was
ultra vires and beyond its competence. In this connection, certain observations:
of the House of Lords in England in the case of Alexander Ward and Co. Ltd. v.
Samyang Navigation Co. Ltd. [1975] 2 All ER 424; [1975] 1WLR 67.3 (HL) were
referred to. There the pursuer was a company registered in Hong Kong and they
had a claim against the defenders, a Korean company, for over Ł1,60,000. The
pursuer company had no directors and did not hold any general meeting in
1968-69. In November, 1970, the summons for the payment of the sum was issued
by the Court of Session in Scotland on behalf of the pursuer company in the
names of two individuals, W and I, together with warrants authorising the
arrest of the ship belonging to the defenders which was lying in Scottish
waters. Arrest was necessary in order to give the Scottish court jurisdiction
to try the action. In December, 1971, the defenders lodged Ł1,65,000 with the
Accountant of the Court and warrants were recalled releasing the defendership
in December, 1971, the Lord Ordinary ordered trial of a preliminary point
raised by the defenders' amended defence that the company not having authorised
the raising of the action, it should be dismissed. In April, 1972, before trial
of that issue, the pursuers went into liquidation and an application was
granted for the liquidator to be added as an additional party. In the name of
the company, the liquidator ratified the acts done on its behalf by W and I.
The defenders contended that despite the purported ratification, the action
should be dismissed since W and I had not been authorised to act on behalf of the
company and the arrestment was not capable of subsequent ratification. Reliance
was placed on certain observations of Lord Hailsham at page 429 of the report.
In view of the facts of this case, it appears to us that the said observations
would be of no relevance to or in disposing of the present appeal. Lord
Kilbrandon, with whose judgment Lord Hailsham agreed, observed (at p. 682 of
[1975] 1 WLR) :
"My Lords, I must say I have the gravest doubts
as to the sound ness of the proposition pleaded. I am not at all convinced that
the management of a company having been confided to the directors and the
instructing of actions at law being an act of management, then, if the company
has for the time no directors, it cannot during that time take steps to recover
its debts."
Our attention was also drawn to the observations in
Ken on Receiver, 15th edition, wherein at page 200, the editors have referred
to the fact that where a receiver is appointed manager, he can carry out all
sales as were necessary for the ordinary conduct of the business over which he
was appointed, but no sale of permanent plant or assets should be made without
the leave of the court. Reliance was also placed on the observations of the
learned editors of that book in the chapter dealing with "Managers",
namely, Chapter 9, where, at page 228, the character of a manager has been
described. There, it was observed that where a receiver was required for the
purpose not only of receiving rents and profits or of getting in outstanding
property, but of carrying on or superintending a trade, business or
undertaking, he was called a manager or more usually a receiver and manager.
The appointment of manager implied that he had power to deal with the property
over which he was appointed manager and to appropriate the proceeds in a proper
manner. It was, therefore, submitted that a Committee of Management was in the
place of manager or a receiver appointed by the court in ordinary cases and
must act under the superintendence and direction of the court and there being
no specific power given by the order appointing the Committee of Management to
sell any unit or any undertaking without the leave or power properly sanctioned
from the court, the Committee of Management was not competent to sell or enter
into agreement for sale of any undertaking. In this connection, reliance was
also placed on certain observations in the case of Gardner v. London, Chatham and Dover Railway Co. (No. 1) [1866] 2 Ch
App. 20. In that case, it was held that a mortgage debenture made by a
railway company in the form given in Schedule "C" of the Companies
Clauses Consolidation Act, 1845, did not give the debenture holder a specific
charge upon the surplus lands of the company or the proceeds of the sale of
them so as to entitle them for an order for a receiver of the sale moneys or
interim rents. The "undertaking" of a railway company which was
pledged in a mortgage was a going concern created by an Act which could not be
broken up or interfered with by the mortgage; the sums of money were moneys
ejusdem generis as the tolls and were earnings of the undertaking which were
made available to satisfy the mortgagee. A railway company might give specific
Charge on the moneys to arise from its sales of its surplus lands for a debt
due to the contractors who had con structed the works. It was held that the
court would not appoint a manager of a railway. Our attention was drawn to
certain observations of Lord Justice Sir H.R. Cairns at page 211 of the report
where it was observed by the learned Lord Justice that when a court appointed a
manager of a business or undertaking, it in effect assumed the management into
its own hands ; for the manager was the servant or the officer of the court and
upon any question arising as to the character or details of the management, it
was the court which must decide and direct. The circum stance that in a
particular case the persons appointed were previously managers employed by the
company was immaterial. When appointed by the court, they were responsible to
the court.
Having considered the facts and the circumstances of
the case before us, it appears to us that clearly s. 293 would not be
attracted. We are also of the opinion that the Committee of Management
appointed to discharge the functions of the board of directors of the company
cannot be termed either a receiver or a manager and, as such, such Committee of
Management was not subject to the limitation that a receiver or a manager was
but, at the same time, it must be emphasised that a Committee of Management is
appointed by the court under s. 397 of the Companies Act, and must always act
under the superintendence and direction of the company court. It is only for
the management of the company's affairs in a certain manner that the court
directs certain functions to be performed by the Committee of Management in a
particular manner. Therefore, a Committee of Management has not an unchartered
licence to do whatever it likes. In an appropriate case, the court can direct
the Committee of Management before any action is taken by it to comply with
certain rules and regulations or to direct the Committee of Management to act
in a particular manner. If the court so directs, then the Committee of
Management must act in accordance with the direction given by the court. If any
proposed action of the Committee of Management is brought to the notice of the
court and the court considers such proposed action improper or unlawful, then
the court can stop the Committee of Management from taking that action. The
court can also direct the Committee of Management to act in a particular manner
which it thinks just and proper. Equally, after an action has been taken, if
such action is prejudicial to the conduct and affairs of the company, then the
court in the interest of proper management of the affairs of the company, in
exercise of jurisdiction under ss. 397 and 398 of the Companies Act, can give
such direction as would be just and proper in the facts of the case. Beyond
this, how ever, it would be improper to impose limitation upon the power and
function of the Committee of Management. Therefore, in not complying with the
requirements of s. 293 of the Companies Act, nor in not obtaining any prior
sanction or leave before entering into the transaction in question, in our
opinion, the Committee of Management had not committed any breach of law.
In aid of the proposition that a Committee of
Management cannot have unlimited power and the transaction entered into by the
special officer must be under the supervision of the court, reliance was placed
on the decision of this court in the case, of International Coal Corporation v.
Pure Sitalpur Coal Concern Ltd., AIR 1972 Cal 45. Appointment of special
officer cannot be by consent of parties but it is a power of the court to be
sparingly used only when specially necessary. He was an officer of the court
and his powers and functions, which will vary, according to the facts of the
case, However, must be only such that he could run the company in the best
interest of the organisation and its members under the court's supervision. He
cannot have unlimited powers unless specifically empowered and should take
directions from the court periodically. His powers could not also be to enable
him to achieve his own end or of his group. In our opinion, the principles laid
down in this case have no application to the instant case before us as the
facts in the case before us are entirely different.
The next aspect on this question is whether a closed
unit as the Dankuni unit could be termed to be an undertaking which required
compliance with s. 293 of the Companies Act. Then in the decision we have just referred, Gardner v. London Chatham
and Dover Railway Co. (No. 1) [1866] 2 Ch App 201, Lord Justice Cairns
at pages 216 and 217 had dealt with the expression "undertaking". The
learned judge has referred to two public Acts, viz., the Companies Clauses Act
as well as the Lands Clauses Act, and has mentioned therein that
"undertaking" is denned to be the undertaking of works by the special
Act authorised to be executed and in the private Act, the object appears to be
not so much to describe what is included in the word "undertaking" as
to divide by metes and bounds, or otherwise the various undertakings of the
company from each other. The learned Lord Justice observed at pages 216 and 217
as follows :
"The object and intention of Parliament,
however, in the case of each of these various undertakings, was clearly to
create a railway which was to be made and maintained, by which tolls and
profits were to be earned, which was to be worked and managed by a company,
according to certain rules of management and under a certain responsibility.
The whole of this,: when in operation, is the work contemplated by the
Legislature, and it is to this that, in my opinion, the name of 'undertaking'
is given. Moneys are provided for, and various ingredients go to make up the
under takings, but the term ' undertaking ' is the proper style, not for the in
gredients, but for the completed work, and it is from the completed work that
any return of moneys or earnings can arise. It is in this sense, in my opinion,
that the 'undertaking' is made the subject of a mortgage. What ever may be the
liability to which any of the property or effects connect ed with it may be
subjected through the legal operation and consequences of a judgment recovered
against it, the undertaking, so far as these con tracts of mortgage are
concerned, is, in my opinion, made over as a thing complete or to be completed
; as a going concern, with internal and Parliamentary powers of management not
to be interfered with; as a fruit- bearing tree, the produce of which is the
fund dedicated by the contract to secure and to pay the debt."
It has to be borne in mind, however, that the said
observations were made in the context of those two statutes which were quite
different from the present context.
In the case before us, it is an admitted fact that
the Dankun unit of the company has remained closed since December, 1976. In
view of the fact that the Dankuni unit has not been in production for more than
five years past, it cannot be said that it is an "undertaking". of he
company which is being sold in this case. In that view of the matter, the
restrictions imposed by s. 293 are not attracted in the instant case and the provisions
of s. 293(1)(a) in terms do not apply to the proposed sale of the Dankuni unit
of the company. It has further to be noticed in this case that sale of the
Dankuni plant is; being effected by the Committee of Management appointed by
court in an application made under s. 397 of the Companies Act and not by the
board of directors. The fetter on the part of the board of directors under the
provisions of s. 293 will not apply to the Committee of Management appointed in
a proceeding under ss. 397 and 398 of the Companies Act. In the orders passed
by Ajay K. Basu, J., on July 18, 1977, and July 26, 1977, and also in the order
passed by the Appeal Court on July 26, 1977, no restriction has been placed on
the part of the Committee of Management.
In the case of Bennet Coleman & Co. v. Union of
India [1977] 47 Comp Cas 92 (Bom) a Division Bench of the Bombay High Court had
occasion to go into the question of the scope of the court's power in a
proceeding under ss. 397 and 398 of the Companies Act. In that case, after
various proceedings in which a company petition was filed by the Union of India
before the Companies Tribunal on or about September 30, 1964, under s. 398 read
with s. 401 of the Companies Act, for, inter alia, the following reliefs: (a)
removal of the newly appointed directors, respondents Nos. 6 to 10 from the
board, (b) injunction restraining respondents Nos. 2, 3 and 4 and respondents
Nos. 6 to 10 from interfering and intermeddling in the affairs of the company,
(c) removal of respondent No. 6 (the general manager) from the employment of
the company and injunction restraining him from functioning or intermeddling
with the affairs of the company, and (d) appointing a special officer to manage
and conduct the affairs of the company. The hearing before the Companies
Tribunal went on for a number of days till June 5, 1967, when the Tribunal was
abolished. The petition was then transferred to the High Court and was numbered
No. 114 of 1967. The hearing in the High Court went on from March 20,
1969, till August 28, 1969, during which only one witness had been examined in
part. At that stage, the petitioner and all the respondents agreed to submit to
the orders of the court, subject to certain stated reservations. The learned
judge thought that, in the circumstances, the best thing would be to pass such
orders as he thought fit on the assumption that the allegations made by the
petitioner against the respondents were correct and that the conditions
prescribed under s. 398 of the Act giving him, jurisdiction to pass appropriate
orders under s. 402 had arisen and existed. He also thought that passing
appropriate orders on such assumption would cause no prejudice to the
respondents inasmuch as there was going to be no admission on the part of any
of the respondents in respect of the allegations contained in the petition and
no finding was being recorded by him on any of the issues framed in this case
and no prejudice would be caused to such of the respondents against whom other
proceedings had been instituted in the matter of those proceedings. The learned
judge passed an order, inter alia, to the following effect : (1) that the
reconstituted board of directors of the company should consist of 11 persons,
out of whom three should be shareholders' directors, three be nominated by the
Central Government and the remaining five be appointed by the court and such
reconstituted board should operate for a period of seven years from the date of
the order ; he further directed that in the first reconstituted board, the
three shareholders' directors should be respondents Nos. 8, 9, 10 and he also
mentioned the names of the other directors and the name of the chairman of the
board; (2) he further directed that the three directors as representing the
shareholders should retire in accordance with the articles of association of
the company at each ordinary annual general meeting but should be eligible for
re-election ; he further directed that a vacancy among the directors appointed
by the Central Government should be filled up by the Central Government, while
a vacancy among the directors appointed by the court should be filled up by the
court. This was done with a view to give a preponderating and effective
majority to the directors appointed by the court and the Government over the
shareholders' directors; (3) he further directed that the articles of
association should stand modified in the manner indicated in the schedule.
Against the said order, all the respondents except respondents Nos. 7 and 9
preferred appeals.
A number of points were decided in the said appeals.
The point which is important for our present purpose is the decision of the
court with regard to the arguments based on s. 255 of the Companies Act. It was
held in that case "that Chapter II of the Act, which includes s. 255, deals
with corporate management of a company through directors in normal
circumstances, while Chapter VI, which contains ss. 397, 398 and 402, deals
with emergent situations or extraordinary circumstances where the normal
corporate management has failed and has run into oppression or mismanagement
and steps are required to be taken to prevent oppression and/or mismanagement
in the conduct of the affairs of the company. In the context of this scheme
having regard to the object that is sought to be achieved by ss. 397 and 398
read with s. .402, the powers of the court thereunder cannot be read as subject
to the provisions contained in the other chapters which deal with normal
corporate management of a company. Further, an analysis of the sections
contained in Chapter VI of the Act will also indicate that the powers of the
court under s. 397 or s. 398 read with s. 402 cannot be read as being subject
to the other provisions contained in sections dealing with usual corporate
management of a company in normal circumstances. The topic or subjects dealt
with by ss. 397 and 398 are such that it becomes impossible to read any such
restriction or limitation on the powers of the court acting under s. 402.
Without prejudice to the generality of the powers conferred on the court under
these sections, s. 402 proceeds to indicate what types of orders the court
could pass. Under clause (a) of s. 402, the court's order may provide for the
regulation of the conduct of the company's affairs in future and under cl. (g)
the court's order may provide for any other matter for which in the opinion of
the court it is just and equitable that provision should be made. An
examination of the aforesaid sections brings out two aspects : first, the very
wide nature of the power conferred on the court, and, secondly, the object that
is sought to be achieved by the exercise of such power with the result that the
only limitation that could be impliedly read on the exercise of the power
should be that nexus must exist between the order that may be passed thereunder
and the object sought to be achieved by those sections and beyond this
limitation which arises by necessary implication, it is difficult to read any
other restriction or limitation on the exercise of the court's power. Further,
ss. 397 and 398 are intended to avoid winding up of the company if possible and
keep it going while at the same time relieving the minority shareholders from
acts of oppression and mismanagement or preventing its affairs being conducted
in a manner prejudicial to public interest and, if that be the objective, the
court must have power to interfere with the normal corporate management of the
company, and to sup plant the entire corporate management, or rather
mismanagement, by re sorting to non-corporate management which may take the
form of appointing an administrator or a special officer or a committee of
advisers, etc., who would be in charge of the affairs of the company. The court
could even have a truncated form of corporate management if the exigencies of
the case required it and any truncated form of corporate management can never
conform to all the provisions dealing with corporate management. It will all
depend, on the facts and circumstances of each case, as to how, in what manner
and to what extent the court should allow the voice of the shareholders'
directors on the board of directors to prevail over that of the other directors
and the court's powers in that behalf could not in any manner be curbed.
Therefore, the position is clear that while acting under s. 398 read with s.
402 of the Companies Act, the court has ample jurisdiction and very wide powers
to pass such orders and give such directions as it thinks fit to achieve the
object and there would be no limitation or restriction on such power that the same
should be exercised subject to the other provisions of the Act dealing with
normal corporate management or that such orders and directions should be in
accordance with such provisions of the Act.
Once it is held that on a true construction that the
court has the widest possible jurisdiction and ample powers to bring about the
desired result, there would be no question of the court not being able to
reframe or insert a new article which would be in conflict with some provisions
of the Act. Sections 397, 398 and 402, by their very nature and contents,
indicate that they are intended to operate as express provisions to the
contrary and would be covered by the phrase "save as otherwise expressly
provided in the Act". In any case, the two sets of situations in which the
provisions of s. 255 and the provisions of ss. 397 and 398 read with s. 402
would respectively operate are entirely different and mutually exclusive and,
as such, there will be no repugnancy between any article that may be refrained
or inserted by the court while passing orders under s. 398 read with s. 402 and
other provisions of the Act including s. 255, which deal with normal corporate
management of the company.
A Division Bench of the Calcutta High Court in the
case of Debi Jhora Tea Co. Ltd .v. Barendra Krishna Bhowmick [1980] 50 Comp Cas
771 had occasion to examine the scope of ss. 397, 398 and 402 of the Companies
Act. It was observed as follows (at pp. 782-783):
"It should be borne in mind that when a court
passes an order under ss. 397, 398 and 402 as has been done in the instant
case, there could be limitation on the court's power while acting under the
sections. Instead of the winding up of a company, the court under the
abovementioned sections has been vested with ample power to continue the
corporate existence of a company by passing such orders as it thinks fit in
order to achieve the objective by removing any member or members of a company
or to prevent the company's affairs from being conducted in a manner
prejudicial to the public interest. The court under s. 398 read with s. 402 of
the Act has the power to supplant the entire corporate management. Under the
aforesaid sections, the court can give appropriate directions which are
contrary to the provisions of the articles of the company or the provisions of
the Companies Act."
And, thereafter, at pages 784-785 :
"It merely extended the time to file nominations
for election to the office of directors. Under ss. 397 and 398 read with s.
402, power has been conferred upon the court ' to make such orders' as it
thinks fit. The power conferred upon the court by the above-mentioned sections
is very wide and the object or objects sought to be achieved by the exercise of
such power have been stated in ss. 397 and 398, As we read sub-cls. (a) and (g)
of s. 402 of the Act, we have no doubt in our mind that the intention of the
Legislature under the above-mentioned sections was to confer wide and ample
powers upon the court for the regulation of the conduct of a company's affairs
and to provide for any other matter which the court thinks just and equitable'
to provide for in the interest of the corporate body and the general public,
Reference in this connection may be made to the case of Bennet Cole-man and
Company v. Union of India [1977] 47 Comp Cas 92 (Bom).
By reason of what has been stated hereinabove, it
appears to us that the court had power to make the order in regard to convening
and holding of the meeting, filing of proxies or nominations or any other
matter for the purpose of conducting the affairs of a company which might be
contrary to the provisions of the articles of the company or the Companies Act,
by virtue of the provisions of ss. 397 and 398 read with s. 402 of the said
Act."
The Supreme Court in the case of Cosmosteels Pvt.
Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312 (SC), also examined the scope
of ss. 397 and 398 of the Companies Act and observed at page 318 as follows :
"The scheme of sections 397 and 402 appears to
constitute a code by itself for granting relief to oppressed minority
shareholders and for granting appropriate relief, a power of widest amplitude,
inter alia, lifting the ban on a company purchasing its shares under court's
direction, is conferred on the court. When the court exercises this power by
directing a purchase of its shares by the company, it would necessarily involve
reduction of the capital of the company. Is such power of the court subject to
a resolution to be adopted by the members of the company which, when passed
with statutory majority, has to be submitted to court for confirmation ? No
canon of construction would permit such an interpretation in which the
statutory power of the court for its exercise depends upon the vote of the
members of the company. This would inevitably be the situation if reduction of
share capital can only be brought about by resorting to the procedure
prescribed in ss. 100 to 104. Additionally, it would cause inordinate delay and
the very purpose of granting relief against oppression would stand
self-defeated. Viewed from a slightly different angle, it would be impossible
to carry out the directions given under s. 402 for reduction of share capital
if the procedure under ss. 100 to 104 is required to be followed. Under ss. 100
to 104, the company has to first adopt a special resolution for reduction of
share capital if its articles so permit. After such a resolution is adopted
which, of necessity, must be passed by majority, it being a special resolution.
By a Statutory majority, it will have to be submitted for confirmation to the
court. Now, when minority shareholders complain of oppression by majority and
seek relief against oppression from the court under ss. 397 and 398 and the
court, in a petition of this nature, considers it fair and just to direct the
company to purchase the shares of the minority shareholders to relieve
oppression, if the procedure prescribed by ss. 100 to 104 is required to be
followed, the resolution will have to be first adopted by the members of the
company ; but that would be well nigh impossible because the very majority
against whom relief is sought would be able to veto it at the threshold and the
power conferred on the court would be frustrated. That could never have been
the intention of the Legislature. Therefore, it is not conceivable that when a
direction for purchase of shares is given by the court under s. 402 and
consequent reduction in share capital is to be effected, the procedure
prescribed for reduction of share capital in ss. 100 to 104 should be required
to be followed in order to make the direction effective."
In view of the principles of law enunciated by the
Supreme Court and also the judgments of the Division Bench of this High Court
and the Bombay High Court and also having regard to the facts of the case
before us, we are of the view that it was not beyond the competence of the
Committee of Management to enter into the impugned contract with the creditor
banks in this case in the manner that it did. It cannot be said that the
provisions of s. 293 had to be strictly complied with before entering into this
contract as argued on behalf of the appellants.
We are, however, unable to accept the contention that
the decree passed in the instant case by the learned trial judge has been acted
upon in some respects and, therefore, it cannot be set aside by the appeal
court. It was argued that the decree has become final and cannot be set aside
in the proceeding under s. 397. It has been argued that on September 16, 1981,
the court of appeal dismissed an application made by Mohanlal Mittal for leave
to file memorandum of appeal from the judgment and order dated August 21, 1981,
whereby a claim against Mohanlal Mittal as a guarantor had stood dismissed.
That application, however, was dismissed on the
ground that Mohanlal Mittal as a guarantor could not feel aggrieved by the
order of the learned trial judge and, therefore, he had no locus standi to
prefer an appeal. In this case, however, "reliance has been placed on the
case of Lachmeshwar v. Keshwar Lal [1940] 3 FLJR 73 (FC); AIR 1941 FC 5, in aid
of the proposition that though the decree passed by the learned trial judge has
been acted upon in other respects except in respect of the Dunkuni plant, the
appellate court had the same power not to sanction the compromise regarding the
sale of the Dunkuni plant and it has the same power as the trial court.
Reliance was placed on the observations of the Federal Court at page 13 of the
report where it was observed that once a decree of the High Court had been
appealed against, the matter became sub judice again and thereafter the court
had seisin of the whole case though for certain purposes, namely, execution,
the decree, was regarded as final and the courts below retained jurisdiction.
Mr. Justice Varadachariar of the Federal Court observed as follows :
"In Subhanand Chowdhary v. Apurba Krishna Mitra
[1940] 3 FLJ 58 ; AIR 1940 FC 7, this court has held that the mere fact that
the particular statute in respect of which the constitutional question was
originally raised had been since repealed will not put an end to the appeal;
and, except on the hypothesis that this court is only a court of error, its
power to do justice between the parties cannot be restricted to cases in which
it is able to hold that the lower court has gone wrong in its law. The contention
that the power of a Court of Appeal is so limited was distinctly negatived in
Attorney-General v. Birmingham, Tame and Rea District Drainage Board [1912] AC
788 (HL) and Quitter v. Mapleson [1882] 9 QBD 672 (CA) which are referred to in
the judgment in Shyamakant Lal v. Rambhajan Singh [1939] FCR 193 ; AIR 1939 FC
74. As stated in Shyamkant Lal v. Rambhajan ingh [1939] FCR 193 ; AIR 1939 FC
74, there is no reason to suppose that the powers of this court when acting as
a Court of Appeal are less extensive than those of the High Courts when hearing
an appeal and it has been a principle of legislation in British India at least
from 1861 that a Court of Appeal shall have the same powers and shall perform
as nearly as may be the same duties as are conferred and imposed by the Civil
Procedure Code on courts of original jurisdiction : See Act No. 23 of 1861, s.
37 ; Act No. 10 of 1877, s. 582 ; Act No. 14 of 1882, s. 582; and Act No. 5 of
1908, s. 107(2). The very words of O. 58, r. 5 of the Rules of the Supreme
Court, on which Bowen L.J. laid stress in Quilter v. Mapleson [1882] 9 QBD 672
at p. 678 and Lord Gorell in Attorney-General v. Birmingham, Tame and Rea
District Drainage Board [1912] AC 788, at p. 801, namely, that the Court of
Appeal has power to make such further or other orders as the case may require,
have been reproduced in O. 41, r, 33, Civil Procedure Code of 1908 ; and even
before the enactment of that Code, the position was explained by Bhashyam
Iyengar, J., in Krishnamachariar v. Mangammal [1901] ILR 26 Mad 91 at pp. 95,
96 in language which makes it clear that the hearing of an appeal is under the
processual law of this country in the nature of a rehearing. The Indian Codes
have from 1859 conferred upon a Court of Appeal the power given by O. 58, r.'4.
Supreme Court Rules, to allow further evidence to be adduced ; and though the
English rule does not in terms impose the same limitations on this power as the
Indian Codes do, these limitations are implied in the reference to 'special
grounds' in the English rule and have in effect been insisted on even in
England as a matter of practice : see Nash v. Rochford Rural District Council
[1917] 1 KB 384 (CA). In view of these provisions, it seems to me to make no
difference that it is not explicity stated in the Indian statutes (as in O. 58,
Supreme Court Rules) that an appeal is by way of rehearing. It is also on the
theory of an appeal being in the nature of a rehearing that the courts in this
country have in numerous cases recognized that in moulding the relief to be
granted in a case on appeal, the Court of Appeal is entitled to take into
account even facts and events which have come into existence after the decree
appealed against. I may also refer to Kanakayya v. Janardhana Padhi [1910] ILR
36 Mad 439 at pp. 441-444 where the law on the point is fully discussed."
Reference in this connection may also be made to
sub-s.(2)of s. 107 of the CPC.
The objection raised by the respondents as to the
maintainability of the appeal, therefore, cannot be accepted on this ground.
On the question of locus standi, reliance was placed
on the decision in the case of Kodia Goundar v. Velandi Goundar, AIR 1955 Mad
281. The Full Bench of the Madras High Court observed that O. 1, r. 6, sub-r.
(2) provided that "any person on whose behalf or for whose benefit a suit
is instituted or defended under sub-r. (1) may apply to the court to be made a
party to such suit". A "party" to such a suit is, therefore, one
who is impleaded as a party or one who on an application under O. 1, r. (8),
sub-r. (2) is brought on record, i.e., one who is "eo nomine" made a
party. The others who were not brought on record could only be deemed to be
parties and would not be parties as such. Section 47 of the CPC would not,
therefore, be a bar to a fresh suit against those persons. A decree obtained in
a suit instituted in accordance with the provisions of O. 1, r. 8, would be
binding an all the members that belonged to the class who Were sought to be
represented, by operation of the principle of "res judicata" as
enacted in s. 11, Expln. VI. But the mere fact that such a decree would be
binding as "res judicata" on others who were sought to be represented
cannot make such a decree enforceable as and by way of execution or otherwise.
A decree obtained in a representative suit against the defendants in a
representative capacity could not be executed personally against persons who
were not "eo nomine" parties. Hence, a decree for injunction could
not be extended so as to render those who were not "eo nomine"
defendants liable for disobedience of the decree. To entitle the decree-holder
to proceed against such persons who were not parties on record, the injunction
must be revived against them, which must be by a separate suit. Without a
revival, therefore, of the decree for injunction against these other persons,
no proceedings in pursuance of the decree could be started against them. It
was, therefore, submitted that as the application in the instant case was filed
with the consent of the present appellants in order to make up the 10% of the
shareholders who should be entitled to sustain an application, it was urged
that the present appellants were parties to the s. 397 application and,
therefore, they are entitled to maintain this appeal in the absence of the main
applicant. Whether the sale of the Dunkuni plant was the subject-matter of the
application under s. 397 and, as such, could be made a subject-matter of an
application independently in respect of which this appeal has been preferred,
our attention was drawn to the Division Bench judgment of this court in the
case of Shyamlal Purohit v. Jagannath Ray AIR 1969 Cal 424 ; [1970] 40 Comp Cas
138, where it was held by Chief Justice Sinha that in the case of a public
limited company registered under the Companies Act, the company was an entity
separate from its shareholders. It was the company which was the owner of its
assets, including immovable properties and not the shareholders. The
shareholder in such a company had a right to share in the profits by way of
receipt of dividends. He had a right in an appropriate case to apply for the
winding up of the company and to take part in the distribution of the surplus
assets after payment of the debts and liabilities which must of course be done
in accordance with the articles of association and the provisions of the said
Act. As long as the company continued to exist that is to say, before its
dissolution, no shareholder could be said to have any interest in the
properties and assets of the company, either legal or equitable. Shareholders
in a company must certainly be interested in the properties and assets of the
company in the sense that a wastage or frittering away of the assets might
affect their rights to enjoy the profits and eventually the distribution of surplus
assets in a winding-up. That, however, was too remote an interest and could not
be included within the definition of "interest" within the meaning of
O. 21, r. 90 of the CPC. But in the instant appeal before us, so far as the
appellant in Appeal No. 271 of 1981 is concerned, who was not a party to the
original s. 397 application, this principle might have some relevance, but in
the case of the present appellants in this appeal, as they were parties in the
s. 397 application which section gives the shareholders holding shares of
certain percentage to have a say in the management of the affairs of the
company and to object to the management of the company in a particular manner,
this principle, in our opinion, would not be applicable in the case of the present
appellant. On the question of the shareholders' rights in the assets of the
company under s. 192 of the Indian Companies Act of 1913, our attention was
drawn to the decision of the Supreme Court in the case of Bacha F. Guzdar
(Mrs.) v. CIT [1955] 25 Comp Cas 1; 27 TR 1. In the facts and in the
circumstances of this case, the decision would not be of much assistance in our
opinion.
On the question that the report of the valuation
which was not disclosed but which was only mentioned in the proceedings before
the learned trial judge, reliance was placed on the observations of this court
appearing in pp. 51 and 52 in the case of Daddy S. Mazda v. K.R. Irani, [1977]
47 Comp Cas 39.
In that case, it was held that no adverse inference
could be drawn from the failure to do something which a party was not bound in
law to do. The provisions in O. 11 of the CPC regarding discovery, production
and inspection of documents were not required to be followed in a summary
proceeding under s. 155 of the Act. It was certainly open to the court to
direct the appellant to produce the documents and if order was made, and not
complied with, it would have been open to the court to draw an adverse
inference. In the case before us, the Dunkuni unit of the company has been sold
at a price which is not less than the price mentioned in the valuation report.
There is no allegation that the valuation report is false or fabricated. The
allegation is lack of bona fides in making the sale by the Committee of
Management. The Committee of Management did not stand to gain anything by
suppression of the valuation report in this case. Therefore, in our opinion, no
adverse inference can be drawn for non-production of valuation report before
the learned judge. But at the same time we are of the opinion that in order to
show complete candour, it would have been better for the respondents to have
placed the valuation report before the court to give the court a complete
picture of the transaction.
On the question of registration, it was contended
that the compromise as such did not transfer the immovable assets in connection
with the Dunkuni plant. The transfer, it was submitted, of immovable assets, if
any, were done by the decree itself and that decree would be duly registered.
It was submitted that s. 67 of the Transfer of Property Act, and s. 17 of the
Registration Act would have no application to the facts and in the
circumstances of this case. In this connection, reliance was placed on the
decision in the case of Sabitri Thakurain v. Mrs. F.A. Savi, AIR 1933 Pat 306,
and our attention was drawn to the observations of the court at pages 420-421
of the report. Reliance was also placed on the decision of the Division Bench
of the Madras High Court in the case of Ranganayaki Ammal (K.) v. Sampathkumaran,
AIR 1940 Mad 897. There, during the pendency of the suit, the parties had
agreed to a compromise decree being passed. There were other disputes besides
the dispute which led to the filing of the suit. These disputes related, inter
alia, to two other houses besides the house in suit and the parties met to
settle all their differences. The terms of settlement having been agreed upon,
they were put in writing in order that there should be no dispute with regard
to them. The parties agreed that the document embodying the terms of the
compromise should be filed in court and decree obtained in terms thereof. It
was held that the document in question was not intended to declare the rights
of the parties in the immovable properties but those rights were declared in
the decree of the court and consequently fell within the purview of s. 17(2)(b)
and not under s. 17(1)(b) of the Indian Registration Act. The definition of
what documents should be registered because it created right in immovable
property and what documents only created a right to get another document was
focussed in two decisions of the Supreme Court, the first one being the
decision in the case of Ratan Lal Sharma v. Purshottam Harit, AIR 1974 SC 1066,
where it was held that where the terms of the arbitration award did not
transfer the share of a partner, A, in the assets of a firm to the other
partner, B, either expressly or by necessary intendment but, on the other hand,
expressly made an allotment of the partnership assets and liabilities to B making
him absolutely entitled to the same in consideration of a sum of money to be
paid by him to. the other partner, A, thereby expressly purporting to create
rights in immovable property of the firm worth above Rs. 100, the award was
compulsorily registrable under s. 17 of the Registration Act and, if
unregistered, could not be looked into and the court could not pronounce
judgment in terms of award under s. 17 of the Arbitration Act, 1940, which
presupposes the existence of an award which could be validly looked into by the
court. The award being an inseparable tangle of several clauses could not be
forced as to separate that part not dealing with immovable property. In the
case of Sidhwa T.P. v. S.B. and Sons Pvt. Ltd., AIR 1974 SC 1912, it was held
by the Supreme Court that where an arbitration award relating to the partition
of immovable property of the value exceeding Rs. 100 directed some of the
parties to execute certain documents as might be necessary for declaring the
shares and for transferring the property, such an award itself did not create
or declare any right, title or interest in the property but it merely created a
right to obtain another document which would, when executed, create such right,
title or interest. Such award fell under s. 17(2)(v) and not under s. 17(1)(b)
and was not, therefore, registrable.
Having considered these. several contentions and the
points raised and the decisions, we have come to the following conclusions :
In our opinion, (1) the Committee of Management was
not hit by s. 293 of the Companies Act and, as such, there was no prior need of
obtaining any approval of the court for entering into the transaction for the
sale and transfer of the Dunkuni Steel Plant.
Though the Board of Management appointed by the court
was not subject to the control under s. 293 of the Companies Act, yet the court
had jurisdiction, in an appropriate case, on appropriate application and on
proper facts being placed before it, to direct that a particular sale should
either take place or to give directions as to the manner in which a particular
sale or a transaction was to take place. In the facts and circumstances of this
case, as mentioned before, the
transaction could go through and as the shareholders who were complaining about
the transaction had full opportunity to place the matter before the court, we
are of the opinion that there has been no infraction of that requirement of
law.
(3) We are further of the
opinion that as. 397 application is a representative application in the sense
that it is on behalf of 10% of the share holders which is required to maintain
such an application and if those shareholders who had given their consent come
to oppose or make any application before the court, they have sufficient locus
standi to be heard by the court and as such, in an appropriate case like the
present, one has a right to be added as parties in their own names. In this
case, inasmuch as Promode Kumar Mittal and other appellants were supporting
Mohanlal Mittal in the application under s. 397 before the court and inasmuch
as Mohanlal Mittal was no longer prosecuting the s. 397 application or opposing
a particular transaction during the pendency of s. 397 application of the
Companies Act, we are of the opinion that the present appellants were entititled
to be added as parties and not acceding to that prayer, the learned judge was
in error.
(4) In this case, though
the other group of Mittal, namely, Indrasen Mittal, was exercising a very
dominant and controlling interest, it appears that the transaction relating to
the sale of the Dunkuni Steel Plant had been considered by the Board of
Management which was appointed by the court and which consisted of other
independent persons including representatives of the financial institutions.
One of the most important factors in this matter is the role of the Bank of
India. The Bank of India because of its own reason and because of its own
investigation and enquiry was willing to give certain credit to the Grand Steel
Alloys Ltd., the purchaser, and was not willing to grant this kind of facility
to others and this agreement being a composite agreement which on the whole
would enure to the benefit of the company as a whole, in our opinion, such a
transaction could not be said to be bad or not for the benefit of the company.
It is true that the sale of such an important asset of the company should have
been advertised and attempted to be sold in a little more organised manner and
it would have been better if a proper valuation had been made and placed before
the learned trial judge before inviting offers. These irregularities, in our
opinion, are not such which would vitiate the sale as mala fide. It appears to
us that the advertisements could have been more specific and clear on this
point but in view of the fact that the Bank of India cannot be compelled to
accept any other terms of settlement and to any other purchaser as the
purchaser of the Dunkuni Steel Plant and as it is a composite decree of the
sale, in our opinion, in the interest of justice, it would not be proper to set
aside this part of the order of the learned trial judge. It is true that in the
Court of Appeal, a higher amount was offered by a purchaser produced at the
instance of the appellant and perhaps it is also true if better and clear
efforts are made then, a higher price might be available. We have, however, to
bear in mind that in view of the inflationary tendency now prevailing in this
country, there is an escalation of price with the passage of time. Therefore,
the very fact that a higher offer could be available now for the Dunkuni Steel
Plant would not be indicative of the position that the sale that was agreed to
by the Bank of India as a part of the composite terms of settlement was not
bona fide or was entered into without proper investigation. In the meantine,
certain vested rights of the other parties have accrued.
(5) We are of the opinion
that the Dunkuni Steel Plant being a closed unit, it could not be considered to
be an undertaking in terms of s. 293 of the Companies Act, 1956.
(6) So far as the question
of registration is concerned, we are of the opinion for the reasons mentioned
hereinbefore that the document of com promise did not transfer or create any
charge or affect any interest in the immovable property. Therefore, the terms of
agreement were not required to be registered. But the terms of decree effected
the transfer.
In the
premises, in so far as the learned trial judge by his order dated August 21,
1981, refused the appellant for being added as party to Company Petition No. 221
of 1977, we are unable to sustain the same and that portion of the order of the
learned trial judge is set aside. So far as the learned trial judge refused the
prayer for injunction restraining the Committee of Management from filing the
terms of settlement, we find no reason to interfere with that portion of the
order of the learned trial judge and that portion of the order of the learned
trial judge is, therefore, upheld. So far as the learned trial judge dismissed
the application of Purna Investment Ltd., for being added as a party, we are in
agreement with the same and the appeal by Purna Investment Ltd. on that ground
is dismissed. The order made for consolidation of Suit No. 295 of 1977 (Bank of
India v. Andhra Steel Corporation Ltd., AIR 1982 Cal 57) and Extraordinary Suit
No. 1 of 1980 (Dena Bank v. Andhra Steel Corporation Ltd.) and the leave
granted to file the said terms of settlement and compromise embodied in the
terms of settlement which were recorded should also be upheld. We also uphold
the order of the learned trial judge in so far as the learned trial judge
dismissed the suit as against the defendants who were not parties to the said
terms of settlement. We also uphold the order of the learned trial judge that
Purna Investment Company Limited could not be given leave to intervene in the
proceedings.
This appeal is, therefore, dismissed subject to the
one condition mentioned hereinbefore.
In the facts and circumstances of this case, parties
will pay and bear their own costs.
The amount deposited by the intending purchaser will
be refunded to him.
On the prayer of Mr. Ahin Chowdhury, Mr. Shyamal Kr.
Patra, who is appointed receiver to hold the key until disposal of this appeal,
will hand over the key on or after July 26, 1982.
The learned advocate for the appellant makes an oral
application for leave to appeal to the Supreme Court. In view of the facts and
the well-settled principles of law and, according to us, no substantial
question of law arises, leave to appeal is refused.
Rs. 1,00,000 deposited with the appellant's
Advocate-on-Record will not be withdrawn until further order of this court.
Registration of the decree will not be done before
July 26, 1982.
Receiver and all parties to act on a signed copy of
the minutes.
Suhas
Chandra Sen, J.—I Agree.
[1985] 58 COMP. CAS. 772 (
HIGH COURT OF
v.
Andhra Steel Corporation Ltd.
SABYASACHI MUKHARJI AND SUHAS CHANDRA SEN,
JJ.
Appeal
No. 312 of 1981 in Company Application No. 193 of 1980 and Company Petition No.
221 of 1977
JUNE 2, 1982
Somenath Chatterjee, Pratap Chatterji and Anindya
Mitra for the Appellant.
R.C. Nag, Ahin Chaudhury, R.C. Deb, Mrs. U. Mukherji,
S.B. Mukherji, P.C. Sen, H.K. Mitra, Dipankar Gupta, S. Pal and P. Chowdhury
for the Respondent.
Sabyasachi Mukharji, J.—This appeal arises out
of the orders passed and judgments delivered in several matters on August
21,1981. The points involved are interesting and rather novel but these are not
many. An order for sale of certain assets of Andhra Steel Corporation Ltd. has
given rise to this appeal. Andhra Steel Corporation Ltd., hereinafter referred
to as "the said company", is controlled by the Mittal family. Sri
B.C. Mittal was the grandfather of the present applicant/appellant. Sri B.C.
Mittal had five sons, namely, Mohanlal Mittal, I.S. Mittal, D.L. Mittal, C.L.
Mittal and R.K. Mittal. The wife of Sree B.C. Mittal had died some time back.
Different members of the Mittal family held substantial blocks of shares in the
said company. M.L. Mittal and his sons and daughters hold substantial shares
but altogether they are in minority. On or about May 13, 1977, M.L. Mittal had
made an application under ss. 397 and 398 of the Companies Act, 1956, being
Company Petition No. 221 of 1977 complaining about alleged mismanagement of the
affairs of the company by his four brothers. Sri B.C. Mittal was an old man and
had died recently. He was bedridden after an attack of paralysis for a long
time. It is the case of M.L. Mittal and his sons in the present applicants/appellants
that he was also mentally infirm and was undergoing shock treatment. In the
application made by M.L. Mittal under ss. 397 and 398 of the Companies Act,
1956, in order to make up 10% shareholding, the present appellants being sons
and daughters of M.L. Mittal supported M.L. Mittal and their supporting
affidavit was annexed to the main s. 397 and s. 398 application. These facts
have to be borne in mind in order to consider one of the main contentions
involved in this appeal.
In the application under ss. 397 and 398 of the
Companies Act, Mohanlal Mittal had complained about mismanagement of the
affairs of the company by his brothers, Indra Sen Mittal, Damodar Lal Mittal,
Chaganlal Mittal and R.K. Mittal. In the said application, an order was passed
on May 25, 1977, for convening an extraordinary general meeting of the company
for the purpose of election of the directors under the chairmanship of Sri M.N.
Sen, Barrister-at-Law. An extraordinary general meeting was duly held. In the
said election, six representatives from various financial institutions were
unanimously elected as directors of the company and six other persons were
elected on contest. Sri K.R. Gopivallabha Iyengar, a retired judge of the
Karnataka High Court, was appointed chairman of the Committee of Management.
The learned trial judge had initially appointed a
Committee of Management and after some proceedings, the matter went up before a
Division Bench of this court and by an order dated July 26, 1977, the Division
Bench, inter alia, ordered as follows :
"THE
COURT : The operation of the order passed by the learned trial judge
will remain stayed and the following 10 persons who were declared to have been
elected as directors by the learned trial judge and the other two persons named
below, i.e., the following 12 persons, will, however, constitute the Committee
of Management until further orders."
Thereafter, the names of the twelve persons were
mentioned in the said order. Some of these persons resigned and were
substiutted. At the time relevant for the present appeal, the Committee of
Management consisted of the following:
"1. MR.K.R. Gopivallabha Iyengar—Chairman
2. Mr.
Srinivasa Shastri, I.A.S.—managing director, Andhra Pradesh State Financial
Corporation, Hyderabad.
3. Mr. B.C. Narayan—director, K. S. F. C.
4. Mr. M.V. Mani—nominee of K. S. I. D. C.
5. Mr. K.J. George—secretary, Govt. of India (retired)
6. Mr. S.P. Banerjee—advocate, Calcutta High Court.
7. Mr. T. Ramachandra Rao—advocate, Andhra Pradesh High Court.
8. Mr. I.S. Sevak—area manager, Bank of India, Karnataka.
9. Mr. T. Krishnappa—general manager, Mysore Iron and Steel Ltd.
10. Mr. H.R. Srinivash—chartered accountant.
11. Mr. B.C. Mittal
12. Mr. I.S. Mittal."
The present appeal arises out of an application made by
Pramod Kumar Mittal, a shareholder of Andhra Steel Corporation Ltd. and a son
of Mohanlal Mittal, for restraining the Committee of Management of the company
from acting on the basis of or in furtherance of or giving any effect to the
terms of settlement which were proposed to be filed in Suit No. 295 of 1977 in
any manner whatsoever. There was a further prayer for Pramod Kumar Mittal to be
added as a party to the Company Petition
No. 221 of 1977 (Mohanlal Mittal v. Andhra Steel Corporation Ltd.) This
application was made by Pramod Kumar Mittal and also by his two brothers, Laxmi
Niwas Mittal and Vinod and Kumar Mittal, and the married sister, Smt. Saroj
Mittal (Rataria). The applicants together with their father, Mohanlal Mittal,
held 10% of the share capital of the Andhra Steel Corporation Ltd. As mentioned
hereinbefore, Mohanlal Mittal had made an application under ss. 397 and 398 of
the Companies Act, 1956, and that application was made with the consent of the
present applicants.
The company had three units for production of steel,
one at Dankuni, one at Vizagapatnam and one at Bangalore. The company's Dankuni
unit had indisputably remained closed since December, 1976. The company's
stocks, raw materials and spare parts at Dankuni, Vizagapatnam and Bangalore
plants were hypothecated in favour of Bank of India. On or about May 23, 1977,
the Bank of India had filed a suit in this court against the company and its
directors who are guarantors. The said suit being Suit No. 295 of 1977 was
pending in this court. In the said suit, receivers were appointed over the
securities and various interlocutory orders were made from time to time for the
purpose of carrying out the manufacturing activities of the company. The
company had also mortgaged its Dankuni plant, comprising of lands, buildings,
plants and machinery in favour of Dena Bank. Dena Bank had filed a suit in the
Chinsura court in the District of Hooghly being Mortgage Suit No. 13 of 1980 in
the court of the Subordinate Judge, Hooghly at Chinsura for the enforcement of
the said mortgage and the suit was transferred to the Calcutta High Court under
cl. 13 of the Letters Patent. In the said suit, the company and its directors
were party defendants. On May 23, 1977, as mentioned hereinbefore, the Bank of
India had filed a suit in this court against the company for a decree for Rs.
4,43,41,209.59 and also for a declaration of charge over goods mentioned in the
agreement of hypothecation between the Bank of India and the Andhra Steel
Corporation Ltd. The bank had also an equitable mortgage of the Dankuni plant
including immovable property of the company which were situated outside the
jurisdiction of this court.
In this appeal, questions have arisen as to the
competency of the Committee of Management to enter into the proposed terms of
settlement, the conduct of the Committee of Management and also the scope and
effect of the terms of settlement.
It was the allegation of M.L. Mittal and his sons,
the present appellants, that Sri B.C. Mittal was at all material times mentally
and physically incapable of acting as a member and taking part in the affairs
of the said company. Sri S.P. Banerjee is a practising advocate of this hon'ble
court and lives in Calcutta. According to the appellants, he is unable to look
after the said affairs of the committee at Bangalore and Vizag. Sri T.
Ramchandra Rao, Sri M.V. Mani and Sri B.C. Narayan, according to the
allegations of the appellants/applicants, were all along been acting at the
instance of Sri I.S. Mittal. It is further the allegation of the appellants
that M.V. Mani and B.C. Narayan, although nominees of Karnataka Financial
Corporation, had all throughout been acting in support of Indrasen Mittal and
his group. It is further alleged that the Karnataka State Financial Corporation
and the Karnataka Industrial Development Corporation had been appearing through
the partner of M/s. Mukherjee and Biswas, advocates on record of I.S. Mittal
and his group, and had been openly supporting I.S. Mittal and his group. The
allegations of the appellant/applicant is, therefore, that the Committee of
Management is really a one-man show and I.S. Mittal does whatever he likes in
relation to the said company.
It is the allegation of the appellant that while the
Dankuni factory which was near Howrah in West Bengal had remained closed since
December, 1976, at that time there was a boom in the steel industry from 1978
which continued, according to the appellants, till about 1980. On this aspect,
the appellant had relied on certain statements made by Indrasen Mittal in the
affidavit-in-opposition.
It is further the case of the appellant that Sri K.R.
Gopivallabha Iyengar, who was the chairman of the Committee of Management
appointed by the court and who is a retired judge of the Karnataka High Court
had also taken a partisan attitude and was openly supporting, according to the
appellants, the acts and decision of I.S. Mittal. The appellants have alleged
that the Committee of Management had not published any report of balance-sheets
and profit and loss accounts for the years 1977-78, 1978-79 and 1979-80 or of
any account dealing with the said company after their appointment. It is,
therefore, their allegations that the affairs of the committee had been kept
secret by the Committee of Management from the general shareholders of the
company. The appellant further alleged that no accounts had been filed before
the court. It is further the allegations of the appellants that Sri I.S. Mittal
and his brothers, D.L. Mittal, C.L. Mittal and R.K. Mittal, are in control of
another company, namely, Southern Steelmet Ltd., having its office in
Bangalore. Southern Steelmet Ltd. had got the capacity of manufacturing wire
rods out of billets and ingots. The said company had been supplying all its
products of billets and ingots at undervalue, according to the appellants, to
the said Southern Steelmet Ltd. The installed capacity of Bangalore unit and
Vizag unit of the said company is 36,000 tonnes and 1,10,000 tonnes per annum
respectively. The allegation of the appellants is that the Committee of
Management had not been utilising more than 25% of the installed capacity of
the said two undertakings of the said company.
The Dankuni unit of the said company is comprised of
electric steel melting furnace with an installed capacity of 18,000 tonnes per
annum and rolling mills with a capacity of 18,000 tonnes per annum. The factory
at Dankuni is comprised of an area of 6 acres of land with building and stores.
The allegation is that Indra Sen Mittal is in effect trying to make a benami purchase
of the Dankuni unit of the company as will be evident from the facts of this
case as brought out in the affidavits.
In this connection, it would also be relevant to
refer to some of the allegations and/or submissions made in the affidavit of
Indrasen Mittal affirmed on or about November, 1980, to the application out of
which this appeal arises. After setting out the circumstances under which the
Committee of Management came to function and after reiterating that the said
Committee of Management had functioned with ability, diligence and bona fide,
it has been stated by the same deponent that though he admitted that the
condition of the steel industries had improved in the country between 1978-79
and 1979-80, there were many companies producing steel in this country which
were running at loss. It has been further stated that the Dankuni unit had
remained closed since December, 1976. It is further the averment that with the
effort of the Committee of Management and through the untiring efforts of the deponent
and his younger brothers, Damodarlal Mittal and Chhagan Lal Mittal, the
company's units at Bangalore and Vizagapatnam had picked up production and were
doing well. It has also been urged that in spite of the hostile attitude of the
company's bankers, the company had been able to generate its own fund and run
its factories at Bangalore and Vizag. He has alleged that since the Committee
of Management took over charge, it was unable to obtain possession of the books
and records of the company which were in Calcutta at the Dankuni unit and in
particular the statutory books and records of the company. An application had
to be made by or on behalf of the Committee of Management directing the
appellant's father, M.L. Mittal, to deliver the books and records of the
company which he was wrongfully withholding from the Committee of Management.
The application was opposed by M.L. Mittal and his sons, Pramod Kumar Mittal
and Vinod Kumar Mittal. A special officer was appointed by this court to take
possession of the books and records and to initial the books and records and
prepare an inventory. In order to delay the delivery of such books to the
Committee of Management, the said M.L. Mittal had raised false and frivolous
objections, and there was difficulty and as there was no order of this court
for filing of the balance-sheet and profit and loss account, the same had not
been filed. It was further asserted that in view of the fact that the Committee
of Management had already commenced and concluded the preparation of the
balance-sheet and the profit and loss account for the years ended Dewali
1975-76 and November, 1977, to November, 1978, and accounts for the year ended
November, 1979, was in the course of preparation and audit, and as no general
meeting of the company had been held, the same could not be placed before the
shareholders. In these circumstances, it was asserted that it was not possible
for the company to publish the balance-sheets for the years 1977-78 to 1979-80
or any accounts of the dealings with the said company after the appointment of
the Committee of Management. It has also been stated by him that it was
incorrect to state that the company had been only utilising 25% of the
installed capacity of the company's units at Bangalore and at Vizag. It has
been asserted that the utilisation had been to the extent of 80% of the
installed capacity at Bangalore and 80% of the melting shop at Vizag since
December, 1978. The Bank of India was the charge-holder in respect of, inter
alia, the Dankuni plant and the bank had filed a suit. The said suit was for
enforcement of the securities hypothecated in favour of Bank of India. Mohanlal
Mittal, the father of the present applicant/appellant, was also a party to the
said suit as a guarantor, As a matter of fact, by the decree which has been
passed, the said suit against Mohanlal Mittal had been dismissed and an appeal
was sought to be preferred by him and leave to file the appeal was not granted
on the ground that it could not be said that he was in any way aggrieved by the
decree passed or the settlements made. It is not necessary to refer to the
details of the proceedings to which reference has been made in the affidavit in
support of the application.
It has been alleged on behalf of respondents, the
Committee of Management, that the Andhra Steel Corporation Ltd. started
negotiation with the Bank of India and Dana Bank for settlement of the disputes
and arrived at a settlement which has given rise to the present litigation.
It has been further alleged by the Committee of
Management that the company was incurring a loss of Rs. 3 lakhs per month for
maintaining the Dankuni plant which was a closed unit since 1976 and the
company after due deliberations decided to sell the said unit to cut down loss
and also to pay off the loans taken by the company. On or about January 16,
1976, the company's plants at Dankuni, Vizagapatnam and Bangalore were valued
by a valuer. In that valuation, the Dankuni plant was valued at Rs. 2.15 crores
by the valuer.
On February 5, 1979, an advertisement was published
in two newspapers, the Business Standard and the Economic Times, inviting
offers for sale of the steel plant at Dankuni. In the advertisement, it was
mentioned that a mini steel plant near Calcutta in a backward area was available
for sale.
On or about March 10,1979, an offer was made by Shiv
Kumar Agarwalla to purchase the said plant at Rs. 2.15 crores.
Following this offer, some negotiations took place by
and between the two aforesaid banks, Andhra Steel Corporation and Shiv Kumar
Agarwalla. This resulted in a composite agreement between the two banks, Andhra
Steel Corporation and Shiv Kumar Agarwalla and Grand Steel and Alloys Ltd., a
company floated by Shiv Kumar Agarwalla for purchasing the aforesaid steel
plant. A sum of Rs. 10.5 lakhs was deposited with the Bank of India on May 22,
1980, by Grand Steel and Alloys Ltd., by a pay order of Indian Overseas Bank in
favour of Bank of India for this purpose.
On or about August 22, 1981, Bank of India as
plaintiff in Suit No. 295 of 1977 (See AIR 1982 Cal 57) and as one of the
defendants in the Extraordinary Suit No. 1 of 1980 having a charge in respect
of the company's plant and machinery at Dankuni made an application before T.
K. Basu J. for, inter alia, the following order :
(a) Suit
No. 295 of 1977 (Bank of India v. Andhra Steel Corporation Ltd., AIR 1982 Cal
57 and Extraordinary Suit No. 1 of 1980 (Dena Bank v. Andhra Steel Corporation
Ltd.) be consolidated ;
(b) Grand
Steel and Alloys Ltd. be added as party defendant in its suit/or in
Extraordinary Suit No. 1 of 1980 and/or both after passing an order of
consolidation of the two suits ;
(c) The
agreement or compromise evidenced by the said terms of settlement be recorded
and a decree be passed in accordance therewith ;
At the time when the said terms of settlement were
sought to be filed in court, respondent No. 1, Pramod Kumar Mittal, objected to
the same and stated through his counsel that he was in a position to find a
buyer of the Dankuni unit of the company for Rs. 2 crores 30 lakhs. T. K. Basu
J. recorded the statement made on behalf of Pramod Kumar Mittal and directed
that a formal application be made for recording the said compromise and filing
the terms of settlement. Before such application for recording the compromise was
made, Purna Investment Ltd., a shareholder of the Andhra Steel Corporation
Ltd., made an application in Suit No. 295 of 1977(See AIR 1982 Cal 57), for
leave to intervene in the said suit and to be added as a party thereto and for
leave to oppose the filing of the terms of settlement in the said suit.
Pramod Kumar Mittal on behalf of himself and on
behalf of Vinod Kumar and Lakshmi Niwas Mittal and Smt. Saroj Ratoria made an
application in the proceedings under ss. 397 and 398 of the Companies Act,
1956, then pending for, inter alia, an order of injunction restraining the
Committee of Management of the Andhra Steel Corporation Ltd. from compromising
the said suits and filing the said terms of settlement. A prayer was also made
in the said application for removal of the Committee of Management. An order
was made restraining the Committee of Management from filing the terms of
settlement in the said suit until disposal of the application.
The application made by the Bank of India for putting
in terms of settlement as well as the company petition came up for hearing
before Salil K. Roy Chowdhury, J., After hearing the matters for several days,
judgment was reserved and on August 21, 1981, Salil K. Roy Chowdhury, J., was
pleased to dismiss the application made by Pramod Kumar Mittal for being added
as a party in Company Petition No. 221 of 1977 and the prayer for injunction
restraining the Committee of Management from filing the said terms of
settlement was also refused by His Lordship. The application by Purna Investment
Ltd. for being added as a party to Suit No. 295 of 1977 was also dismissed. The
application filed by the Bank of India, however, succeeded. An order was made
for consolidation of Suit No. 295 of 1977 and Extraordinary Suit No. 1 of 1980
and leave was granted to file the said terms of settlement in court and the
compromise embodied in the said terms of settlement was recorded. Thereafter,
Salil K. Roy Chowdhury, J., was pleased to direct that Suit No. 295 of 1977 and
Extraordinary Suit No. 1 of 1980 were to be treated as on the day's list and
passed a decree in accordance with the terms of settlement. The suit was
dismissed as against the defendants who were not parties to the said terms of
settlement.
After the learned judge passed the impugned order,
there was an oral application for stay of the operation of the order which the
learned trial judge did not grant. Thereupon, before the Division Bench, an
oral application was made on August 21, 1981, for stay of the operation of the
order of the learned trial judge so far as delivery of the Dankuni Steel Plant
was concerned. It was orally submitted that in between the time, that is to
say, when the learned trial judge delivered the judgment on August 21, 1981, at
about l.20 p.m. and the matter was mentioned before the Division Bench on the
same day at about 2.10 in the afternoon, delivery had taken place. On enquiry,
it was revealed that the key of the steel plant had only been delivered to the
advocate on record of the purchaser and actual physical possession had not
taken place. On that, the learned advocate for the purchaser was appointed to
be the receiver of the key and was directed not to part with the possession
until further orders of this court. The said order has continued. As we have
mentioned before, Bank of India had a charge in respect of all movables and
hypothecation in its favour of all the plants. The company had also mortgaged
its Dankuni plant comprising of the lands, buildings and machinery in favour of
Dena Bank.
After the appeal was preferred and in the course of
hearing of the stay petition before the Division Bench, the appellant produced
Calcutta Hardware Supply Agency and Dwarka Prasad Chowdhury who were willing to
purchase the plant at Dankuni for Rs. 2,45,00,000 and as a token of the bona
fide intention had produced certain cheques and certain letters of guarantee
from the bank.
In support of this appeal, it was contended, firstly,
that the contract, that is to say, the terms of settlement by which the
agreement was entered into, was beyond the competence of the Committee of
Management and, therefore, there could not have been any valid agreement
between the parties and, as such, there could not have been any terms of
settlement. In order to appreciate this contention, it would be necessary to
refer to the argument advanced before us. It was contended that the Committee
of Management was appointed to discharge the function of and was in place and
stead of the board of directors of the company. Therefore, it was submitted
that the Committee of Management had to function under the same restriction as
the board of directors of a company had. In this connection, reference was made
to the provisions of s. 293 of the Companies Act, 1956, the relevant portion of
which is set out as under :
"293. Restrictions on powers of board.—(1) The
board of directors of a public company, or of a private company which is a
subsidiary of a public company, shall not, except with the consent of such
public company or subsidiary in general meeting (underlined by us),—
(a) sell,
lease or otherwise dispose of the whole, or substantially the whole, of the
undertaking of the company, or where the company owns more than one
undertaking, of the whole, or substantially the whole, of any such undertaking
;...............
(2) Nothing
contained in clause (a) of sub-section (I) shall affect—
(a) the title of a buyer or other person who buys or takes a lease of any such undertaking as is referred to in that clause, in good faith and after exercising due care and caution ; or
(b) the selling or leasing of any property of the company where the ordinary business of the company consists of, or comprises, such selling or leasing."
The other sub-sections are not necessary for our
present purpose. We may incidentally while on these provisions note that s. 293
appears in Chapter II of Part VI of the Act which deals with the constitution
of the board of directors generally and under the group of sections dealing
with the board's power and restrictions thereon. There are certain sections,
namely, s. 291, which deals with the general power of the board of directors of
the company, section 292 deals with certain powers to be exercised only at
board meetings and s. 293 is headed as " Restriction on powers of the
board". Section 293A, which is not relevant for our present purpose, deals
with the prohibition regarding making of political contributions and s. 293B
deals with the power of the board and other persons to make contributions to
the National Defence Fund, etc. The point that is emphasised is that the board
is to function on behalf of the company in a specified manner and under certain
specified conditions and are under specified restrictions. The Committee of
Management, it was, inter alia, contended, could not have greater power unless
specifically conferred by the court in the order appointing the Committee of
Management giving it such unrestricted powers. It was more or less the common
case that no such specified special powers had specifically been given to the
Committee of Management in the instant case by the court appointing or
confirming the order of appointment of the Committee of the Management. It was
also contended that, in the alternative, if it was contended that the Committee
of Management was like a special officer or a receiver of the assets of the
company, then such a receiver could not sell off the undertakings of the
company unless in the order appointing the Committee of Management there was
such specified and enumerated power, which, it was submitted, was absent in the
instant case. Arguments were made which we shall presently note as to whether
such a Committee of Management could be treated as a receiver and whether such
leave was necessary in the instant case, A question was canvassed before us
that a particular unit of a company could not be considered to be an
undertaking, of the company in terms of s. 293(1)(a) of the Act. A closed unit,
it was submitted, could not be treated as an undertaking as it is understood,
We have mentioned hereinbefore that it was the common case that no specific
leave had been obtained from the court entertaining the company's petition
under ss. 397 and 398 of the Companies Act in the instant case. It was further
urged that though the learned judge who was exercising and disposing of the
several matters under the Companies Act as well as the suit which was assigned
to the particular learned trial judge who was disposing of this company's
petition, these orders could only be passed in separate and independent
jurisdiction.
The next point that was urged before us was that the
agreement for sale upon which the terms of settlements were passed was not a
bona fide transaction. In support of this submission, several points were
urged, namely, that the advertisement was not proper and valid, secondly, there
was absence of the minutes of the meeting of the Committee of Management
regarding the sale of these units, thirdly, the relationship between Indersen
Mittal and the real buyer, Shiv Kumar Agarwalla, fourthly, the paid-up capital
of the purchaser was insignificant, fifthly, there was no valuation report
placed before the learned trial judge, sixthly, there was no mention of the
date of the agreement, that is to say, when the alleged agreement was alleged
to have been entered into and, lastly, because of certain subsequent facts,
that is to say, the emergence of a purchaser who was willing to offer at a
higher price prim facie would indicate that the unit was being sold at a lesser
value. We hall have to refer in detail to certain facts in examining these
several contentions It was then contended that the decree was bad because the
agreement upon which the decree was passed was not a registered document and,
as such, could not be taken note of and looked at.
Apart from disputing these submissions, it was urged
on behalf of the respondents that the appellants had no locus standi to make
this application in the first instance and/or to prefer this appeal. It was,
secondly, submitted that the decree having been passed in accordance with the
terms of settlement, no relief could at this stage be granted in favour of the
appellants. Incidentally, it was also submitted that the terms of settlement
have been given effect to in respect of several other matters and cannot now be
impugned piecemeal.
In this case, indisputably, as there had not been any
sanction or leave obtained for entering into the terms of settlement pursuant
to which the decree was passed in favour of the Union Bank of India, it is
necessary to consider the contention whether either under s. 293 of the
Companies Act, which we have set out hereinbefore, sanction was required or
whether any leave to compromise was necessary in view of the fact that the
Committee of Management appointed by the court was in the position of a
receiver which required the leave of the court or sanction of the court before
entering into the compromise. We have set out s. 293 of the Companies Act. We
have also set out the terms of the order dated July 26, 1977, whereby the court
had empowered the Committee of Management to function. The question, therefore,
is, are the transactions entered into by the Committee of Management,
transactions entered into by the board of directors or receiver or officers of
the court ? It is quite clear in view of the terms used in s. 293 that s. 293
in terms cannot have any application to the facts and circumstances of this
case. The Committee of Management was not the board of directors of the
company. The board of directors of the company had to perform several functions
; it cannot be envisaged that the Committee of Management was functioning as
the board of directors. The board of directors had to perform several other
functions which could not be expected to be performed by the Committee of
Management appointed by the court. In this connection, reference was made to s.
161 of the Companies Act which enjoins filing of certain returns indicating the
names of the directors, etc., or s. 169, which also enjoined calling of
extraordinary general meeting of the board of directors on certain conditions
specially sub-s. (9) of s. 169 about the reasonable expenses incurred by the
requisitionists in connection with the holding of the meeting. Similarly, s.
215 of the Act required authentication of balance-sheet in certain manner by
the board of directors and s. 217, specially sub-s. (4). In this connection,
about the Committee of Management, reference may be made to certain decisions
in aid of the proposition that, in any event, s. 293 could only apply to a
voluntary sale and not to a sale or transfer which takes place by operation of
law in pursuance of a decree at the instance of a charge-holder in enforcement
of its rights. When a Committee of Management sells, it sells, it was
contended, by the authority of the appointment by the court and, therefore, the
acts of the Committee of Management would not come within the purview of the
limitations of the board of directors under s. 293 of the Act. In this
connection, reliance was placed; on certain observations in the case of Krishna
Das Nandy v. Bidhan Chandra Roy, AIR 1959 Cal 181, at paragraph 42, though the
said observations were made in the context of facts which were entirely
different. Our attention was also drawn to certain observations of the Supreme
Court in the case of Sailendra Narayan
Bhanja Deo v. State of Orissa, AIR 1956 SC 346. We are of the opinion
that the said decision is not of much relevance in the present case.
It was contended that in the scheme of s. 293 and in
the context of the other provisions of the statute, compliance with the said
provisions of s. 293 could not be made by the Committee of Management. It is
necessary to consider whether in view of the facts of this case and the
provisions of the Companies Act, leave or prior sanction or direction of the
court was required for entering into the terms which would entail sale or
transfer of any of the units or undertaking of the company. In this connection,
it was suggested that if any leave was necessary, such leave had to be obtained
from the court exercising jurisdiction under ss. 397 and 398 of the Companies
Act, namely, the court functioning as the company court; such leave, it was
urged, could not be inferred by the permission of the suit court to file the
terms of settlement and passing a decree there upon. It was stressed that the
fact that by a fortuitous combination of circumstances, the same learned judge
was exercising company jurisdiction and suit jurisdiction could not obviate the
necessity of such leave. It was further stressed that in this case as there had
been no direction or sanction obtained from the court prior to entering into
the transactions or agreeing to the terms of settlement, the subsequent
commission of the court to file the terms of settlement, would not cure the
defect because it was urged that the act of the Committee of Management was
ultra vires and beyond its competence. In this connection, certain
observations: of the House of Lords in England in the case of Alexander Ward
and Co. Ltd. v. Samyang Navigation Co. Ltd. [1975] 2 All ER 424; [1975] 1WLR
67.3 (HL) were referred to. There the pursuer was a company registered in Hong
Kong and they had a claim against the defenders, a Korean company, for over
Ł1,60,000. The pursuer company had no directors and did not hold any general
meeting in 1968-69. In November, 1970, the summons for the payment of the sum
was issued by the Court of Session in Scotland on behalf of the pursuer company
in the names of two individuals, W and I, together with warrants authorising
the arrest of the ship belonging to the defenders which was lying in Scottish
waters. Arrest was necessary in order to give the Scottish court jurisdiction
to try the action. In December, 1971, the defenders lodged Ł1,65,000 with the
Accountant of the Court and warrants were recalled releasing the defendership
in December, 1971, the Lord Ordinary ordered trial of a preliminary point
raised by the defenders' amended defence that the company not having authorised
the raising of the action, it should be dismissed. In April, 1972, before trial
of that issue, the pursuers went into liquidation and an application was
granted for the liquidator to be added as an additional party. In the name of
the company, the liquidator ratified the acts done on its behalf by W and I.
The defenders contended that despite the purported ratification, the action
should be dismissed since W and I had not been authorised to act on behalf of
the company and the arrestment was not capable of subsequent ratification.
Reliance was placed on certain observations of Lord Hailsham at page 429 of the
report. In view of the facts of this case, it appears to us that the said
observations would be of no relevance to or in disposing of the present appeal.
Lord Kilbrandon, with whose judgment Lord Hailsham agreed, observed (at p. 682
of [1975] 1 WLR) :
"My Lords, I must say I have the gravest doubts
as to the sound ness of the proposition pleaded. I am not at all convinced that
the management of a company having been confided to the directors and the
instructing of actions at law being an act of management, then, if the company
has for the time no directors, it cannot during that time take steps to recover
its debts."
Our attention was also drawn to the observations in
Ken on Receiver, 15th edition, wherein at page 200, the editors have referred
to the fact that where a receiver is appointed manager, he can carry out all
sales as were necessary for the ordinary conduct of the business over which he
was appointed, but no sale of permanent plant or assets should be made without
the leave of the court. Reliance was also placed on the observations of the
learned editors of that book in the chapter dealing with "Managers",
namely, Chapter 9, where, at page 228, the character of a manager has been
described. There, it was observed that where a receiver was required for the
purpose not only of receiving rents and profits or of getting in outstanding
property, but of carrying on or superintending a trade, business or undertaking,
he was called a manager or more usually a receiver and manager. The appointment
of manager implied that he had power to deal with the property over which he
was appointed manager and to appropriate the proceeds in a proper manner. It
was, therefore, submitted that a Committee of Management was in the place of
manager or a receiver appointed by the court in ordinary cases and must act
under the superintendence and direction of the court and there being no
specific power given by the order appointing the Committee of Management to
sell any unit or any undertaking without the leave or power properly sanctioned
from the court, the Committee of Management was not competent to sell or enter
into agreement for sale of any undertaking. In this connection, reliance was
also placed on certain observations in the case of Gardner v. London, Chatham and Dover Railway Co. (No. 1) [1866] 2 Ch
App. 20. In that case, it was held that a mortgage debenture made by a
railway company in the form given in Schedule "C" of the Companies
Clauses Consolidation Act, 1845, did not give the debenture holder a specific
charge upon the surplus lands of the company or the proceeds of the sale of
them so as to entitle them for an order for a receiver of the sale moneys or
interim rents. The "undertaking" of a railway company which was
pledged in a mortgage was a going concern created by an Act which could not be
broken up or interfered with by the mortgage; the sums of money were moneys
ejusdem generis as the tolls and were earnings of the undertaking which were
made available to satisfy the mortgagee. A railway company might give specific
Charge on the moneys to arise from its sales of its surplus lands for a debt
due to the contractors who had con structed the works. It was held that the court
would not appoint a manager of a railway. Our attention was drawn to certain
observations of Lord Justice Sir H.R. Cairns at page 211 of the report where it
was observed by the learned Lord Justice that when a court appointed a manager
of a business or undertaking, it in effect assumed the management into its own
hands ; for the manager was the servant or the officer of the court and upon
any question arising as to the character or details of the management, it was
the court which must decide and direct. The circum stance that in a particular
case the persons appointed were previously managers employed by the company was
immaterial. When appointed by the court, they were responsible to the court.
Having considered the facts and the circumstances of
the case before us, it appears to us that clearly s. 293 would not be
attracted. We are also of the opinion that the Committee of Management
appointed to discharge the functions of the board of directors of the company
cannot be termed either a receiver or a manager and, as such, such Committee of
Management was not subject to the limitation that a receiver or a manager was
but, at the same time, it must be emphasised that a Committee of Management is
appointed by the court under s. 397 of the Companies Act, and must always act
under the superintendence and direction of the company court. It is only for
the management of the company's affairs in a certain manner that the court
directs certain functions to be performed by the Committee of Management in a
particular manner. Therefore, a Committee of Management has not an unchartered
licence to do whatever it likes. In an appropriate case, the court can direct
the Committee of Management before any action is taken by it to comply with
certain rules and regulations or to direct the Committee of Management to act
in a particular manner. If the court so directs, then the Committee of
Management must act in accordance with the direction given by the court. If any
proposed action of the Committee of Management is brought to the notice of the
court and the court considers such proposed action improper or unlawful, then
the court can stop the Committee of Management from taking that action. The
court can also direct the Committee of Management to act in a particular manner
which it thinks just and proper. Equally, after an action has been taken, if
such action is prejudicial to the conduct and affairs of the company, then the
court in the interest of proper management of the affairs of the company, in
exercise of jurisdiction under ss. 397 and 398 of the Companies Act, can give
such direction as would be just and proper in the facts of the case. Beyond
this, how ever, it would be improper to impose limitation upon the power and
function of the Committee of Management. Therefore, in not complying with the
requirements of s. 293 of the Companies Act, nor in not obtaining any prior
sanction or leave before entering into the transaction in question, in our
opinion, the Committee of Management had not committed any breach of law.
In aid of the proposition that a Committee of
Management cannot have unlimited power and the transaction entered into by the
special officer must be under the supervision of the court, reliance was placed
on the decision of this court in the case, of International Coal Corporation v.
Pure Sitalpur Coal Concern Ltd., AIR 1972 Cal 45. Appointment of special
officer cannot be by consent of parties but it is a power of the court to be
sparingly used only when specially necessary. He was an officer of the court and
his powers and functions, which will vary, according to the facts of the case,
However, must be only such that he could run the company in the best interest
of the organisation and its members under the court's supervision. He cannot
have unlimited powers unless specifically empowered and should take directions
from the court periodically. His powers could not also be to enable him to
achieve his own end or of his group. In our opinion, the principles laid down
in this case have no application to the instant case before us as the facts in
the case before us are entirely different.
The next aspect on this question is whether a closed
unit as the Dankuni unit could be termed to be an undertaking which required
compliance with s. 293 of the Companies Act. Then in the decision we have just referred, Gardner v. London Chatham
and Dover Railway Co. (No. 1) [1866] 2 Ch App 201, Lord Justice Cairns
at pages 216 and 217 had dealt with the expression "undertaking". The
learned judge has referred to two public Acts, viz., the Companies Clauses Act
as well as the Lands Clauses Act, and has mentioned therein that
"undertaking" is denned to be the undertaking of works by the special
Act authorised to be executed and in the private Act, the object appears to be
not so much to describe what is included in the word "undertaking" as
to divide by metes and bounds, or otherwise the various undertakings of the
company from each other. The learned Lord Justice observed at pages 216 and 217
as follows :
"The object and intention of Parliament,
however, in the case of each of these various undertakings, was clearly to
create a railway which was to be made and maintained, by which tolls and
profits were to be earned, which was to be worked and managed by a company,
according to certain rules of management and under a certain responsibility.
The whole of this,: when in operation, is the work contemplated by the
Legislature, and it is to this that, in my opinion, the name of 'undertaking'
is given. Moneys are provided for, and various ingredients go to make up the
under takings, but the term ' undertaking ' is the proper style, not for the in
gredients, but for the completed work, and it is from the completed work that
any return of moneys or earnings can arise. It is in this sense, in my opinion,
that the 'undertaking' is made the subject of a mortgage. What ever may be the
liability to which any of the property or effects connect ed with it may be
subjected through the legal operation and consequences of a judgment recovered
against it, the undertaking, so far as these con tracts of mortgage are
concerned, is, in my opinion, made over as a thing complete or to be completed
; as a going concern, with internal and Parliamentary powers of management not
to be interfered with; as a fruit- bearing tree, the produce of which is the
fund dedicated by the contract to secure and to pay the debt."
It has to be borne in mind, however, that the said
observations were made in the context of those two statutes which were quite
different from the present context.
In the case before us, it is an admitted fact that
the Dankun unit of the company has remained closed since December, 1976. In
view of the fact that the Dankuni unit has not been in production for more than
five years past, it cannot be said that it is an "undertaking". of he
company which is being sold in this case. In that view of the matter, the
restrictions imposed by s. 293 are not attracted in the instant case and the
provisions of s. 293(1)(a) in terms do not apply to the proposed sale of the
Dankuni unit of the company. It has further to be noticed in this case that
sale of the Dankuni plant is; being effected by the Committee of Management
appointed by court in an application made under s. 397 of the Companies Act and
not by the board of directors. The fetter on the part of the board of directors
under the provisions of s. 293 will not apply to the Committee of Management
appointed in a proceeding under ss. 397 and 398 of the Companies Act. In the
orders passed by Ajay K. Basu, J., on July 18, 1977, and July 26, 1977, and
also in the order passed by the Appeal Court on July 26, 1977, no restriction
has been placed on the part of the Committee of Management.
In the case of Bennet Coleman & Co. v. Union of
India [1977] 47 Comp Cas 92 (Bom) a Division Bench of the Bombay High Court had
occasion to go into the question of the scope of the court's power in a
proceeding under ss. 397 and 398 of the Companies Act. In that case, after
various proceedings in which a company petition was filed by the Union of India
before the Companies Tribunal on or about September 30, 1964, under s. 398 read
with s. 401 of the Companies Act, for, inter alia, the following reliefs: (a)
removal of the newly appointed directors, respondents Nos. 6 to 10 from the
board, (b) injunction restraining respondents Nos. 2, 3 and 4 and respondents
Nos. 6 to 10 from interfering and intermeddling in the affairs of the company,
(c) removal of respondent No. 6 (the general manager) from the employment of
the company and injunction restraining him from functioning or intermeddling
with the affairs of the company, and (d) appointing a special officer to manage
and conduct the affairs of the company. The hearing before the Companies
Tribunal went on for a number of days till June 5, 1967, when the Tribunal was
abolished. The petition was then transferred to the High Court and was numbered
No. 114 of 1967. The hearing in the High Court went on from March 20,
1969, till August 28, 1969, during which only one witness had been examined in
part. At that stage, the petitioner and all the respondents agreed to submit to
the orders of the court, subject to certain stated reservations. The learned
judge thought that, in the circumstances, the best thing would be to pass such
orders as he thought fit on the assumption that the allegations made by the
petitioner against the respondents were correct and that the conditions
prescribed under s. 398 of the Act giving him, jurisdiction to pass appropriate
orders under s. 402 had arisen and existed. He also thought that passing
appropriate orders on such assumption would cause no prejudice to the
respondents inasmuch as there was going to be no admission on the part of any
of the respondents in respect of the allegations contained in the petition and
no finding was being recorded by him on any of the issues framed in this case
and no prejudice would be caused to such of the respondents against whom other
proceedings had been instituted in the matter of those proceedings. The learned
judge passed an order, inter alia, to the following effect : (1) that the
reconstituted board of directors of the company should consist of 11 persons,
out of whom three should be shareholders' directors, three be nominated by the
Central Government and the remaining five be appointed by the court and such
reconstituted board should operate for a period of seven years from the date of
the order ; he further directed that in the first reconstituted board, the
three shareholders' directors should be respondents Nos. 8, 9, 10 and he also
mentioned the names of the other directors and the name of the chairman of the
board; (2) he further directed that the three directors as representing the
shareholders should retire in accordance with the articles of association of
the company at each ordinary annual general meeting but should be eligible for
re-election ; he further directed that a vacancy among the directors appointed
by the Central Government should be filled up by the Central Government, while
a vacancy among the directors appointed by the court should be filled up by the
court. This was done with a view to give a preponderating and effective
majority to the directors appointed by the court and the Government over the
shareholders' directors; (3) he further directed that the articles of
association should stand modified in the manner indicated in the schedule.
Against the said order, all the respondents except respondents Nos. 7 and 9
preferred appeals.
A number of points were decided in the said appeals.
The point which is important for our present purpose is the decision of the
court with regard to the arguments based on s. 255 of the Companies Act. It was
held in that case "that Chapter II of the Act, which includes s. 255,
deals with corporate management of a company through directors in normal
circumstances, while Chapter VI, which contains ss. 397, 398 and 402, deals
with emergent situations or extraordinary circumstances where the normal
corporate management has failed and has run into oppression or mismanagement
and steps are required to be taken to prevent oppression and/or mismanagement
in the conduct of the affairs of the company. In the context of this scheme
having regard to the object that is sought to be achieved by ss. 397 and 398
read with s. .402, the powers of the court thereunder cannot be read as subject
to the provisions contained in the other chapters which deal with normal
corporate management of a company. Further, an analysis of the sections
contained in Chapter VI of the Act will also indicate that the powers of the
court under s. 397 or s. 398 read with s. 402 cannot be read as being subject
to the other provisions contained in sections dealing with usual corporate
management of a company in normal circumstances. The topic or subjects dealt
with by ss. 397 and 398 are such that it becomes impossible to read any such
restriction or limitation on the powers of the court acting under s. 402.
Without prejudice to the generality of the powers conferred on the court under
these sections, s. 402 proceeds to indicate what types of orders the court
could pass. Under clause (a) of s. 402, the court's order may provide for the
regulation of the conduct of the company's affairs in future and under cl. (g)
the court's order may provide for any other matter for which in the opinion of
the court it is just and equitable that provision should be made. An
examination of the aforesaid sections brings out two aspects : first, the very
wide nature of the power conferred on the court, and, secondly, the object that
is sought to be achieved by the exercise of such power with the result that the
only limitation that could be impliedly read on the exercise of the power
should be that nexus must exist between the order that may be passed thereunder
and the object sought to be achieved by those sections and beyond this
limitation which arises by necessary implication, it is difficult to read any
other restriction or limitation on the exercise of the court's power. Further,
ss. 397 and 398 are intended to avoid winding up of the company if possible and
keep it going while at the same time relieving the minority shareholders from
acts of oppression and mismanagement or preventing its affairs being conducted
in a manner prejudicial to public interest and, if that be the objective, the
court must have power to interfere with the normal corporate management of the
company, and to sup plant the entire corporate management, or rather
mismanagement, by re sorting to non-corporate management which may take the
form of appointing an administrator or a special officer or a committee of
advisers, etc., who would be in charge of the affairs of the company. The court
could even have a truncated form of corporate management if the exigencies of
the case required it and any truncated form of corporate management can never
conform to all the provisions dealing with corporate management. It will all
depend, on the facts and circumstances of each case, as to how, in what manner
and to what extent the court should allow the voice of the shareholders'
directors on the board of directors to prevail over that of the other directors
and the court's powers in that behalf could not in any manner be curbed.
Therefore, the position is clear that while acting under s. 398 read with s.
402 of the Companies Act, the court has ample jurisdiction and very wide powers
to pass such orders and give such directions as it thinks fit to achieve the
object and there would be no limitation or restriction on such power that the
same should be exercised subject to the other provisions of the Act dealing
with normal corporate management or that such orders and directions should be
in accordance with such provisions of the Act.
Once it is held that on a true construction that the
court has the widest possible jurisdiction and ample powers to bring about the
desired result, there would be no question of the court not being able to
reframe or insert a new article which would be in conflict with some provisions
of the Act. Sections 397, 398 and 402, by their very nature and contents,
indicate that they are intended to operate as express provisions to the
contrary and would be covered by the phrase "save as otherwise expressly
provided in the Act". In any case, the two sets of situations in which the
provisions of s. 255 and the provisions of ss. 397 and 398 read with s. 402
would respectively operate are entirely different and mutually exclusive and,
as such, there will be no repugnancy between any article that may be refrained
or inserted by the court while passing orders under s. 398 read with s. 402 and
other provisions of the Act including s. 255, which deal with normal corporate
management of the company.
A Division Bench of the Calcutta High Court in the
case of Debi Jhora Tea Co. Ltd .v. Barendra Krishna Bhowmick [1980] 50 Comp Cas
771 had occasion to examine the scope of ss. 397, 398 and 402 of the Companies
Act. It was observed as follows (at pp. 782-783):
"It should be borne in mind that when a court
passes an order under ss. 397, 398 and 402 as has been done in the instant
case, there could be limitation on the court's power while acting under the
sections. Instead of the winding up of a company, the court under the
abovementioned sections has been vested with ample power to continue the
corporate existence of a company by passing such orders as it thinks fit in
order to achieve the objective by removing any member or members of a company
or to prevent the company's affairs from being conducted in a manner
prejudicial to the public interest. The court under s. 398 read with s. 402 of
the Act has the power to supplant the entire corporate management. Under the
aforesaid sections, the court can give appropriate directions which are
contrary to the provisions of the articles of the company or the provisions of
the Companies Act."
And, thereafter, at pages 784-785 :
"It merely extended the time to file nominations
for election to the office of directors. Under ss. 397 and 398 read with s.
402, power has been conferred upon the court ' to make such orders' as it
thinks fit. The power conferred upon the court by the above-mentioned sections
is very wide and the object or objects sought to be achieved by the exercise of
such power have been stated in ss. 397 and 398, As we read sub-cls. (a) and (g)
of s. 402 of the Act, we have no doubt in our mind that the intention of the
Legislature under the above-mentioned sections was to confer wide and ample
powers upon the court for the regulation of the conduct of a company's affairs
and to provide for any other matter which the court thinks just and equitable' to
provide for in the interest of the corporate body and the general public,
Reference in this connection may be made to the case of Bennet Cole-man and
Company v. Union of India [1977] 47 Comp Cas 92 (Bom).
By reason of what has been stated hereinabove, it
appears to us that the court had power to make the order in regard to convening
and holding of the meeting, filing of proxies or nominations or any other
matter for the purpose of conducting the affairs of a company which might be
contrary to the provisions of the articles of the company or the Companies Act,
by virtue of the provisions of ss. 397 and 398 read with s. 402 of the said
Act."
The Supreme Court in the case of Cosmosteels Pvt.
Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312 (SC), also examined the scope
of ss. 397 and 398 of the Companies Act and observed at page 318 as follows :
"The scheme of sections 397 and 402 appears to
constitute a code by itself for granting relief to oppressed minority
shareholders and for granting appropriate relief, a power of widest amplitude,
inter alia, lifting the ban on a company purchasing its shares under court's
direction, is conferred on the court. When the court exercises this power by
directing a purchase of its shares by the company, it would necessarily involve
reduction of the capital of the company. Is such power of the court subject to
a resolution to be adopted by the members of the company which, when passed
with statutory majority, has to be submitted to court for confirmation ? No
canon of construction would permit such an interpretation in which the
statutory power of the court for its exercise depends upon the vote of the
members of the company. This would inevitably be the situation if reduction of
share capital can only be brought about by resorting to the procedure
prescribed in ss. 100 to 104. Additionally, it would cause inordinate delay and
the very purpose of granting relief against oppression would stand
self-defeated. Viewed from a slightly different angle, it would be impossible
to carry out the directions given under s. 402 for reduction of share capital
if the procedure under ss. 100 to 104 is required to be followed. Under ss. 100
to 104, the company has to first adopt a special resolution for reduction of
share capital if its articles so permit. After such a resolution is adopted
which, of necessity, must be passed by majority, it being a special resolution.
By a Statutory majority, it will have to be submitted for confirmation to the
court. Now, when minority shareholders complain of oppression by majority and
seek relief against oppression from the court under ss. 397 and 398 and the
court, in a petition of this nature, considers it fair and just to direct the
company to purchase the shares of the minority shareholders to relieve oppression,
if the procedure prescribed by ss. 100 to 104 is required to be followed, the
resolution will have to be first adopted by the members of the company ; but
that would be well nigh impossible because the very majority against whom
relief is sought would be able to veto it at the threshold and the power
conferred on the court would be frustrated. That could never have been the
intention of the Legislature. Therefore, it is not conceivable that when a
direction for purchase of shares is given by the court under s. 402 and
consequent reduction in share capital is to be effected, the procedure
prescribed for reduction of share capital in ss. 100 to 104 should be required
to be followed in order to make the direction effective."
In view of the principles of law enunciated by the
Supreme Court and also the judgments of the Division Bench of this High Court
and the Bombay High Court and also having regard to the facts of the case
before us, we are of the view that it was not beyond the competence of the
Committee of Management to enter into the impugned contract with the creditor
banks in this case in the manner that it did. It cannot be said that the
provisions of s. 293 had to be strictly complied with before entering into this
contract as argued on behalf of the appellants.
We are, however, unable to accept the contention that
the decree passed in the instant case by the learned trial judge has been acted
upon in some respects and, therefore, it cannot be set aside by the appeal
court. It was argued that the decree has become final and cannot be set aside
in the proceeding under s. 397. It has been argued that on September 16, 1981,
the court of appeal dismissed an application made by Mohanlal Mittal for leave
to file memorandum of appeal from the judgment and order dated August 21, 1981,
whereby a claim against Mohanlal Mittal as a guarantor had stood dismissed.
That application, however, was dismissed on the
ground that Mohanlal Mittal as a guarantor could not feel aggrieved by the
order of the learned trial judge and, therefore, he had no locus standi to
prefer an appeal. In this case, however, "reliance has been placed on the
case of Lachmeshwar v. Keshwar Lal [1940] 3 FLJR 73 (FC); AIR 1941 FC 5, in aid
of the proposition that though the decree passed by the learned trial judge has
been acted upon in other respects except in respect of the Dunkuni plant, the
appellate court had the same power not to sanction the compromise regarding the
sale of the Dunkuni plant and it has the same power as the trial court. Reliance
was placed on the observations of the Federal Court at page 13 of the report
where it was observed that once a decree of the High Court had been appealed
against, the matter became sub judice again and thereafter the court had seisin
of the whole case though for certain purposes, namely, execution, the decree,
was regarded as final and the courts below retained jurisdiction. Mr. Justice
Varadachariar of the Federal Court observed as follows :
"In Subhanand Chowdhary v. Apurba Krishna Mitra
[1940] 3 FLJ 58 ; AIR 1940 FC 7, this court has held that the mere fact that
the particular statute in respect of which the constitutional question was
originally raised had been since repealed will not put an end to the appeal;
and, except on the hypothesis that this court is only a court of error, its
power to do justice between the parties cannot be restricted to cases in which
it is able to hold that the lower court has gone wrong in its law. The
contention that the power of a Court of Appeal is so limited was distinctly
negatived in Attorney-General v. Birmingham, Tame and Rea District Drainage
Board [1912] AC 788 (HL) and Quitter v. Mapleson [1882] 9 QBD 672 (CA) which
are referred to in the judgment in Shyamakant Lal v. Rambhajan Singh [1939] FCR
193 ; AIR 1939 FC 74. As stated in Shyamkant Lal v. Rambhajan ingh [1939] FCR
193 ; AIR 1939 FC 74, there is no reason to suppose that the powers of this
court when acting as a Court of Appeal are less extensive than those of the
High Courts when hearing an appeal and it has been a principle of legislation
in British India at least from 1861 that a Court of Appeal shall have the same
powers and shall perform as nearly as may be the same duties as are conferred
and imposed by the Civil Procedure Code on courts of original jurisdiction :
See Act No. 23 of 1861, s. 37 ; Act No. 10 of 1877, s. 582 ; Act No. 14 of
1882, s. 582; and Act No. 5 of 1908, s. 107(2). The very words of O. 58, r. 5
of the Rules of the Supreme Court, on which Bowen L.J. laid stress in Quilter
v. Mapleson [1882] 9 QBD 672 at p. 678 and Lord Gorell in Attorney-General v.
Birmingham, Tame and Rea District Drainage Board [1912] AC 788, at p. 801,
namely, that the Court of Appeal has power to make such further or other orders
as the case may require, have been reproduced in O. 41, r, 33, Civil Procedure
Code of 1908 ; and even before the enactment of that Code, the position was
explained by Bhashyam Iyengar, J., in Krishnamachariar v. Mangammal [1901] ILR
26 Mad 91 at pp. 95, 96 in language which makes it clear that the hearing of an
appeal is under the processual law of this country in the nature of a
rehearing. The Indian Codes have from 1859 conferred upon a Court of Appeal the
power given by O. 58, r.'4. Supreme Court Rules, to allow further evidence to be
adduced ; and though the English rule does not in terms impose the same
limitations on this power as the Indian Codes do, these limitations are implied
in the reference to 'special grounds' in the English rule and have in effect
been insisted on even in England as a matter of practice : see Nash v. Rochford
Rural District Council [1917] 1 KB 384 (CA). In view of these provisions, it
seems to me to make no difference that it is not explicity stated in the Indian
statutes (as in O. 58, Supreme Court Rules) that an appeal is by way of
rehearing. It is also on the theory of an appeal being in the nature of a
rehearing that the courts in this country have in numerous cases recognized
that in moulding the relief to be granted in a case on appeal, the Court of Appeal
is entitled to take into account even facts and events which have come into
existence after the decree appealed against. I may also refer to Kanakayya v.
Janardhana Padhi [1910] ILR 36 Mad 439 at pp. 441-444 where the law on the
point is fully discussed."
Reference in this connection may also be made to
sub-s.(2)of s. 107 of the CPC.
The objection raised by the respondents as to the
maintainability of the appeal, therefore, cannot be accepted on this ground.
On the question of locus standi, reliance was placed
on the decision in the case of Kodia Goundar v. Velandi Goundar, AIR 1955 Mad
281. The Full Bench of the Madras High Court observed that O. 1, r. 6, sub-r.
(2) provided that "any person on whose behalf or for whose benefit a suit
is instituted or defended under sub-r. (1) may apply to the court to be made a
party to such suit". A "party" to such a suit is, therefore, one
who is impleaded as a party or one who on an application under O. 1, r. (8),
sub-r. (2) is brought on record, i.e., one who is "eo nomine" made a
party. The others who were not brought on record could only be deemed to be
parties and would not be parties as such. Section 47 of the CPC would not,
therefore, be a bar to a fresh suit against those persons. A decree obtained in
a suit instituted in accordance with the provisions of O. 1, r. 8, would be
binding an all the members that belonged to the class who Were sought to be
represented, by operation of the principle of "res judicata" as
enacted in s. 11, Expln. VI. But the mere fact that such a decree would be
binding as "res judicata" on others who were sought to be represented
cannot make such a decree enforceable as and by way of execution or otherwise.
A decree obtained in a representative suit against the defendants in a
representative capacity could not be executed personally against persons who
were not "eo nomine" parties. Hence, a decree for injunction could
not be extended so as to render those who were not "eo nomine"
defendants liable for disobedience of the decree. To entitle the decree-holder
to proceed against such persons who were not parties on record, the injunction
must be revived against them, which must be by a separate suit. Without a
revival, therefore, of the decree for injunction against these other persons,
no proceedings in pursuance of the decree could be started against them. It
was, therefore, submitted that as the application in the instant case was filed
with the consent of the present appellants in order to make up the 10% of the
shareholders who should be entitled to sustain an application, it was urged
that the present appellants were parties to the s. 397 application and,
therefore, they are entitled to maintain this appeal in the absence of the main
applicant. Whether the sale of the Dunkuni plant was the subject-matter of the
application under s. 397 and, as such, could be made a subject-matter of an
application independently in respect of which this appeal has been preferred,
our attention was drawn to the Division Bench judgment of this court in the case
of Shyamlal Purohit v. Jagannath Ray AIR 1969 Cal 424 ; [1970] 40 Comp Cas 138,
where it was held by Chief Justice Sinha that in the case of a public limited
company registered under the Companies Act, the company was an entity separate
from its shareholders. It was the company which was the owner of its assets,
including immovable properties and not the shareholders. The shareholder in
such a company had a right to share in the profits by way of receipt of
dividends. He had a right in an appropriate case to apply for the winding up of
the company and to take part in the distribution of the surplus assets after
payment of the debts and liabilities which must of course be done in accordance
with the articles of association and the provisions of the said Act. As long as
the company continued to exist that is to say, before its dissolution, no
shareholder could be said to have any interest in the properties and assets of
the company, either legal or equitable. Shareholders in a company must
certainly be interested in the properties and assets of the company in the
sense that a wastage or frittering away of the assets might affect their rights
to enjoy the profits and eventually the distribution of surplus assets in a
winding-up. That, however, was too remote an interest and could not be included
within the definition of "interest" within the meaning of O. 21, r.
90 of the CPC. But in the instant appeal before us, so far as the appellant in
Appeal No. 271 of 1981 is concerned, who was not a party to the original s. 397
application, this principle might have some relevance, but in the case of the
present appellants in this appeal, as they were parties in the s. 397
application which section gives the shareholders holding shares of certain
percentage to have a say in the management of the affairs of the company and to
object to the management of the company in a particular manner, this principle,
in our opinion, would not be applicable in the case of the present appellant.
On the question of the shareholders' rights in the assets of the company under
s. 192 of the Indian Companies Act of 1913, our attention was drawn to the
decision of the Supreme Court in the case of Bacha F. Guzdar (Mrs.) v. CIT
[1955] 25 Comp Cas 1; 27 TR 1. In the facts and in the circumstances of this
case, the decision would not be of much assistance in our opinion.
On the question that the report of the valuation
which was not disclosed but which was only mentioned in the proceedings before
the learned trial judge, reliance was placed on the observations of this court
appearing in pp. 51 and 52 in the case of Daddy S. Mazda v. K.R. Irani, [1977]
47 Comp Cas 39.
In that case, it was held that no adverse inference
could be drawn from the failure to do something which a party was not bound in
law to do. The provisions in O. 11 of the CPC regarding discovery, production
and inspection of documents were not required to be followed in a summary
proceeding under s. 155 of the Act. It was certainly open to the court to
direct the appellant to produce the documents and if order was made, and not
complied with, it would have been open to the court to draw an adverse
inference. In the case before us, the Dunkuni unit of the company has been sold
at a price which is not less than the price mentioned in the valuation report.
There is no allegation that the valuation report is false or fabricated. The
allegation is lack of bona fides in making the sale by the Committee of
Management. The Committee of Management did not stand to gain anything by
suppression of the valuation report in this case. Therefore, in our opinion, no
adverse inference can be drawn for non-production of valuation report before
the learned judge. But at the same time we are of the opinion that in order to
show complete candour, it would have been better for the respondents to have
placed the valuation report before the court to give the court a complete
picture of the transaction.
On the question of registration, it was contended
that the compromise as such did not transfer the immovable assets in connection
with the Dunkuni plant. The transfer, it was submitted, of immovable assets, if
any, were done by the decree itself and that decree would be duly registered.
It was submitted that s. 67 of the Transfer of Property Act, and s. 17 of the
Registration Act would have no application to the facts and in the
circumstances of this case. In this connection, reliance was placed on the
decision in the case of Sabitri Thakurain v. Mrs. F.A. Savi, AIR 1933 Pat 306,
and our attention was drawn to the observations of the court at pages 420-421
of the report. Reliance was also placed on the decision of the Division Bench
of the Madras High Court in the case of Ranganayaki Ammal (K.) v.
Sampathkumaran, AIR 1940 Mad 897. There, during the pendency of the suit, the
parties had agreed to a compromise decree being passed. There were other
disputes besides the dispute which led to the filing of the suit. These
disputes related, inter alia, to two other houses besides the house in suit and
the parties met to settle all their differences. The terms of settlement having
been agreed upon, they were put in writing in order that there should be no
dispute with regard to them. The parties agreed that the document embodying the
terms of the compromise should be filed in court and decree obtained in terms
thereof. It was held that the document in question was not intended to declare
the rights of the parties in the immovable properties but those rights were
declared in the decree of the court and consequently fell within the purview of
s. 17(2)(b) and not under s. 17(1)(b) of the Indian Registration Act. The
definition of what documents should be registered because it created right in
immovable property and what documents only created a right to get another
document was focussed in two decisions of the Supreme Court, the first one
being the decision in the case of Ratan Lal Sharma v. Purshottam Harit, AIR
1974 SC 1066, where it was held that where the terms of the arbitration award
did not transfer the share of a partner, A, in the assets of a firm to the
other partner, B, either expressly or by necessary intendment but, on the other
hand, expressly made an allotment of the partnership assets and liabilities to
B making him absolutely entitled to the same in consideration of a sum of money
to be paid by him to. the other partner, A, thereby expressly purporting to
create rights in immovable property of the firm worth above Rs. 100, the award
was compulsorily registrable under s. 17 of the Registration Act and, if
unregistered, could not be looked into and the court could not pronounce
judgment in terms of award under s. 17 of the Arbitration Act, 1940, which
presupposes the existence of an award which could be validly looked into by the
court. The award being an inseparable tangle of several clauses could not be
forced as to separate that part not dealing with immovable property. In the
case of Sidhwa T.P. v. S.B. and Sons Pvt. Ltd., AIR 1974 SC 1912, it was held
by the Supreme Court that where an arbitration award relating to the partition
of immovable property of the value exceeding Rs. 100 directed some of the
parties to execute certain documents as might be necessary for declaring the
shares and for transferring the property, such an award itself did not create
or declare any right, title or interest in the property but it merely created a
right to obtain another document which would, when executed, create such right,
title or interest. Such award fell under s. 17(2)(v) and not under s. 17(1)(b)
and was not, therefore, registrable.
Having considered these. several contentions and the
points raised and the decisions, we have come to the following conclusions :
In our opinion, (1) the Committee of Management was
not hit by s. 293 of the Companies Act and, as such, there was no prior need of
obtaining any approval of the court for entering into the transaction for the
sale and transfer of the Dunkuni Steel Plant.
Though the Board of Management appointed by the court
was not subject to the control under s. 293 of the Companies Act, yet the court
had jurisdiction, in an appropriate case, on appropriate application and on
proper facts being placed before it, to direct that a particular sale should
either take place or to give directions as to the manner in which a particular
sale or a transaction was to take place. In the facts and circumstances of this
case, as mentioned before, the
transaction could go through and as the shareholders who were complaining about
the transaction had full opportunity to place the matter before the court, we are
of the opinion that there has been no infraction of that requirement of law.
(3) We are further of the
opinion that as. 397 application is a representative application in the sense
that it is on behalf of 10% of the share holders which is required to maintain
such an application and if those shareholders who had given their consent come
to oppose or make any application before the court, they have sufficient locus
standi to be heard by the court and as such, in an appropriate case like the
present, one has a right to be added as parties in their own names. In this
case, inasmuch as Promode Kumar Mittal and other appellants were supporting
Mohanlal Mittal in the application under s. 397 before the court and inasmuch
as Mohanlal Mittal was no longer prosecuting the s. 397 application or opposing
a particular transaction during the pendency of s. 397 application of the
Companies Act, we are of the opinion that the present appellants were
entititled to be added as parties and not acceding to that prayer, the learned
judge was in error.
(4) In this case, though
the other group of Mittal, namely, Indrasen Mittal, was exercising a very
dominant and controlling interest, it appears that the transaction relating to
the sale of the Dunkuni Steel Plant had been considered by the Board of
Management which was appointed by the court and which consisted of other
independent persons including representatives of the financial institutions.
One of the most important factors in this matter is the role of the Bank of
India. The Bank of India because of its own reason and because of its own
investigation and enquiry was willing to give certain credit to the Grand Steel
Alloys Ltd., the purchaser, and was not willing to grant this kind of facility
to others and this agreement being a composite agreement which on the whole
would enure to the benefit of the company as a whole, in our opinion, such a
transaction could not be said to be bad or not for the benefit of the company.
It is true that the sale of such an important asset of the company should have
been advertised and attempted to be sold in a little more organised manner and
it would have been better if a proper valuation had been made and placed before
the learned trial judge before inviting offers. These irregularities, in our
opinion, are not such which would vitiate the sale as mala fide. It appears to
us that the advertisements could have been more specific and clear on this
point but in view of the fact that the Bank of India cannot be compelled to
accept any other terms of settlement and to any other purchaser as the
purchaser of the Dunkuni Steel Plant and as it is a composite decree of the
sale, in our opinion, in the interest of justice, it would not be proper to set
aside this part of the order of the learned trial judge. It is true that in the
Court of Appeal, a higher amount was offered by a purchaser produced at the
instance of the appellant and perhaps it is also true if better and clear
efforts are made then, a higher price might be available. We have, however, to
bear in mind that in view of the inflationary tendency now prevailing in this
country, there is an escalation of price with the passage of time. Therefore,
the very fact that a higher offer could be available now for the Dunkuni Steel
Plant would not be indicative of the position that the sale that was agreed to
by the Bank of India as a part of the composite terms of settlement was not
bona fide or was entered into without proper investigation. In the meantine,
certain vested rights of the other parties have accrued.
(5) We are of the opinion
that the Dunkuni Steel Plant being a closed unit, it could not be considered to
be an undertaking in terms of s. 293 of the Companies Act, 1956.
(6) So far as the question
of registration is concerned, we are of the opinion for the reasons mentioned
hereinbefore that the document of com promise did not transfer or create any
charge or affect any interest in the immovable property. Therefore, the terms
of agreement were not required to be registered. But the terms of decree
effected the transfer.
In the
premises, in so far as the learned trial judge by his order dated August 21,
1981, refused the appellant for being added as party to Company Petition No.
221 of 1977, we are unable to sustain the same and that portion of the order of
the learned trial judge is set aside. So far as the learned trial judge refused
the prayer for injunction restraining the Committee of Management from filing
the terms of settlement, we find no reason to interfere with that portion of the
order of the learned trial judge and that portion of the order of the learned
trial judge is, therefore, upheld. So far as the learned trial judge dismissed
the application of Purna Investment Ltd., for being added as a party, we are in
agreement with the same and the appeal by Purna Investment Ltd. on that ground
is dismissed. The order made for consolidation of Suit No. 295 of 1977 (Bank of
India v. Andhra Steel Corporation Ltd., AIR 1982 Cal 57) and Extraordinary Suit
No. 1 of 1980 (Dena Bank v. Andhra Steel Corporation Ltd.) and the leave
granted to file the said terms of settlement and compromise embodied in the
terms of settlement which were recorded should also be upheld. We also uphold
the order of the learned trial judge in so far as the learned trial judge
dismissed the suit as against the defendants who were not parties to the said
terms of settlement. We also uphold the order of the learned trial judge that
Purna Investment Company Limited could not be given leave to intervene in the
proceedings.
This appeal is, therefore, dismissed subject to the
one condition mentioned hereinbefore.
In the facts and circumstances of this case, parties
will pay and bear their own costs.
The amount deposited by the intending purchaser will
be refunded to him.
On the prayer of Mr. Ahin Chowdhury, Mr. Shyamal Kr.
Patra, who is appointed receiver to hold the key until disposal of this appeal,
will hand over the key on or after July 26, 1982.
The learned advocate for the appellant makes an oral
application for leave to appeal to the Supreme Court. In view of the facts and
the well-settled principles of law and, according to us, no substantial
question of law arises, leave to appeal is refused.
Rs. 1,00,000 deposited with the appellant's
Advocate-on-Record will not be withdrawn until further order of this court.
Registration of the decree will not be done before
July 26, 1982.
Receiver
and all parties to act on a signed copy of the minutes.
Suhas Chandra Sen, J.—I Agree.
[1992] 75 COMP. CAS. 583
(BOM.)
HIGH COURT OF
P.S. Offshore Inter Land Services
(P.) Ltd.
v.
D.R. DHANUKA J.
Judges Summons No. NIL of 1991 in Company
Application No. 78 of 1991 in Company Petition No. 144 of 1991
MARCH 21 AND 22, 1991
D.R. Zaiwala,
P.N. Mody and Shashikumar Nair for the Petitioners.
K.S. Cooper,
T.K. Cooper, Amarchand Mangaldas, Satish Shah, S.R. Borulkar, J.B. Chinai, Aspi
Chinoy, Suresh D. Parikh, G.E. Vahanvati and E.P. Bharuvacha and R.A Kapadia
for the Respondent.
D.R. Dhanuka,
J.—This is a judge's summons
taken out by the petitioners for an interim injunction to restrain the
respondents "from, in any manner, acting in furtherance of the agreements
dated 21st May, 1990, and 26th January, 1991, and acting in furtherance of the
purported resolution of the board of directors of the 1st respondent-company
dated 5th February, 1991". By this judge's summons, the petitioners are
also seeking an interim injunction restraining the respondents from selling,
dealing with, disposing of, encumbering or alienating the vessel "Boss
Vishwa".
This summons
involves a question of interpretation of section 293(1)(a) of the Companies
Act, 1956 (1 of 1956), and the word "undertaking" used therein. Under
the aforesaid section, the board of directors of a public company or a private
company which is a subsidiary of a public company is prohibited from selling,
leasing or otherwise disposing of the whole of the undertaking or substantially
the whole of the undertaking Without the consent of such company in general
meeting. The section is mandatory. I shall deal with the subject-matter of
interpretation of the expression "undertaking" used in this section
in the later part of this judgment.
The
petitioners are shareholders of the first respondent-company. The petitioners
and the supporting respondents belong to the Sawhney group. The petitioners and
the supporting respondents hold more than 95 per cent. of the shares of the
first respondent-company. The shareholding of the Sawhney group is set out in paragraph
4 of the affidavit dated 14th March, 1991, of Mr. Ramanan, Zonal Manager of
Indian Bank, filed in this proceeding and there is no dispute about the same.
In a petition filed under sections 397 and 398 of the Companies Act (1 of 1956)
(Company Petition No. 144 of 1991), the petitioners are complaining of
mismanagement of the affairs of the company by respondents Nos. 2 to 5 who are
directors of the first respondent-company as nominees of public financial
institutions.
On 13th
November, 1982, the first respondent-company was incorporated and registered as
a private limited company. On 13th August, 1988, the first respondent became a
public limited company. The authorised share capital of the first
respondent-company is Rs. 10 crores. The present issued, subscribed and paid-up
share capital is Rs. 5,00,50,000 comprising 50,05,000 fully paid-up equity
shares of Rs. 10 each. The Indian Bank is the banker of the first
respondent-company.
The first
respondent-company is engaged in the activity of oil exploration and off-shore
drilling of oil. It is averred in the petition that respondent No. 1 actively
assists the Oil and Natural Gas Commission (ONGC) in its oil exploration and
offshore drilling projects whenever contracts are awarded to the first
respondent-company by the ONGC. The first respondent-company owns three vessels
for the purpose of its business, i.e., Boss-1, Boss Prithvi and Boss Vishwa.
Some time in the month of June, 1989, respondent No. 1 acquired the vessel in
dispute known as "Boss Vishwa" for the price of US $ 12 million. A
foreign bank advanced a term loan of US $ 9.6 million to respondent No. 1 under
an agreement dated 15th December, 1989. The Indian Bank executed a deed of
guarantee and indemnity in respect of the obligations of the first respondent
in favour of the said foreign bank known as ANZ Singapore Ltd. for repayment of
the said amount and also accruing interest. The Indian Bank has advanced large
amounts to the first respondent-company under various heads. Financial
institutions also have advanced large amounts to respondent No. 1. Right from
the beginning, the said vessel could not be operated or used in the business of
the first respondent-company as no contract was awarded by the ONGC and it had
to remain idle creating problems of operational expenditure, etc., as more
particularly set out by the first respondent in its application dated 20th
July, 1990, to the Director-General of Shipping for his approval under the
Merchant Shipping Act and its enclosures. It is admitted by all parties
concerned that on 21st May, 1990, a memorandum of agreement was executed
between the first respondent-company as the seller and S. Sejersted Bodtker and
Co., Oslo, as the buyers, whereunder the first respondent agreed to sell the
said vessel to the said foreign buyer or its nominee at a price which was
ultimately crystallised by issue of an addendum at US $ 16 million. On 26th
January, 1991, another document was executed by the sixth respondent and two
other members of the management committee of the first respondent in favour of
the foreign buyer which is titled "minutes of agreement for mobilisation
and delivery of motor vessel 'Boss Vishwa' pursuant to memorandum of agreement
dated 21st May 1990". Prior to the execution of the said writing/document by the parties
(a copy whereof is annexed as exhibit C to the petition), an application had
already been made by the first respondent-company to the Director-General of
Shipping for his approval to the sale of the said vessel in terms of the said
agreement dated 21st May, 1990. The said application was made on 20th July,
1990. There is no dispute about the factum or the efficacy of the agreement
dated 21st May, 1990, or the statements made in the application to the
Director-General of Shipping and the enclosures appended thereto like viability
report, valuation reports, etc. Along with the said application, the first
respondent-company itself forwarded various documents like valuation reports,
etc., showing that the price of US $ 16 million was a fair price as, according
to the two valuation reports enclosed with the said application, the said
vessel was of the value of US $ 15.5 million and US $ 15 million respectively.
Along with the said application, a statement was forwarded by the first
respondent-company to the Director-General of Shipping labelled as viability
report prepared by the first respondent-company signed by its authorised
signatory stating therein that, in spite of the best efforts, the first
respondent was unable to obtain a job for the said vessel from the ONGC and the
said vessel could not be utilised and that the company was incurring massive
standing operational expenses. It was stated in the said application by
respondent No. 1 and the enclosures thereto that the first respondent shall be
heading for a financial crisis in case permission for the sale of the said
vessel for US $ 16 million was not granted, as sought. Ultimately, permission
was granted by the Director-General of Shipping after examining all the
necessary material as contemplated under section 42(1) of the Merchant Shipping
Act, 1958, by his letter dated 1st November, 1990.
It is being
contended on behalf of the petitioners that the said writing dated 26th
January, 1991, is in the nature of a fresh agreement and it is being wrongly
described by the members of the management committee which included the
representative of the Indian Bank and the sixth respondent, as if the said
writing was in the nature of a further document towards implementation of the
original agreement dated 21st May, 1990. The said writing dated 26th January,
1991, for sale of the said vessel for US $ 16 million was made subject to
passing of a board resolution by the board of directors of the sellers as well
as by the board of the buyers by 5th February, 1991. On 5th February, 1991, a
resolution was in fact passed by the board of directors of the first
respondent-company and necessary intimation thereof was also given to the
foreign buyer of the said vessel by telex as well as a letter. The prayers made
in the company petition filed by the Sawhney group are as under :
"(a)
that this Hon'ble court be pleased :
(i) to declare the said resolution of the board
of directors dated 5th February, 1991, as null, void and of no effect in law
and to set aside the same ;
(ii) to direct the respondents to convene a
meeting of the general body of the said company for the purposes of considering
the alleged agreements with the said buyer dated 21st May, 1990, and 26th
January, 1991."
As this
stage, it is necessary to make a reference to the composition of the board of
directors of the first respondent-company. The first respondent-company is
heavily indebted to the Indian Bank as well as to financial institutions and
others. The first respondent-company is also liable to pay large amounts to one
Deepak Fertilisers and Petro Chemicals Corporation (hereinafter referred to as
"Deepak Fertilisers") under consent order dated 31st July, 1990, in
Notice of Motion No. 1556 of 1990, in Suit No. 1463 of 1990, to which the first
respondent is a party. By the said consent order dated 31st July, 1990, passed
with the full consent of the Sawhney group, it was provided that the board of
directors shall, at all times, inter alia, include nominees of Deepak
Fertilisers. At all material times, the board of directors consisted of four
nominees of financial institutions, i.e., respondents Nos. 2 to 5, three
nominees of the Sawhney group, i.e., respondents Nos. 6, 9 and 10 and two
nominees of Deepak Fertilisers, i.e., respondents Nos. 7 and 8.
Before I
refer to the submissions of learned counsel on either side and deal with the
same and also refer to the documents and facts at some length, it is necessary
to set out certain admitted facts, right at the outset. The said admitted facts
which are required to be highlighted, at the outset, are as under:
"(1) The agreement dated 21st May, 1990, was
arrived at with the full consent of the Sawhney group and was signed by
respondent No. 6 on behalf of respondent No. 1. The said agreement was duly
approved by the board of directors of the first respondent-company without any
protest from any of the directors.
(2) Application for approval of the sale of the
vessel made to the Director-General of Shipping was signed by the
vice-president of the first respondent-company and it is nobody's case that the
said application contains any misstatement.
(3) The valuation reports forwarded by the first
respondent-company to the Director-General of Shipping indicated that the price
of US $ 16 million was a fair price. This statement was supported by two of the
valuation reports forwarded by the first respondent to the Director-General
with the said application.
(4) In the said application for approval of the
sale of the vessel, several difficulties were pointed out by the first
respondent-company in operating the said vessel and the factual justification
was put forward for making of the business decision by the company to dispose
of the said vessel in the interest of the company with elaborate details.
(5) The first respondent-company was unable to
pay the amount of interest to the foreign bank, i.e., ANZ Singapore Ltd. which
had fallen due in the month of March, 1990. The said bank had advanced a term
loan of US $ 9.6 million to the first respondent-company on guarantee and indemnity
given by Indian bankers. The first respondent-company approached the Indian
Bank to make the said payment and debit the first respondent in this behalf.
(6) By a letter dated 31st December, 1990
(exhibit-8), to the affidavit of Mr. V. Ramanan (Zonal Manager of Indian Bank),
the sixth respondent on behalf of the first respondent approached the Indian
Bank for certain facilities involving financial commitment on the express
representation that the first respondent shall render full co-operation in the
matter of sale of the said vessel. Perhaps the bank is to be paid from the sale
proceeds of the vessel. The vessel has been lying idle for a very long time.
(7) The writing dated 26th January, 1991, was
signed by the sixth respondent. The sixth respondent is a member of the Sawhney
group. It must be presumed that all members of Sawhney group are consenting
parties to each of the arrangements signed by respondent No. 6. Respondents
Nos. 6, 9 and 10 have supported one another at the hearing of this summons and
there is no dispute amongst them.
(8) Agreement dated 2nd March, 1991, is "an
agreement described by the parties as Towcon International Ocean Towage
Agreement" arrived at between the first respondent and Essar International
Limited for further implementation of agreement of sale dated 26th January,
1991, in implementation of agreement dated 21st May, 1990, with variation of
some of the terms not prejudicial to the first respondent-company. The said
agreement was also signed by respondent No. 6 on behalf of respondent No. 1 and
the said agreement is obviously liable to be considered as an agreement in
implementation of the agreement of sale dated 26th January, 1991, duly
authorised by the board resolution dated 5th February, 1991. It follows that
respondent No. 6 did so with the consent, knowledge and authority of all
members of the Sawhney group."
On 27th June,
1990, the board of directors of respondent No. 1, under the chairmanship of Mr.
Prem Sawhney, passed the following resolution:
"Resolved
that the company do sell its vessel Boss Vishwa at a price of US $ 16 million
and Mr. Prem Sawhney and Mr. Gurinder Kahlon, be and are hereby severally
authorised to do all such acts, deeds and things as may be necessary to give
effect to this resolution, including execution of documents of transfer.
Further
resolved that the sale proceeds of US $ 16 million, when received, be
appropriated with the consent of ICICI—the lead financial institution."
In the
meeting of the board of directors dated 28th December, 1990, attended by six
directors including Mr. Prem Sawhney and Mr. Gurinder Kahlon, it is recorded as
under :
"The
Chairman briefed the directors on the discussions at the Management Committee
Meetings on the proposed sale of Boss Vishwa. He informed the directors that
the Management Committee had decided to proceed with the proposed sale,
provided that the company gets a net realization of US $ 16 million. The
Chairman then briefed the directors about the negotiations being carried out
with the buyers. After a discussion, the status was noted by the board. During
the course of discussions, Shri Gurinder Kahlon highlighted the reasons which
had compelled the company to initiate the sale in the first place and
subsequent changes in the circumstances. The Chairman said that the resolution
to sell Boss Vishwa had already been passed and there was no need to pass any
further resolution."
The Sawhney
group is a willing party to this resolution. The resolution was unanimous.
The notice
dated 28th January, 1991 in respect of the board meeting dated 5th February,
1991, reads as under :
"A
meeting of the board of directors will be held at 15.30 hrs. on Tuesday 5th
February, 1991, at the registered office of the company.
The agenda
papers will be sent to you shortly. . . "
The impugned
board resolution dated 5th February, 1991, is not extracted in the judgment as
it is not annexed to the petition or any of the affidavits. Draft minutes of
the meeting dated 5th February, 1991, were made available to the court. It is,
however, an admitted fact that, by a majority of 4 to 3, the sale of the vessel
on varied terms evidenced by writing dated 26th January, 1991, was sanctioned
by the board.
On 13th
March, 1991, the present petition was filed. On 15th March, 1991, the first
respondent, under the signature of the sixth respondent, addressed a letter to
the Indian Bank stating therein as under :
"Ref:
Remittance of interest payment for the period 28th February, 1991, to 7th
March, 1991, and 7th March, 1991, to 14th March, 1991, favouring ANZ Singapore.
We are
pleased to enclose the Permit No. EC : BY : TSP : 563/119 (L2) 90-91 and Permit
No. EC : BY: TSP/564/119(L2) 90-91 dated 15-3-1991, for remittance of US $
13,230 and US $ 13,113.33 respectively towards interest payment to ANZ Singapore
Limited, the above remittance were to be the remitted value dated 7-3-91 and
14-3-91 res.
Kindly remit
the same to their account No. 000471/001 with ANZ Bank, New York, U.S.A., by
debiting our account with your goodselves.
This
overdrawn amount would be met from the sale proceeds of the vessel Boss Vishwa
(emphasis
supplied).
Kindly do the
needful and oblige."
Thus, it
would be clear that, even by this letter, the first respondent induced the bank
to remit the amount of interest payable to ANZ Singapore on the representation
that the overdrawn amount would be met from the sale proceeds of the said
vessel.
I have heard
learned counsel for the parties at some length. I must state that prima facie
there are no equities in favour of the petitioners. Even the maintainability of
the petition is doubtful. I have, however, decided to deal with the contentions
urged on merits and record a prima facie finding on each of the grounds of
challenge urged in the petition. The grounds of challenge not to be found in
the petition but evolved during the course of arguments will have to be
ignored. In a petition under sections 397 and 398 of the Companies Act (1 of
1956), all material facts must
be set out in the petition itself and allegations of fraud, coercion, mala
fides, if any, must be supported by particulars.
Mr. K.S.
Cooper, learned counsel instructed by Arun Sakpal and Co., argued on behalf of
the first respondent-company. Mr. Cooper also made submissions on behalf of
respondent No. 3, a director, nominated by one of the financial institutions
and, in this capacity, he was instructed by Messrs. Amarchand Mangaldas,
solicitors. An objection was raised on behalf of the petitioners and on behalf
of the supporting respondents that Arun Sakpal and Co., did not have the
requisite authority in law to represent the company and had, accordingly, no
authority to brief learned counsel to appear on behalf of the first
respondent-company. This objection will have to be viewed in the context of the
peculiar facts of this case and not too theoretically. The Sawhney group
represents 95 per cent. of the shareholding of the company and is in substance
the petitioner. The substantial challenge in this petition is to the board
resolution dated 5th February, 1991. In the Board meeting dated 5th February,
1991, seven directors were present. Four of the directors who were
representatives of financial institutions, i.e., respondents Nos. 2 to 5,
supported the resolution in connection with the sale of the said vessel in
terms of the said writing dated 26th January, 1991. Respondents Nos. 6, 7 and 8
opposed the said resolution. Respondents Nos. 9 and 10 were not present at the
said meeting for reasons to which reference would be made in the later part of
this judgment, to the extent necessary.
Ordinarily,
in any litigation concerning a company, the advocate for the company must
derive his authority either under a board resolution or under an authorisation
supported by the majority shareholders or at least under a vakalatnama signed
by the principal officer of the company. In pursuance of the consent order
dated 31st July, 1990, passed on the Notice of Motion No. 1556 of 1990, in Suit
No. 1463 of 1990, a managing committee had been constituted to manage the
day-to-day affairs of the company. The said management committee, inter alia,
included a representative of the Indian Bank. Mr. Zaiwala, learned counsel for
the petitioners, has tendered a file containing copies of the relevant minutes
which I have taken on record with the consent of all parties. It appears from
the said file and also from the affidavit filed by Dr. H. S. Wachha that Dr. H.
S. Wachha was nominated as the chairman of the various meetings. When the
concerned board members who are nominees of public financial institutions came
to know about this litigation, some of them decided to engage solicitors on behalf of the first
respondent-company to support the decision which was taken in the board meeting
dated 5th February, 1991. The appearance of Arun Sakpal and Co. is supported by
respondents Nos. 3, 8 and Mr. Ramanan, nominee of the Indian Bank on the
managing committee. Arun Sakpal and Co. have filed appearance on behalf of the
first respondent-company at the instance of these three persons in good faith.
There is some lacuna in the procedure followed. It is for the interested
parties to request the board of directors of the first respondent-company to
pass the necessary resolution and for the board to take its own decision. The
ultimate authority in the matter is the board. For the moment, the contention
urged is kept open for being considered at the final hearing of the petition.
The preliminary contention urged by the petitioners is of no practical
consequence as Mr. Cooper is also briefed by the advocates on record for
respondent No. 3 and there is no lacuna whatsoever in this behalf.
I must state
that I will have to restrict my prima facie enquiry to the grounds set out in
paragraph 12 of the petition and I cannot allow the parties to travel beyond
the petition and reply to the contentions urged in the petition. It has been
submitted that the impugned resolution dated 5th February, 1991, is assailable
by the petitioners as it could not have been passed in the absence of prior
consent of Deepak Fertilisers in view of the clause in the consent terms that
the company shall not enter into any long-term or abnormal contract or
undertake any obligation whatsoever except such as are in the usual, necessary,
ordinary and proper course of its business or enter into any capital
transaction either as tender/purchaser without the prior written consent of the
said party. At the board meeting dated 5th February, 1991, respondent No. 7 had
opposed the said resolution dated 5th February, 1991. At the hearing, Mr. J. B.
Chinai, learned counsel for respondents Nos. 7 and 8, has submitted to the
orders of the court. In other words, respondents Nos. 7 and 8 have no
particular objection or contention if the impugned sale is allowed to go
through. It is not possible to accept the ground of challenge that a
transaction duly concluded between the company represented by its board of
directors preceded by the business decision of its managing committee with a
foreign buyer or any other party and acted upon by the parties should be set
aside at the instance of the Sawhney group for lack of prior written consent of
Deepak Fertilisers thereto. Prior to the consent terms dated 31st July, 1990,
the agreement dated 21st May, 1990, was already arrived at between the first
respondent-company and the said foreign buyer for sale of the said vessel, of
which respondents Nos. 7 and 8 must have been fully aware when they entered into the consent terms. The
Indian Bank and the foreign buyer (original or its nominee) are not parties to
the said consent terms.
Mr. Zaiwala,
learned counsel for the petitioners, has then challenged the impugned
transaction of sale on the ground that the said vessel constitutes the
undertaking of the first respondent-company and it cannot be disposed of
without a general body resolution as required under section 293(1)(a) of the
Companies Act (1 of 1956) (hereinafter referred to as "the Act").
This argument appeared to me to be attractive at first blush. However, after hearing
learned counsel for some time, and after having gone through the authorities
and relevant provisions of the Act with the assistance of learned counsel, I
have come to the prima facie conclusion that section 293(1)(a) of the Act is
not at all attracted to the facts of this case and no interim relief of the
kind sought can be granted at the instance of the Sawhney group which was a
willing consenting party to the transaction till recently. In my opinion, the
contention urged is not even reasonably or fairly arguable. If, however, under
law, the board has no power to sanction the sale of the vessel and it is a
mandate of law that the sanction of the general body must be obtained before
any such transaction is concluded, the petitioners may succeed notwithstanding
the lack of equities on their side.
The
expression "undertaking" has not been defined in the Act. Before I
refer to the dictionary meanings and the authorities cited on the subject, it
is desirable to reproduce the section. Section 293(1)(a) of the Companies Act
(1 of 1956) reads as under:
"293.(1) The board of
directors of a public company, or a private company which is a subsidiary of a
public company, shall not, except with the consent of such public company or
subsidiary in general meeting.—
(a) sell, lease or
otherwise dispose of the whole, or substantially the whole of the undertaking
of the company, or where the company owns more than one undertaking, of the
whole or substantially the whole, of any such undertaking," (emphasis supplied).
Thus,
the Companies Act, 1956, restricts the powers of the board, by the
above-referred provisions, to sell, lease or otherwise dispose of the whole or
substantially the whole of the undertaking of the company.
In my
judgment, the expression "undertaking" used in this section is liable
to be interpreted to mean "the unit", the business as a going
concern, the activity of the company duly integrated with all its components in
the form of assets and not merely some asset of the undertaking. Having regard
to the object of the provision, it can, at the most, embrace within it all the
assets of the business as a unit or practically all such constituents. If the
question arises as to whether the major capital assets of the company
constitute the undertaking of the company while examining the authority of the
board to dispose of the same without the authority of the general body, the
test to be applied would be to see whether the business of the company could be
carried on effectively even after disposal of the assets in question or whether
the mere husk of the undertaking would remain after disposal of the assets? The
test to be applied would be to see whether the capital assets to be disposed of
constitute substantially the bulk of the assets so as to constitute the
integral part of the undertaking itself in the practical sense of the term.
Mr. Cooper,
learned counsel for respondents Nos. 1 and 3, invited my attention to the
judgment of the Mysore High Court in the case of Yallamma Cotton, Woollen and
Silk Mills Co. Ltd., In re [1970] 40 Comp Cas 466. Narayana Pai J., sitting
singly, held in the above-referred case that an "undertaking" was
not, in its real meaning, anything which may be described as a tangible piece
of property like land, machinery or equipment. It was held by the court that an
undertaking within the meaning of the above provisions was an activity which in
commercial or in business parlance meant an activity engaged in with a view to
earn profit. In this case, a dispute arose between the official liquidator of
the company under liquidation and a secured creditor who was the mortgagee in
respect of practically all the assets of the company and the question arose as
to whether the security created was in respect of the "undertaking"
and was liable to be treated as void for want of resolution of the general body
of the company. It was held by the court that section 293(1)(a) of the Act was
not applicable. During the course of the judgment, the learned judge referred
to the meaning of the expression "undertaking" given in Webster's
Dictionary as under (page 484):
"An
undertaking, according to Webster's Dictionary, only means something that is
undertaken or a business, work or project which one engages in or attempts, or
an enterprise."
This judgment
was approved by the Division Bench of the same High Court in International
Cotton Corporation P. Ltd. v. Bank of Maharashtra [1970] 40 Comp Cas 1154.
A somewhat
similar question arose in a different context in the case of R.C. Cooper v.
Union of India [1970] 40 Comp Cas 325 (SC), necessitating discussion of the
meaning of the word "undertaking" as interpreted in judicial
decisions, Indian and English. The Honourable Mr. Justice A. N. Ray in his
dissenting judgment (Note : The judgment is not a dissenting judgment on the
meaning of the word "undertaking") observed at page 415 of his
judgment that the expression "undertaking" meant a "going
concern". The learned judge observed that the undertaking meant the entire
organisation. It was observed by the learned judge, at page 417, that the
undertaking was an amalgam of all ingredients of property and was not capable
of being dismembered. It was further held on this aspect as under:
"In
reality the undertaking is a complete and complex weft and the various types of
business and assets are threads which cannot be taken apart from the
weft."
It appears
that the undertaking means a "unit", a business or a project. Each
factory of a company may be considered as a separate undertaking. In the
above-referred case, the Supreme Court was considering the meaning of the word
"undertaking" as used in the Bank Nationalisation Statute of 1969.
The above-referred observation, though not directly an interpretation of section
293(1)(a) of the Act is of some assistance in finding out the true meaning of
the word "undertaking" used in section 293(1)(a) of the Act. It
appears to me that, for the purpose of section 293(1)(a) of the Act, all the
capital assets of the undertaking taken together would be embraced by the
expression "undertaking" as, otherwise, it would be very easy to
defeat the legislative intention and avoid procurement of the consent of the
general body when the legislative intention is clear that the directors cannot
dispose of the entire or substantially the whole business of the company
without the consent of the general body. If, after disposal of practically all
the capital assets of a company, what remains is only the husk of the assets,
it would be perhaps difficult to take the view that, merely, assets of the
undertaking were disposed of and not the undertaking itself. It is, therefore,
possible to take a view that the board of directors cannot dispose of "all
the capital assets of the company" taken together which will denude the
company of its business or will leave merely the husk left behind. In the
present case, however, the first respondent-company owns three vessels and the
vessel in question was acquired only in June, 1989, and the same is lying idle.
The first respondent-company is carrying on its business with the help of the
other two vessels. The company
itself was a party to the transaction in respect of the disposal of one of its
vessels in the ordinary course of its business for the reasons stated in the
application seeking approval of the Director-General of Shipping signed by its
vice-president. If the company had owned only one vessel and the result of the
sale of the said vessel had been to wind up the company or to wind up the
business of the company in entirety or substantially, different criteria would
have applied. This is a case of a business decision taken by the board of
directors of the company as far back as on 21st May, 1990, in respect of sale
of one of its assets which was lying idle in respect whereof operational
expenses were mounting. The various reasons given by the first respondent
itself in the viability report and in the justification put forward in the
application made to the Director-General of Shipping for approval of the sale of
the vessel cannot be ignored while considering the question as to whether one
of the three vessels by itself, without anything more, can be considered as an
undertaking. It is impossible for me to treat merely one of the assets of the
company as an "undertaking". Several judgments have been cited by Mr.
Zaiwala on behalf of the petitioners as well as by Mr. Cooper on behalf of
respondents Nos. 1 and 3 under the Industrial Disputes Act, 1947, where the
question arose as to how the expression "industrial undertaking" was
to- be interpreted in industrial law. Mr. Zaiwala relied on the judgment of our
High Court in the case of National Union of Commercial Employees v. M.R. Meher,
AIR 1960 Bom 22, and the judgments of the Supreme Court in S.G. Chemicals and
Dyes Trading Employees' Union v. S.G. Chemicals and Dyes Trading Limited.
[1986] 2 SCR 126 and Management of Hindustan Steel Ltd. v. Their Workmen [1973]
3 SCR 303. Mr. Cooper relied on the judgment of the Supreme Court in the case
of Madras Gymkhana Club Employees' Union v. Management of the Madras Gymkhana
Club Employees' Union, AIR 1968 SC 554, 563 (para 26). I am afraid that none of
these judgments can be considered relevant for the purpose of interpreting and
applying section 293(1)(a) of the Companies Act (1 of 1956), which has a
different legislative mission to serve.
Mr. S. D.
Parekh, learned counsel appearing for the Indian Bank, invited my attention to
the judgment of the. High Court of Calcutta in the case of Pramod Kumar Mittal
v. Andhra Steel Corporation Ltd. [1985] 58 Comp Cas 772. In this case, the
court had appointed a committee of management in a petition under sections 397
and 398 of the Act. The committee of management disposed of certain assets,
including plant and machinery, under orders of the court. Some of the
interested shareholders challenged
the said sale. It was held by the honourable Division Bench that the Dankuni
unit of the company had remained closed for a period of five years. The
honourable Division Bench of the Calcutta High Court rejected the application
made to it for setting aside the sale on two grounds, namely, (i) that the
committee of management appointed by the court was not subject to fetters
imposed on the board of directors under section 293(1)(a) of the Act. Accordingly,
reliance on this section by the petitioners before the court was misplaced. I
am in respectful agreement with the view expressed by the High Court of
Calcutta on the interpretation of sections 293(1)(a), 397 and 398 of the Act to
this extent only. Secondly, it was held in this case that section 293(1)(a) did
not apply to the proposed sale of the Dankuni unit of the company as it could
not be considered as an undertaking because of its having remained closed for
more than five years. With great respect to the honourable Division Bench of
the High Court of Calcutta, I am unable to persuade myself to agree with this
part of the enunciation of law. I respectfully differ. In my humble view,
section 293(1)(a) makes no distinction whatsoever between a running undertaking
and a closed undertaking. It is, however, not necessary to pursue this
discussion further as having regard to the facts of this case, even if the
vessel under sale constituted about 50 per cent. of the capital asset of the
first respondent-company acquired in June, 1989 (the company having been
incorporated in November, 1982), it is not possible for me to record even a
prima facie finding to the effect that the transaction amounts to sale of the
undertaking within the meaning of section 293(1)(a) of the Act.
Mr. Aspi
Chinai, learned counsel appearing for respondents Nos. 9 and 10, invited my
attention to the meaning of the word "undertaking" from Words and
Phrases Legally Defined by Butterworths, second edition, pages 240-241. The
relevant extract from the various meanings of the expression
"undertaking" given therein relied on by learned counsel reads as
under :
"Australia—'undertaking'
is a word of variable meaning ... Basically the idea which it conveys is that
of a business or enterprise ... The word 'undertaking', like the word
'business' ... will commonly embrace, when used dispositively, the property or
some property which is used in connection with the undertaking and it may be
too, the debts and liabilities, or some debts and liabilities, which have
arisen in relation thereto." (emphasis supplied)
For the sake
of brevity, I am not extracting all the meanings of the expression
"undertaking" given in the said standard work.
I am in
agreement with the meaning given in the above standard work to the effect that
an undertaking means a business or an enterprise. It is, however, not possible
for me to agree that the word "undertaking" as used in section
293(1)(a) of the Act can mean or embrace within itself even one of the several
capital assets used by the owner in connection with the undertaking. To this
limited extent, I disagree, having regard to the language used in section
293(1)(a) of the Act, its legislative history and its avowed object. At any
rate, the assets in question must be substantially all (if not all) the assets
of the undertaking so as to leave nothing of the business or the running
concern in the business sense of the term after the asset intended to be disposed
of is disposed of. It is impossible to accept the wider proposition that
disposal of a single asset of the company (even a vessel) would mean disposal
of the undertaking itself. If the asset to be disposed of is the sole capital
asset of the company with the help of which the business of the company is run,
the matter may be different. I have no hesitation in rejecting the submission
of the petitioners that the vessel in dispute constitutes the undertaking of
the first respondent-company. It is merely one of several business assets of
the company. It could, therefore, be disposed of by the board of directors and
no general body consent is required.
It is
contended in paragraph 12(c) of the petition that the said sale is liable to be
considered as fraudulent and mala fide as it is at an undervaluation. It is
alleged that the foreign buyer himself had forwarded a valuation certificate
dated 1st October, 1990, (a copy whereof is annexed as exhibit 'G' to the
petition) valuing the vessel at US $ 20-22 million. It is contended that an
important national asset is likely to be lost by the first respondent-company
and the impugned sale is not for the benefit of the company and not in the
ordinary course of the business of the company, but with a view to oblige the
bank and the financial institutions. The entire superstructure of the
allegation appearing in paragraph 12(c) of the petition is made on the footing
that the court ought to accept the valuation report dated 1st October, 1990, as
the correct report. The first respondent-company acquired the vessel in
question for US $ 12 million. The agreement dated 21st May, 1990, was
ultimately crystallised for the price of US $ 16 million. Along with the
application for approval made to the Director-General of Shipping, two
valuation reports forwarded by the company valued the vessel at US $ 15.50 and
US $ 15 millions respectively.
The Director-General of Shipping granted his approval for disposal of the
vessel at the price of US $ 16 million. As far as the report dated 1st October,
1990, is concerned, I must refer to the affidavit of Mr. Peter Plint,-Solicitor
of London, who has filed the said affidavit on behalf of the foreign buyer. It
appears from the contents of the said affidavit that, by letter dated 14th
March, 1991, Mr. Jon Skabo of Jan Sundt A/S has clarified that the 1st October
valuation was given on the basis of the vessel being in a fully operable
condition, having satisfied all classification society and Lloyds Register
requirements. It is stated in the said affidavit that in her present condition
on "as is where is" basis at Bombay, the vessel is liable to be
valued at a price between US $ 15.5— US $ 16.5 million. Under the terms of the
agreement dated 21st May, 1990 the
first respondent-company had agreed to deliver the said ship at Singapore. Now
the sale is on "as is where is" basis and on somewhat different terms
beneficial to the first respondent-company. I have gone through the minutes of
the management committee of the first respondent-company with the help of
learned counsel appearing for the parties. It was the view of the sixth and
ninth respondents themselves that the vessel should fetch at least US $ 16
million net. It appears that there were prolonged negotiations on 24th, 25th
and 26th January, 1991. The writing dated 26th January, 1991, is signed by the
sixth respondent. I put a pointed question to learned counsel for the
petitioners who, in substance, represent the Sawhney group comprising 95 per
cent. shareholders of the first respondent-company as to whether any offer for
a higher price was available. Learned counsel was candid enough to inform the
court that no higher offer was available. Even the agreement dated 26th
January, 1991 is signed by all the three members of the management committee
including respondent No. 6 who represents the Sawhney group. The said agreement
is even partly implemented by signing of a further agreement dated 2nd March,
1991, with Essar International to which I have made a reference. Accordingly, I
have no hesitation in recording a prima facie finding that no case of
undervaluation is made out. After having been a willing and consenting party to
the transaction, the petitioners or members of the Sawhney group cannot be
allowed to approbate and reprobate at least at an interlocutory stage-where
equitable considerations alone must predominantly prevail in the absence of a
statutory prohibition. It is true that Mr. Ramanan is the representative of the
Indian Bank on the managing committee. It is true that respondents Nos. 2 to 5
represent various financial institutions. It is not possible for me to hold
that they have not acted reasonably or fairly or that they have acted
fraudulently or mala fide or that they have committed breach of any fiduciary
duty. There is no material on record to justify the allegation made.
Mr. Aspi
Chinai, learned counsel for respondents Nos. 9 and 10, was right in propounding
a proposition of law that the directors must look after the interest of the
company and even if they are nominee directors of a company, they cannot
sacrifice the interest of the company. Mr. Aspi Chinai relied on a judgment of
the Privy Council in the case of EBM Co. Ltd. v. Dominion Bank [1937] 7 Comp
Cas 448. This principle has no applicability to the facts of this case as no
such blameworthy conduct on the part of respondents Nos. 2 to 5 or on the part
of the Indian Bank or its nominee is proved to the satisfaction of the court at
this prima facie stage.
At one of the
managing committee meetings, respondent No. 6 was not present. Two of the
representatives postponed the consideration of the item of sale of the vessel
so that the matter could be fully discussed. There were prolonged negotiations
with the buyers and there was hard bargaining and various terms have been evolved
for the benefit of the company. As against that, the company has been writing
letter after letter to the bank to release more and more funds for the
discharge of its various liabilities on the representation that some of these
liabilities will be discharged out of the sale proceeds of the vessel. In this
state of affairs, can the court hold that the financial institutions or the
bank are guilty of mala fides or fraud even if indirectly their interests also
are safeguarded in the sense that out of the sale proceeds of the vessel some
of the liabilities of the company are likely to get discharged ? If the sale is
with the full consent or with the full deliberations of the Sawhney group and
at a fair price, no blame can be attached to the conduct of respondents Nos. 2
to 5 or the Indian Bank. It cannot be forgotten that there is a third party
buyer in the picture who is a bona fide third party for value without notice.
Mr. Zaiwala, learned counsel for the petitioners, submitted that the buyer was
not as innocent as it looked. Whatever it may be, I am not shown any reliable
cogent material on the basis of which I can record a finding that the buyer's
conduct is blameworthy so as to warrant the grant of an injunction. If the
statistics are to be compiled regarding the expenditure on reconditioning of
the vessel already incurred, operational loss already suffered and expenses
already incurred on the vessel, even though the income therefrom is nil, it
would become clear that any prudent board would have or at least could have
come to the same conclusion.
It has then
been contended by Mr. Zaiwala, learned counsel appearing on behalf of the
petitioners, that the board resolution dated 5th February, 1991, itself is
illegal as the notice was inadequate and no agenda papers were forwarded to the
directors although it was stated in the notice of the board meeting issued on
28th January, 1991, that the agenda will follow. It was a stipulation of the
writing dated 26th January, 1991, arrived at between the foreign buyer and the
management committee, inter alia, consisting of respondent No. 6 representing
the Sawhney group that the board resolution of both sides, namely, the
seller-company and the buyer-company, must be made available by 5th February,
1991, and that the entire arrangement was made subject to the said condition.
Respondent No. 6 used to keep respondents Nos. 9 and 10 duly informed of the
steps taken in relation to the sale of the said vessel as he was a nominee of
the Sawhney group on the board and on the management committee without holding
any share of the company. It is not the case of respondent No. 9 or respondent
No. 10 that they were not made aware of the developments regarding the
renegotiation and finalisation of the agreement dated 26th January, 1991, subject
to the sanction of the board by 5th February, 1991. In the circumstances, the
notice of the meeting had necessarily to be a short notice. Respondent No. 10
received the notice of the board meeting within two or three days of 28th
January, 1991. At the material time, respondent No. 10 was at Delhi. Respondent
No. 10 ought to have attended the board meeting which was scheduled to be held
on 5th February, 1991. Respondent No. 10 could have sent a letter or a telegram
expressing his view. Respondent No. 9 was undoubtedly at London. Respondent No.
9 left India for London presumably with a view to negotiate with the new
financier and with full knowledge of the meeting. In this context, the
directors must have known even in the absence of the agenda that the meeting of
the board was convened in an endeavour to comply with the stipulation of the
writing/agreement dated 26th January, 1991, to the effect that it was made
subject to board resolution. On this aspect, Mr. Cooper, learned counsel for
respondents Nos. 1 and 3, has invited my attention to section 286 of the Act,
which provides that no notice need be served on a director who is abroad.
Having regard to the totality of the facts and after taking an overall view of
the matter, I am prima facie satisfied that the decision taken by the majority
of the directors at the said board meeting was a bona fide business decision in
the interest of the company. The view taken by the majority of the directors
was at least one of the two reasonably possible views. Respondent No. 6
representing the Sawhney group supported the transaction evidenced by the writing/agreement dated 26th
January, 1991, and in various meetings of the managing committee. Respondent
No. 6 adopted an inconsistent stand in the board meeting dated 5th February,
1991 by opposing the resolution. Respondent No. 6 represents the Sawhney group
and, therefore, the entire Sawhney group, in substance, adopted the impugned
transaction on 2nd March, 1991, by taking further steps in the implementation
of the transaction of sale. The petitioners and members of the Sawhney group
are blowing hot and cold at the same time and adopting inconsistent stands. The
petitioners and supporting respondents, are, therefore, guilty of gross
improprieties.
It has been
argued on behalf of the petitioners and the supporting respondents that the
notice of the board meeting could not be considered as a valid notice as no
agenda was forwarded even though it was stated in the notice that the agenda
shall follow. On this aspect, there was a debate at the Bar. Mr. Zaiwala,
learned counsel for the petitioners, relied upon the judgment of Mathew J., in
the case of Parmeshwari Prasad Gupta v. Union of India [1974] 44 Comp Cas 1
(SC). In this case, it was held by the Supreme Court that the resolution passed
at the board meeting could not be considered as valid if no notice was given to
the directors of the company. In this case, the Hon'ble Supreme Court approved
the statement of law formulated in Halsbury's Laws of England, volume 9, page 46,
wherein it was stated that the notice of the meeting and of the business to be
transacted should be given to all persons entitled to participate and that if a
member whom it was reasonably possible to summon was not summoned, the meeting
will not be duly convened, even though the omission was accidental or was due
to the fact that the member had informed the officer whose duty it was to serve
the notice that he need not serve a notice on him. In the present case, notice
of the meeting has been given to all the directors. Having regard to the
circumstances of the case and the contents of the agreement dated 26th January,
1991, which was arrived at, perhaps, with some difficulty and after prolonged
negotiations, the notice had necessarily to be a short notice. Mr. Cooper cited
judgments of several High Courts holding that the board resolution could not be
assailed merely because the notice did not contain a copy of the agenda. There
is some lacuna in the procedure followed in this case as the agenda was not forwarded.
The alleged defect/lacuna is not fatal. The directors knew or are presumed to
have known that the meeting was called to seek approval of the board to the
transaction of sale as some of the terms of the agreement dated 21st May, 1990,
were now varied. The above-referred judgment of the Supreme Court dealt with a
situation where no notice was
served on a director entitled to receive the notice. It is to be presumed in
the normal course of human affairs under section 114 of the Evidence Act that
respondent No. 6 had kept the directors informed of the negotiations and the
writing executed by all the members of the management committee including
respondent No. 6 on 26th January, 1991. In any event, the alleged defect is
curable and the Sawhney group has adopted the transaction by its subsequent
conduct by executing the agreement dated 2nd March, 1991, through respondent
No. 6, an important step towards implementation of the impugned transaction. In
my judgment, in view of the subsequent conduct of the petitioners in acting
upon the said transaction by entering into the agreement dated 2nd March, 1991,
and by asking the Indian Bank to advance further amounts on the representation
that the liabilities of the first respondent towards the bank will be paid out
of the sale proceeds of the vessel, it is not possible to grant any equitable
relief to the petitioners alone on this ground. Respondent No. 1, the
petitioners and the supporting respodents are estopped from impugning the
transaction or obstructing its implementation except on the ground of a
statutory prohibition or a pure legal contention based on section 293(1)(a) of
the Act. I have already held that prima facie the said section has no
application to the sale of one of the unused and unoperated vessels and the
impugned sale cannot be regarded as the sale of an "undertaking".
Even during the pendency of the petition, respondent No. 6 who is the
representative of the Sawhney group on the board and holds no shares has
further supported the transaction of sale in the correspondence, i.e., by
addressing letter dated 15th March, 1991, to the Indian Bank. It is alleged by
respondent No. 6 in his affidavit that he was coerced to sign the letter dated
31st December, 1990. I am not at all impressed by the allegation of coercion,
the said allegation is not bona fide but is only an afterthought. If respondent
No. 6 was coerced to sign the letter dated 31st December, 1990, who coerced him
to sign the letter dated 15th March, 1991, or the writing dated 26th January, 1991,
or the agreement dated 2nd March, 1991? No answer is. forthcoming. Learned
counsel for the petitioners and supporting respondents have been able to raise
some contention with an air of so-called plausibility, but, on consideration of
all the material in the proper perspective and taking an equitable view of the
matter and considering the justice of the case, I have come to the conclusion
that it is not a fit case for grant of any injunction in favour of the
petitioners. It is too late to stop the sale. In my judgment, it will be unfair
and unjust to do so.
Mr. Zaiwala,
learned counsel for the petitioners, submitted that a third party foreign
financier was willing to provide a bank guarantee to the Indian Bank and
provide funds for restructuring of the first respondent-company. I am not
concerned in this summons with this aspect. The sale of the vessel arrived at
fairly and with the consent of the Sawhney group, financial institutions,
Indian Bank, etc., cannot be stopped on a mere expectation of restructuring of
the company and additional finance becoming available to the first respondent
sometime in future. The fact remains that if interim relief is granted and,
subsequently, the petition is dismissed, it would be impossible for respondent
No. 1 to compensate the respondents who will suffer irreparable loss by grant
of such injunction. The transaction which is being implemented is the very same
transaction with variation of some of the terms beneficial to the first
respondent-company, to which the Sawhney group was a party. In my judgment,
there is no justification for seeking an injunction to stop the sale. Mr.
Parekh, learned counsel for the Indian Bank, who has opposed this judge's
summons urged in the alternative that, in case per chance any interim relief is
to be granled to the petitioners, the petitioners must be put on terms. It is
not necessary to deal with this contention as the petitioners have not made out
any prima facie case whatsoever. The hearing of the petition is expedited.
Liberty to the parties to apply for a fixed date of hearing after pleadings are
completed and the matter is ripe for hearing.
Mr. S. D.
Parekh, learned counsel for Indian Bank, has tendered a statement showing that
the variation in the terms of the agreement dated 21st May, 1990, arrived at
between the parties on 26th January, 1991, is for the benefit of respondent No.
1. The said statement reads as under :
Particulars of differences between memorandum of agreement
dated 21st May, 1990, and mobilisation agreement dated 26th January, 1991
|
|
Item |
MDA dated 21st May, 1990 |
Mobilisation agreement dated
26th January, 1991 |
|
1. |
Delivery |
Singapore |
Bombay |
|
|
|
6/46 |
1/51 |
|
2. |
Payment |
Upon delivery at Singapore |
Upon passing Indian territorial water |
|
|
|
3/45 |
2/51 |
|
3. |
Price |
US $ 16 million |
US $ 16 million |
|
|
|
(Addendum No. 2) |
2/51 |
|
4. |
Expenses for classification |
Seller to pay unlimited liability |
As is where is |
|
|
|
6/46 |
1/51 |
|
5. |
Expenses to and from dry dock |
Seller to pay unlimited liability |
As is where is |
|
|
|
6/46 |
1/51 |
|
6. |
If rudder, etc., found to be broken |
Seller to pay unlimited liability |
As is where is |
|
|
|
6/46 |
1/51 |
|
7. |
Classification certificate |
To be delivered with present certificate |
As is where is |
|
|
|
11/47 |
1/51 |
|
8. |
Under-water parts |
Inspection at Singapore Defects to be made good. by seller. Liability
of seller is unlimited 6/46 |
Limited to US $100,000 to be paid by seller 6/53 |
|
9. |
Expenses of taking rig from Bombay to Singapore |
Seller to deliver at Singapore and meet transport expenses |
(1) USD
250,000 buyer to pay |
|
|
|
|
(2) Between
USD250,000 l/3rd buyer to pay, subject to maximum of150,000 |
|
|
|
|
(3) Seller
to bear 2/3rd of expenses up to USD8,00,000 |
|
|
|
|
(4) Above
USD 800,000 buyers to pay5/53 |
Prima facie,
learned counsel for the bank, appears to be right in his contention.
Mr. Aspi
Chinai, learned counsel for respondents Nos. 9 and 10, has invited my attention
to letter dated 31st December, 1990 (exhibit 8 to the affidavit dated 14th
March, 1991, by Mr. V. Ramanan), and contended that respondent No. 1 suffered
at all material times from economic duress caused by the Indian Bank. Mr.
Chinai has submitted that respondent No. 1 had no choice but to agree to the
sale of the vessel as desired by the Indian Bank as, but for the consent of the
first respondent-company to sell the vessel, the Indian Bank would not have
extended the Bid Bond already issued in favour of the ONGC and the first
respondent would have suffered the risk of losing the multi-crore contract
awarded by the ONGC to the
vessel Boss Prithvi. No such allegation of duress is to be found in the
petition. I must, therefore, refuse to examine this ground of challenge. In any
event, there is no merit in the contention of learned counsel. Banks and other
financial institutions are expected to take bona fide business decisions to
safeguard the recovery and/or not to incur further financial commitments except
on terms.
In paragraph
7 of his affidavit, Mr. V. Ramanan, Zonal Manager of the Indian Bank, has set
out that the following amounts were outstanding by the first respondent to the
bank on the date of filing of the said affidavit:
(a) Rs.
3.15 crores overdraft account.
(b) Rs.
2.65 crores advance bill facility.
(c) Rs. 1.87 crores paid to ANZ
Singapore Ltd. in respect of interest payable by the first respondent-company.
In relation to the very same vessel, the ANZ Singapore Ltd. had granted foreign
currency loan of US $ 9.6 million against guarantee and indemnity of the bank.
(d) US
$ 9.6 million amount of guarantee.
(e) Rs. 27 lakhs outstanding liability
in respect of certain guarantees executed by the bank.
(f) An aggregate outstanding of Rs.
7.67 crores which had already become due and payable coupled with liability in
relation to loan of US $ 9.6 million by the foreign bank as aforesaid, etc.,
(g) Rs.
14 crores to financial institutions.
In
paragraph 7(1) of the said affidavit, Mr. Ramanan has referred to the
"Towcon" agreement dated 2nd March, 1991, and the further steps taken
in that behalf. It appears that the bank has paid a sum of Rs. 9.8 lakhs to
Essar International Limited at the instance of respondent No. 1 and lots of
amounts are spent on repairing and reconditioning the vessel in order to make
it ready to sail.
In paragraph
9 of his affidavit dated 14th March, 1991, Mr. Ramanan has set out facts and
data to show that the first respondent-company and all concerned thought it fit
to go ahead with the sale of the said vessel bona fide. Some of the submissions
made in the said paragraph of the affidavit are as under:
(a) The first respondent could not
obtain the contemplated contract from the ONGC and the business purpose for
which the vessel was acquired stood frustrated.
(b) The company was required to spend
large amounts for keeping the said vessel in hot stacked condition.
(c) A sum of Rs. 27.64 lakhs was spent
merely on repairs and to bring the vessel to the condition where it could be
towed. About 5 million US dollars will have to be spent before the vessel could
be put to commercial use.
Prima facie,
the decision to sell the vessel was made by respondent No. 1 with the consent
of the mortgagee in good faith and the interest of the company and the
allegations of alleged fraud or mala fides are not established.
Mr. Zaiwala,
learned counsel for the petitioner, has contended that the agreement dated 21st
May, 1990, was terminated and the agreement dated 26th January, 1991, must be
viewed as a totally new agreement. Mr. Zaiwala has invited my attention to
certain correspondence between the parties in support of his contention. In my
judgment, it is not necessary to probe into this controversy and I must proceed
on the footing that the writing/agreement dated 26th January, 1991, and its
contents are prima facie binding on the first respondent-company. Prima facie
the same are also binding on the Sawhney group as the said writing/agreement is
signed by each of the members of the management committee, including respondent
No. 6. Prima facie, I am not prepared to view the said agreement dated 26th
January, 1991, as a totally new transaction independently of the transaction
dated 21st May, 1990.
In the
result, the judge's summons is dismissed with costs as there is neither justice
nor any legal merit in the case of the petitioners. Costs to be paid by the
petitioners to the contesting respondents in different sets, each set Rs.
3,000.
At this
stage, Mr. Zaiwala, learned counsel for the petitioners, makes an oral
application for passing of an order to the effect that Novel Shipping Inc.
(respondent No. 12), the ultimate foreign buyer of the vessel, should be
restrained from entering into any transaction of sale of the said vessel with
any third party after the sale in favour of the said foreign buyer by the first
respondent-company is completed in terms of the writing dated 26th January,
1991, or encumber the same without obtaining prior leave of the court in order
to ensure compliance with the ultimate order of the court in case the
petitioners succeed in the petition. Learned counsel for the petitioners also
applies for a direction to the said foreign buyer to the effect that the said
foreign buyer must undertake to bring the vessel back to Bombay in case the petitioners succeed and that there
should be no change in respect of flag and registration of the said vessel in
the meanwhile. Learned counsel for the petitioners emphasises the fact that the
original transaction evidenced by the agreement dated 21st May, 1990, was in
favour of the party named under the contract with a provision that the
transaction should be completed in favour of the named buyer or its nominee and
the nominee keeps on changing. Mr. Kapadia, learned counsel for respondent No.
12, opposes this application and contends that no interim relief should be
granted in this matter as respondent No. 12 is a bona fide third party and it
cannot be placed under a restraint order in view of my findings.
Having regard
to my strong prima facie findings recorded in the earlier part of this
judgment, it is not possible for me to grant an injunction against respondent
No. 12. The application is, accordingly, rejected.
The
petitioners are, however, entitled to some protection for a short time in order
to enable them to approach the Hon'ble Appellate Court, if they so desire.
Since 15th March, 1991, there has been no order of injunction restraining the
completion of the sale and there will be none even now. By its orders dated
15th March, 1991, this court vacated ad interim orders dated 13th March, 1991.
By its order dated 18th March 1991, this court refused to extend the ad interim
relief granted earlier on 13th March, 1991. Novel Shipping Inc., respondent No.
12, are restrained from entering into any transaction of sale of the said
vessel Boss Vishwa with any third party or encumber the same without obtaining
prior leave of the court. The sale of the said vessel in favour of respondent
No. 12 may be completed in terms of the writing/agreement dated 26th January,
1991. This order shall be operative up to 12th April, 5 p.m. In case the
petitioners or the supporting respondents file any appeal, the petitioners and
the supporting respondents shall give 48 hours' notice to the learned advocates
for the contesting respondents.
Mr. Kapadia,
learned counsel for respondent No. 12, invited me to impose a condition on the
petitioners and the supporting respondents to the effect that the petitioners
and the supporting respondents must co-operate with respondent No. 12 in the
matter of sailing of the vessel and completion of the sale. It is reasonably
expected that the petitioners and the supporting respondents shall not obstruct
the sale or sailing of the vessel unless the sale itself is stayed by an order
of the Hon'ble Appellate Court. No direction in this behalf appears to be
necessary or feasible.
Mr. Kapadia,
learned counsel for respondent No. 12, makes an application for a direction to
the effect that respondent No. 12 should be allowed to create an encumbrance in
favour of its bankers, NMB Postrank group, N. V. Rotterdam. Respondent No. 12
cannot be permited to create such an encumbrance unless the bank is willing to
give a suitable undertaking to abide by the ultimate orders of this court or of
the appeal court or is put on some terms whatever deemed fit keeping in mind
the objective of providing an opportunity to the petitioners and the supporting
respondents to test this order in appeal, if so desired. Liberty to respondent
No. 12 to make the necessary application in this behalf for permission of the
court to create the said encumbrance on affidavit without taking out a judge's
summons, after 24 hours' notice to the petitioners.
On Mr.
Zaiwala's application, Judge's Summons No. 88 of 1991 is adjourned for two
weeks.
[1960] 30 COMP. CAS. 367 (
Hindusthan
Commercial Bank Ltd.
v.
LAHIRI AND BACHAWAT, JJ.
A.O.O.NOS. 129 AND 130 OF 1958
AUGUST 11, 1959
BACHAWAT, J. - The
appeal No. 129 of 1958 is from an order sanctioning a scheme of arrangement
under section 391 of the (Indian) Companies Act, 1956. The appeal No. 130 of
1958 is from an order confirming reduction of capital. Both these orders were
passed by BOSE J. The two appeals have been heard together. This judgment is
intended to cover both the appeals.
The
respondent company is a public company limited by shares. It was incorporated
in 1945 under the Indian Companies Act, 1913. The appellant holds 2,000
preference shares in the share capital of the company. The authorised share
capital of the company is Rs. 50,00,000 divided into 3,75,000 ordinary shares
of Rs. 10 each, 10,000 5 per cent. cumulative participating preference shares
of Rs. 100 each, 50,000 deferred shares of Rs. 5 each. The memorandum of the
company states that shares have the rights, privileges and conditions attached
thereto as are provided by the regulations of the company for the time being
with power to increase and reduce capital of the company and to attach thereto
respectively such preferential, deferred, qualified or special rights or
privileges or conditions as may be determined by or increased under the
regulations of the company and to vary modify or abrogate any such rights,
privileges and conditions in such manner as may for the time being be provided
by the regulations of the company. Article 74 authorises the company to reduce
its capital by special resolution subject to confirmation by the court. Article
8 contains a statement of the rights and privileges of the several classes of
shares. The article is expressly subject to what is thereafter provided in
other articles of the company. BY article 8 the preferential shares have the
right to a fixed cumulative preferential dividend of five per cent. per annum
(income-tax free) on the capital for the time being paid up on the shares and
to extra non-cumulative dividend in certain contingencies, the total dividend
in any year not to exceed 7 per cent. In winding up all the preferential shares
are to rank in priority both as regards the return of capital and the payment
of arrears of the 5 per cent. preferential dividend. The total paid up capital
of the company is Rs. 29,20,300. The paid up capital consists of 1,89,985 ordinary
shares of Rs. 10 each, 8,452 preference shares of Rs. 100 each and 35,050
deferred shares of Rs. 5 each all fully paid up. The main business of the
company is the manufacture of radios and radiograms and household electrical
accessories. The company had always the benefit of technical collaboration with
well-known foreign firms of repute. The company was, however, never able to
declare dividends. The 5 per cent. preferential cumulative dividend on the
preference shares was not paid for 12 years since 1945 up to 1957. The company
sustained heavy losses. The total loss up to the 31st July, 1956, amounts to
Rs. 36,00,000. In May, 1956, the company entered into an arrangement of
technical collaboration with Messrs. Simplex Electric CO. Ltd., a well-known company
of electrical equipment manufactures of Birmingham. This arrangement was
approved of by the Government of India. For the purpose of maintaining and
increasing its production further finance is necessary and for that purpose a
presentable balance-sheet is essential. For the present Messrs. Simplex
Electric Co. Ltd. has agreed to the arrangement only on a royalty basis. If the
financial condition of the company improves, they will also partake in the
capital of the company. The company had to incur various loans. A sum of Rs.
10,80,000 is due to the Industrial Finance Corporation of India on account of
loans advanced by the Corporation. The loans from Messrs. Karamchand Bros.
Private Ltd., the managing agents of the company, stands at over Rs. 75,00,000.
The total dues of the sundry creditors amount to Rs. 5,36,286.
In
these circumstances, in January, 1957, the board of directors of the company
proposed a scheme of arrangement between the several classes of shareholders
and as part of the scheme a reduction of the capital of the company. The
proposal for the scheme of arrangement was accompanied by an explanatory
circular. The scheme, as originally proposed, provided for (a) cancellation of
share capital in accordance with the arrangement detailed in the circular (b)
for reduction of the share capital by cancellation of the paid up capital to
the extent of Rs. 70 for every preference share of Rs. 100 each, to the extent
of Rs. 8 for every ordinary share of Rs. 10 each and to the extent of Rs. 4
each for every deferred share of Rs. 5 each (c) for consolidation of the shares
and for issue of fully paid up ordinary shares of Rs. 10 each in lieu of
preference, ordinary and deferred shares and for allotment of 3 fully paid up
ordinary shares of Rs. 10 each in lieu of one preference share of Rs. 100 each
including the arrears of dividend thereon (d) for reduction of the authorised
capital of the company to Rs. 37,50,000 ordinary shares of Rs. 10 each (e) for
further issue of 2,83,142 ordinary shares of Rs. 10 each subject to the
sanction of the Controller of Capital Issues out of which 1,20,000 ordinary
shares are to be allotted to the managing agents or their nominees in part
satisfaction of their dues from the company to the extent of rupees 12 lakhs,
66,858 ordinary shares are to be offered to the existing shareholders of the
company and the remaining 96,284 ordinary shares are to be disposed of by the
directors in such manner as they deem fit. The explanatory circular pointed out
that by the proposed cancellation of capital a sum of Rs. 22,51,720 would
become available for wiping out the debit balance in the profit and loss
account and that on making such adjustment a sum of Rs. 13,48,280 would remain
to the debit of the profit and loss account. The circular states that the
managing agents had subject to the acceptance of the scheme, agreed to forego
Rs. 13 lakhs out of their advance to the company and to convert Rs. 12 lakhs
out of the balance of the advance into ordinary shares of the company. The
circular added that the managing agents had not charged any interest on their
advance since August, 1951, and had thereby in leiu of one preference share of
Rs. 100 each including the arrears of dividend thereon (d) for reduction of the
authorized capital of the company to Rs. 37,50,000 dividend into 37,50,000
ordinary shares of Rs. 10 each foregone interest amounting to over Rs. 10 1/2
lakhs and had also foregone their monthly allowance amounting to Rs. 3,75,000.
As
the scheme of arrangement involved reduction of capital the directors convened
separate class meetings of the preference, ordinary and deferred shareholders
for passing special resolutions for reduction of capital and also an
extraordinary general meeting of the three classes of shareholders for approving
the scheme of arrangement. Special resolutions for the reduction of capital
were unanimously passed by the three classes of shareholders at their separate
class meetings held on the 14th February, 1957. The scheme of arrangement as a
whole including the reduction of capital was also approved at the extraordinary
general meeting of the preference, ordinary and deferred shareholders held on
the same day. At the extraordinary general meeting the scheme was opposed by
the appellants, S.S. Pure who held 2,000 preference shares and by one Mohammed
Abdulla who held 100 preference shares. The other shareholders present at the
meeting approved of the scheme.
On
the 12th of September, 1957, the appellant instituted in this court a suit for
declaration that the resolutions passed on the 14th February, 1957, were ultra
vires and illegal and not binding upon the company and for consequential
injunction. We are informed that the suit is still pending. Mr. Mitra did not
contend that the pendency of the suit is a relevant matter to be taken into
consideration by the court in these appeals. On or about the 25th September,
1957, the company presented to this court two separate petitions for reduction
of capital and for sanctioning the scheme of arrangement. The two petitions were
admitted by MALLICK J., who gave the necessary directions for the convening of
the class meetings of the three classes of shareholders for approval of the
scheme of arrangement. Pursuant to that order three separate class meetings
were convened and held on the 11th of December, 1957. The proposed scheme of
arrangement with certain important modifications was approved by all the three
separate meetings. The class meetings of ordinary and deferred shareholders
unanimously approved of the modified scheme of arrangement. The meeting of the
preference shareholders was attended by shareholders holding shares of the
value of Rs. 6,42,700. Shareholders holding shares of the value of Rs. 4,42,700
voted in favour of the resolution approving the modified scheme. No one voted
against the resolution. The appellant holding preference shares of the value of
Rs. 2 lakhs was represented at the meeting by one V.G. Pai. The chairman
enquired of V.G. Pai whether he was voting against the resolution and, if so,
to raise his hands against it. V.G. Pai did not vote and informed the chairman
and the meeting that he was neutral and that he would not vote either for or
against the resolution, the chairman thereupon declared the resolution for
approval of the modified scheme to be carried unanimously by the persons
present and voting at the meeting. Subsequently by letter and in the affidavits
filed on its behalf the appellant attempted to contend that the minutes of the
meeting did not accurately represent what transpired there and that V.G. Pai
really intended to oppose the resolution. This contention was apparently not
pressed before BOSE J. Before us Mr. Mitra expressly abandoned this contention.
Before BOSE J., it was argued that the modified scheme was not approved by the
requisite majority of preference shareholders. This contention was rejected by
BOSE J. There is no substance in this contention. The records show clearly that
the majority in number representing 3/4 ths in value of preference shareholders
present and voting at the meeting of preference shareholders approved of the
modified scheme. Before us Mr. Mitra expressly conceded that the modified
scheme was approved by the requisite majority of preference shareholders and
other classes of shareholders in accordance with section 391 of the (Indian)
Companies Act, 1956.
The
scheme which was approved at the separate class meetings was the scheme as
originally proposed subject to certain important variations proposed and
carried out at those meetings. In lieu of the original proposal to cancel the
preference shares and to allot ordinary shares in lieu of the preference shares
the amended scheme provides for reorganisation and sub-division of the reduced
preference shares of Rs. 30 each into preference shares of Rs. 10 and for allotment
of 3 preference shares of Rs. 10 each in lieu of the reduced preference shares
of Rs. 30 each including arrears of dividend on the preference shares. The
modified scheme attaches to the reorganised preference shares of Rs. 10 each
the right to payment of a fixed cumulative preferential dividend at 7 per cent.
per annum and for certain extra divided not exceeding in any year 5 percent
perannum. The modified scheme also provides for sub-division and reorganisation
of the deferred shares in lieu of their cancellation as provided in the
original scheme.
The
two applications were heard and disposed of by BOSE J., by two separate
judgments and orders on the 13th of June, 1958. He allowed both applications.
By one order he sanctioned the modified scheme of arrangement subject to the
conditions that (a) within three months from the date of his order the managing
agents of the company would pay off the claims of the unpaid sundry creditors
of the company, (b) within one month from the date of the order the managing
agents would acknowledge in writing that they forego Rs. 13 lakhs of their
claim against the company, and (c) if the company does not or is unable to pay
any dividend to the shareholders by December 31, 1951, this fact may be brought
to the notice of the court and the court would be at liberty to give directions
for changing the management of the company if it thinks fit to do so and to
take such other steps as it appears to the court to be proper. By a separate
order he confirmed the proposed reduction of capital. These two appeals have
been preferred from those orders. Pending the appeals the operations of the
order of BOSE J. sanctioning the scheme of arrangement was stayed.
It
is to be observed that the reduction of capital is an integral part of the
scheme of arrangement. The scheme of arrangement being expressly conditional on
the confirmation of the reduction of capital by the court the scheme will not
be sanctioned if the reduction of capital is not confirmed. On the other hand,
if the court for some reason refuses to sanction the scheme of arrangement, in
the circumstances of the case, it will not be fair and equitable to confirm the
reduction of capital alone.
Many
of the matters which arise for consideration in the two appeals are common to
them. In this judgment I will firstly deal with the contentions which are
peculiar to one or the other appeal and will thereafter deal with contentions
which are common to both of them.
Appeal
No. 130 of 1958 is from the order confirming the reduction of capital. The
share capital is sought to be reduced by cancelling the paid up share capital
which has been lost and is unrepresented by available assets. Mr. Mitra
contended that the company had no power to reduce any share capital which is
already lost. He relied on the decision of JESSEL M.R. in In re Ebbw Vale
Steel, Iron and Coal Co. {(1876) 4 Ch. D. 827}, in which JESSEL M.R. held that
under section 9 of the English Companies Act, 1867, he had no jurisdiction to
sanction the reduction of the paid up share capital which had been partially
lost. He relied upon the following observation of JESSEL M.R. at page 831 :
"You do not `reduce' capital which has been already paid up and
exhausted." It is curious that such an eminent Master of Law as the late
Master of the Rolls came to a conclusion which certainly did not represent the
state of the law even at the time when that decision was given. This point is
brought out clearly by LORD MACNAGHTEN in British and American Trustee and
Finance Corporation Ltd. v. Couper {[1894] A.C. 399, 412}. The court had then
and has now power to confirm a reduction of capital by cancellation of lost
capital. The point is made clear by section 100 of the (Indian) Companies Act,
1956, which provides that subject to confirmation by the court, a company
limited by shares may, if so authorised by its articles by special resolution,
reduce its share capital in any way: and in particular and without prejudice to
the generality of this power, the company may cancel any paid up share capital
which is lost or is unrepresented by available assets.
Mr.
Mitra argued that where the whole of the paid up share capital has been lost,
part of it cannot be cancelled. There is no substance in this contention. The
company may reduce its share capital in any way. It may cancel any paid up
share capital which is lost. It may cancel a part of the lost share capital.
Where the whole of the capital is lost the company may cancel any part of it.
The section does not place any fetter on the power of the company as is
suggested by Mr. Mitra. In appeal No. 130 of 1958,, Mr. Mitra further argued
that the ,loss of capital has not been proved. In agreement with BOSE J., I am
of the opinion that the loss of capital has been sufficiently proved. There is
cogent evidence of the loss of capital on the record of this case. The balance
sheets tell their own tale. There is also the affidavit of a director of the
company in support of the petition. Even prima facie evidence of the loss of
capital is sufficient where the power of the court under section 100 of the
(Indian) Companies Act is invoked. See Caldwell v. Caldwell and Co. (Paper
Makers) Ltd. (2) [1916] W.N. 70 (H.L.), Marwari Stores Ltd. v. Gourishanker
Goenka. (3) [1936] 6 Comp. Cas. 285.
In
appeal no. 129 of 1958, Mr. Mitra expressly abandoned the contention that the
issue of fresh shares under the scheme of arrangement amounts to borrowing and
as such as in in violation of section 293(d) of the (Indian) Companies Act,
1956. This contention was advanced before BOSE J. and was rejected by him. It
is plain that the raising of capital by the issue of shares cannot be the
borrowing of monies within the meaning of section 293(d) of the (Indian)
Companies Act, 1956.
In
appeal No. 129 of 1958 Mr. Mitra argued that clauses 9(a) and 9(c) of the
scheme of arrangement which authorises allotment of 1,20,000 ordinary shares to
the managing agents and which further authorises the directors to dispose of
96,284 ordinary shares in such manner as they deem fit is in contravention of section
81 of the (Indian ) Companies Act, 1956. It is true that by the scheme it is
proposed to increase the subscribed capital of the company by the issue of new
shares and such proposal is ,made at a time subsequent to the first allotment
of shares in the company. In such a case, by section 81, subject to any
directions to the contrary which may be given by the company in general
meeting, the new shares have to be offered to the persons who are then holders
of the equity shares of the company in proportion to the capital then paid up
on those shares. In the absence of statutory restrictions the directors had
power to issue new shares up to the limit of the authorised capital in such
manner as they think fit. The section is intended to fetter this power of the
directors where no direction is given on this smatter by the company in the
general meeting. The section preserves the power of the company in a general
meeting to give directions to the contrary. In this case, the company in a
general meeting has given clear directions to the contrary. having regard to
these directions, the allotment of shares to the managing agents and the
disposal of shares in such manner as the directors deem fit, cannot be said to
be in contravention of section 81. I should have expected that a complaint of
contravention of section 81 should have come from the holder of an equity share
who is sought to be deprived of the benefit of section 81. But the complaint in
this case comes not from the holder of an equity share but from the holder of
preference shares.
In
appeal No. 130 of 1958, Mr. Mitra contended that clause (I) of the modified
scheme of arrangement passed at the class meetings held on the 11th December,
itself involves reduction of capital and as such the modified scheme ought not
to be sanctioned because there is no special resolution for reduction of
capital by the modified scheme and because the formalities required for the
confirmation of such reduction have not been complied with. He relies on the
decision of SIMONDS J. in re St. James Court Estate Ltd. (1) [1944] I Ch. 6;
[1943] 13 Comp. Cas. 218. In that case SIMONDS J. refused to sanction a scheme
of arrangement which provided for conversion of preference shares into
redeemable preference shares. Such a conversion was in substance a surrender of
the existing preference shares in exchange for the redeemable preference shares
and amounted to a reduction and simultaneous increase of capital. Nothing of
that kind took place by clause (I) of the modified scheme. Clause (I) of the
modified scheme provides for reorganization and sub-division of preference
shares of Rs. 30 into preference shares of Rs. 10 each and also for
extinguishment and/ or modification of the special rights, privileges and
conditions attached to the existing preference shares. The preference shares as
such were not extinguished. The existing shares with the reduced capital were
sub-divided and re-organised and the rights attached thereto were modified.
I
will now deal with the arguments which are common to both appeals. Mr. Mitra
argued that the scheme of arrangement as a whole including the reduction of
capital has modified special rights attached to preference shareholders.
Mr.
Deb appearing on behalf of the respondent expressly conceded that the scheme
has modified some of the special rights and privileges attached to the
preference shares. This concession was made though BOSE J. seems to have ruled
that the scheme did not modify any of those special rights and privileges. I
think that the concession was rightly made by Mr. Deb out of deference to BOSE
J., I must briefly state the reasons for this conclusion. By article 8 (e) of
the articles of association the preference shares rank in priority both as
regards return of capital and payment of arrears of the 5 percent. Preferential
dividend whether declared or not over all other shares for the time being in
the capital of the company. The scheme of arrangement wipes out the arrears of
the 5 per cent. cumulative preferential dividend for the last twelve years. In
lieu of one preference share of Rs. 100 and reduced to Rs. 30 and all arrears
of dividends thereon a preference shareholder would receive three preference
shares of Rs. 10 each. The preference shareholders have been allowed to retain
30 percent of their paid up capital while the ordinary and preference
shareholders have been allowed to retain 20 percent. of their paid up capital.
The provision for reduction of capital forms part of one entire arrangement and
it is impossible to say that extra 10 percent. capital represents arrears of
dividend the payment of th4e arrears of dividend is being made by the issue of
shares. The market value of the shares is not known. The right to receive
payment of the arrears of dividend in cash is taken away. quite clearly the
scheme of arrangement abrogates and or modifies, commutes and affects the
preferential right to payment of the arrears of the 5 percent. cumulative
preferential dividend. the scheme cancels 70 percent. of the paid up capital of
the preference share without cancelling the entire paid up capital of the
ordinary and the deferred shareholders. The scheme, therefore, abrogates
modifies and affects the right of preference shareholders to preferential
return of capital. The decision of In re Mackenzie & Co. Ltd. (1) [1916] 2
Ch. 450. is distinguishable. In that case the share capital of the company was
divided into ordinary and preference shares. The preference shares were
entitled to a fixed cumulative preferential dividend on the nominal amount of
the capital from time to time paid up on them but they had no priority as to
capital. ASTBURY J. held that in the circumstances of the case a rateable
reduction of capital of both preference and ordinary shares did not alter the
rights attached to the preference shares. In the instant case the right of the
preference shareholder to preferential return of capital on winding up is
abrogated, modified and affected by the cancellation of part of the capital
paid up on the preference shares before cancelling the entire capital paid up
on the deferred and the ordinary shares.
Mr.
Mitra then referred us to the provisions of section 106 and 107 of the (Indian)
Companies Act, 1956, and article 77A of the articles of the company.
By
section 106 of the (Indian) Companies Act, 1956, in the case of a company the
share capital of which is divided into different classes of shares provision
may be made by the memorandum or articles authorising the variation of the
rights attached to any class of shares subject to the consent of the holders of
not less than three-fourth of the issued shares of that class or the sanction
of a resolution passed at a separate meeting of the holders of those shares and
supported by the holders of not less than three-fourths of those shares. By
sub-section (2) of section 106 any provision in the memorandum or articles in
force immediately before the commencement of the Act which specifies for this
purpose a proportion of less than three-fourths had been specified therein
instead. The variation of the rights attached to a class of shares in pursuance
of such a provision is subject to the right of dissentient shareholders given
by section 107 of the (Indian) Companies Act, 1956. Where an application on
behalf of the holders of not less than ten per cent. of the issued shares of
that class is made to the court in accordance with the section to have the
variation cancelled the variation cannot take effect unless and until it is
confirmed by the court and the court may disallow the variation if it is
satisfied that the variation would unfairly prejudice the shareholders of the
class represented by the applicant.
In
this case rights have been attached to separate class of shares by the articles
and the articles also provide for variation of those rights. Article 77A
provides that the rights and privileges attached to each class of share may,
subject to the provisions of section 66A of the Indian Companies Act, 1913,
corresponding to section 106 of the (Indian) Companies Act, 1956, be modified,
commuted, affected, abrogated or dealt with by agreement between the company
and any person purporting to contract on behalf of that class, provided such
agreement is (a) ratified in writing by the holders of at least three-fourths
in nominal value of the issued shares of the class or is (b) confirmed by an
extra-ordinary resolution passed at a separate general meeting of the holders
of shares of that class. The last sentence of this article runs thus :
"
This article is not to derogate from any power the company would have had if
this article were omitted."
Mr.
Mitra argued that the modification of the special rights attached to the
preference shares could only be made with the sanction of the majority of the
holders of three-fourths of the issued preference shares in accordance with
article 77A of the articles of association read with section 106 of the (Indian
) Companies Act, 1956, and as the sanction of the requisite majority was not
obtained, the scheme of arrangement as a whole including the reduction of
capital cannot be sanctioned by this court.
Now,
rights may be attached to classes of shares either by the articles or by the
memorandum. Where rights are attached to a class of shares by the articles, in
view of section 31 of the (Indian) Companies Act, 1956, it is permissible for
the company to alter those rights by special resolution. And where rights are
attached to a class of shares by the memorandum, in view of section 13 and 16
of the (Indian) Companies Act, 1956, such a provision of the memorandum is not
deemed to one of its conditions and may, therefore, be altered in the same
manner as the articles of the company. The (Indian) Companies Act,1956, does
not contain a provision similar to section 23(2) of the English Companies Act,
1948, by which the power of the company to alter any condition in the
memorandum which could lawfully have been contained in the articles does not
extend to variation or abrogation of the special rights of any class of
members. An alteration of the rights attached to a class of shares by special
resolution is however open to challenge on the ground that it is an abuse of
the power of the company to alter its articles and an oppressive device to
benefit the majority at the expense of the class. For this reason the
memorandum or the articles generally contains a provision authorising the
variation of the rights attached to any class of shares with the sanction of
the holders of a not less than three-fourths of the issued shares of that
class. Such a provision is lawful and is sanctioned by section 106 of the
(Indian) Companies Act, 1956. Article 77A of the articles of association of the
respondent -company is such a provision. In form article 77A explicitly states
that it does not derogate from any other power which the company would have had
if it had been omitted.
Under
these articles in strict law it is permissible for the company to alter the
rights attached to a class of shares by passing a resolution altering the
articles. See Palmer's company Precedents, 16th edn., page 531. Still except in
special circumstances and in the absence of scheme of arrangement the court
should refuse to sanction a reduction of capital involving alteration of class
rights where the special resolution for reduction has not obtained the approval
of the requisite majority of the class in accordance with the variation of
rights clause, sometimes the provision for variation of class rights in terms
restricts the powers of the company to alter those rights. In In re Old
Silkstone Collieiries Ltd. (1) [1954] I. Ch. 169. article 6 provided that the
special rights attached to any class of shares may either with the consent in
writing of holders of three-fourths shares of that class or with the sanction
of an extraordinary resolution passed at a separate general meeting of such
holders (but not otherwise) be modified and abrogated. Certain special rights
had been attached to two classes of preference stock by two previous special
resolutions for reduction of capital which had been confirmed by the Court. The
company passed a third resolution for reduction of capital which purported to
extinguish those stocks. This resolution was not passed with the assent of
separate meetings of those classes or with the consent of the holders of
three-fourths shares of those classes. The English Court Of appeal refused to
confirm the reduction. The court held that the reduction modified or abrogated
the special rights of those classes. On this finding it was conceded that the
total elimination of the preference capital was incompetent with out the
approval of those classes under article 6. EVERSHED M.R. observed that the
special rights could only be taken away under the articles by observing the
restrictions of article 6.Jenkins L.J. observed that in order validly to carry
out the reduction it was necessary to put the proposals to those two classes of
stock in accordance with article 6 and to procure the approval of those two
classes to the proposals by the requisite majority. It should be noticed that
article 6 provided that the special rights might be modified or abrogated in
the manner provided in that article but not otherwise, that article 6 had been
neither deleted nor altered and that the company by special resolution in
exercise of its power under the articles sought to abrogate and modify the
special rights without observing the restrictions imposed by the articles and
in these circumstances the court held that the special resolution had not been
validly passed. The learned editors of Buckley on the Companies Acts, 13th
edn., at page 158, foot note (r), notice the case of Fife Coal Co. Ltd.,
petitioners (2) [1948] S.C. 505. where a Scottish Court in special
circumstances confirmed a reduction of capital which involved repayment of part
of the ordinary paid up share capital otherwise than in accordance with the
rights of the preference shareholders without requiring the approval of a class
meeting of such shareholders.
It
should be noticed that there was no scheme of arrangement or compromise in the
case of In re Old Silkstone Collieries Ltd. (1) [1954] I. Ch. 169. the special
rights attached to a class of shares may lawfully be altered by the machinery
of a scheme of arrangement and under section 391 the court may sanction a
scheme which involves alteration of class rights.
The
word, "arrangement ", in section 391 is of wide import. By section
390, "arrangement" includes reorganisation of the share capital of
the company by the consolidation of shares of different classes or by the
division of shares into shares of different classes or both those methods. The
court has the power to sanction a scheme of arrangement though the scheme
modifies the special rights attached to a class of shares.
In
re Hoare & Co. Ltd. (2) [1910] W.N. 87. NEVILLE J. sanctioned a scheme of
arrangement which involved a reduction of capital and which modified the
special rights attached to two classes of preference shares. The share capital
was divided into preference shares of pounds 10 each, A cumulative preference
shares of 10 pounds each and ordinary shares of I pounds all fully paid up. The
preference dividend was five per cent. The preference shares had priority in
dividend and capital over the ordinary shares. The scheme provided for
cancellation of the entire paid up capital of the ordinary shares and for extinction
of those shares, for cancellation of the paid-up capital of preference shares
to the extent of 2 pounds share and for cancellation of the capital paid up on
a preference share of 10 pounds each to the extent of 8 pounds- IOS. per share
and for consolidation and conversion of the reduced shares into shares of 10
pounds each all ranking pari passu as regards dividends and capital. The
reduction there, as in this case, was conditional on the scheme of arrangement
being approved by the shareholders of the company and sanctioned by the court.
The scheme provided for the extinguishment of all arrears of dividend on the
two classes of preference shares and for issue of participation certificates to
the to two classes of shareholders. Palmer's Company Precedents, 16th Edition,
pages 1103-1104,, gives a form of an order sanctioning a scheme of arrangement
and altering the rights of shareholders as fixed by the memorandum. The share
capital of the company was divided into ordinary and deferred shares and the scheme
varied the rights attached to ordinary shares by conferring on them a right to
a preferential dividend at the rate of 7 1/2 per cent on this paid up capital
in modification of clause 5 of the memorandum . I am conscious that the
majority required by section 391(2) is the majority in number representing
three-fourths in value of the class of members present and voting at the
meeting whereas the majority required by the provision referred to in section
106, is three-fourths of the holders of the class of shares, and the court is
bound to scrutinise this scheme of arrangement with care. But the absence of
approval of the scheme by the majority required by the provision referred to in
section 106 is no bar to the sanction of the scheme of arrangement under
section 391.
Mr.
Mitra argued that the special formalities required by article 77A or any other
provision for variation of class rights such as is referred to in section 106
must be followed and observed just as the special formalities required to be observed
by section100 to 105 on reduction of capital must be complied with in the case
of a scheme of arrangement involving reduction of capital. There can be no
doubt that where the scheme of arrangement involves reduction of capital, the
special provisions relating to reduction of capital must be complied with. (see
in re Cooper: Cooper v. Johnson Ltd. (1) [1902] W.N. 199; In re India National
Bank Ltd. (2) (1949) 53 C.W.N. 207, 210., and Bengal Bank Ltd. v. Suresh
Chakravarthy 93) [1951] 21 Comp. Cas. 315. Sections 100 to 103 of the Indian
Companies Act being special provisions relating to the power of the court to
confirm reduction of capital, they limit the generality of the power which is
conferred on the court by section 391 to sanction a scheme of arrangement where
the court called upon .to sanction a scheme of arrangement finds that it is
also called upon to confirm a reduction of capital, the court is bound to
follow and observe the formalities which it ought to follow and observe in
cases of confirmation of reduction of capital. A provision in the articles
providing for variation of rights of a class does not, however, prescribe any
formality or formalities to be observed by the court. A provision of this type
enables the company to alter the rights attached to a class without the
sanction of the court. Where the power of the court to sanction a scheme of
arrangement involving modification of the rights attached to a class in invoked
such a provision can have no application. Mr. Mitra next argued that in the
exercise of its discretionary power, the court should refuse to sanction the
reduction of capital as also the scheme of arrangement. On this point, his
argument was two-fold. He argued firstly that the reduction of capital and the
scheme of arrangement are unfair and inequitable inasmuch as they cancel part
of the capital paid up on the preference shares without cancelling the entire
capital paid upon the deferred and the ordinary shares though, under the
constitution of the company, the losses should fall in the first instance upon
the ordinary and the deferred shareholders. He argued secondly that apart from
this major consideration, having regard to all the circumstances of the case,
the court ought not to confirm the reduction of capital or sanction the scheme
of arrangement.
In
this case the statutory formalities with regard to the reduction of capital as
also the scheme of arrangement have all been complied with. The creditors do
not object and are not prejudiced. Still before confirming the reduction of
capital the court is under the duty of satisfying itself that reduction is fair
and equitable between the different classes of shareholders : per LORD SIMONDS
in Scottish insurance Corporation Ltd. v. Wilson Clyde and Coal Co. Ltd. (1)
[1949] A.C. 462, 486; 19 Comp. Cas. 202 And before sanctioning the scheme of
arrangement the court is under the duty of satisfying itself that the scheme is
such that an intelligent and honest man, a member of the class concerned and
acting in respect of his interest, might reasonably approve : per MAUGHAM J. in
In re Dorman Long & Co. (2) [1934] I. Ch. 634, at 655, 657; 5 Comp. Cas.
30. whereas in this case the reduction of capital forms part of the scheme of
arrangement : these two considerations are interlinked with each other and the
overall duty of the court is to satisfy itself that the scheme of arrangement
together with the reduction of capital is such that an intelligent and honest
man, a member of the class concerned and acting in respect of his interest, might
reasonably approve and might reasonably consider to be fair and equitable.
I
will now consider the first branch of Mr. Mitra's argument. Prima facie on
general principles of fairness the burden of the loss upon reduction of lost
capital ought to fall in the same manner as it would have fallen if the company
were being then wound up. But there may be special circumstances which may make
it fair and equitable to throw the burden of the loss in some other manner.
Thus where there is only one class of shares prima facie the loss should borne
rateably by all. But for good reasons the loss may be made to fall unequally on
different sets of shares and the court may sanction such a reduction : see
British and American Trustee and finance Corporation Limited v. Couper (3)
[1894] A.C. 399. In re Credit Assurance and Guarantee Corporations Ltd. (4)
[1902] 2 Ch. 601. And also where there are different classes of shares are
constituted without any preference shares and the preference shares are
constituted without any preference as regards capital, prima facie there should
be an all-round reduction of capital and the loss should be borne rateably by
all the shares : Bannatyne v. Direct Spanish Telegraph Co. (5)(1887) 34 Ch. D.
287, 299-300. But where there are different classes of shares and one class has
priority as regards return of capital in winding up prima facie the loss should
be thrown first on the shares which have no such priority: See In re Floating
Dock Co. of St. Thomas Ltd. (1) [1895] 1 Ch. 691. But special circumstances may
justify a departure from this prima facie rule. In the present case the
preference shares have a right to preferential return of capital in winding up.
Prima facie the whole of the capital paid on the deferred and the ordinary
shares should be cancelled before any part of the capital paid up on the
preference shares is cancelled. This prima facie rule has not been observed.
Only 80 per cent of the capital paid up on the ordinary and the deferred shares
have been cancelled. Without cancelling the remaining 20 per cent of their paid
up capital there has been cancellation of 70 percent of the capital paid up on
the preference shares. But I have come to the conclusion that we ought not to
withhold our sanction to the scheme of reduction on the ground that the entire
capital paid up on the ordinary and deferred shares should have been cancelled
in the first instance for the following reasons :
This
ground was not taken and was not argued before BOSE J. There is no reference to
this ground in the two judgments delivered by him. Mr. Mitra conceded before us
that he did not argue this point before the learned judge and that this is a
new point taken by him for the first time in appeal. The present contention
appears to be contrary to the submissions made on behalf of the appellant by
one Bhagatatula Venketa Sanyasi Rao in his affidavit affirmed on the 11th
January, 1958. In paragraph 24 of his affidavit he submitted that the proposed
reduction was in any event not equitable inasmuch as the proportion of
reduction was not rateable and that the losses, if any, was not rateably borne
by the different classes of shareholders and that the proposed reduction and or
scheme would work injustice on all the different classes of shareholders. Far
from saying that the whole of the ordinary and deferred share capital should be
wiped out before cancellation of the preference share capital, his contention
there was that the losses should be rateably borne by all the different classes
of shareholders. Quite distinct and separate considerations of fact arise with
respect to the contentions advanced in paragraph 24 of that affidavit and to
the contention advanced now. Considerations of fact which are germane to the
present argument are not necessarily germane to the argument advanced in that
paragraph. In view of the fact that this point was not taken before BOSE J. and
in view of the fact that the contention there taken was contrary to and
inconsistent with the present contention we are not inclined to allow Mr. Mitra
to raise this point for the first time in the appeal.
On
the assumption that the appellant should be allowed now to raise this point I
have examined the material on the record and I have come to the conclusion that
the court ought not to withhold confirmation of the reduction of capital and
the sanction of the scheme of arrangement on the ground now taken.
The
whole of the paid up capital of the company has been lost. If the company were
wound up to-day, not only the entire paid up capital of the ordinary and the
deferred shares but also the whole of the paid up preference share capital
would be wiped out. In such winding up in spite of their preferential right to
return of capital the preference shareholders would get nothing. if the scheme
of arrangement is not sanctioned the company is bound to be wound up and all
the shareholders will lose their entire capital. The retention of 20 per cent
of the capital of the ordinary and the deferred shares is not being made at the
expense of the preference shareholders. The managing agents have foregone 13
lakhs of their dues conditionally on the scheme of arrangement being sanctioned
by the court. If the scheme of arrangement is not sanctioned, the company will
not get the benefit of this concession of Rs. 13 lakhs. The total uncancelled
paid up share capital of the ordinary and deferred shareholders amounts to
roughly about Rs. 4,15,020. If the abstract claim of the preference
shareholders is upheld, loss to the extent of Rs. 4,15,020 should be further
borne by the ordinary and the deferred shareholders but by the sanction of the
scheme of arrangement the company is getting the additional benefit of Rs. 13
lakhs. The preference shareholders are, therefore, not really made to bear an
additional burden of the loss by reason of the retention of 20 per cent of the
paid up capital of the ordinary and the deferred shares to the extent of
4,15,020. In effect, what has been allowed to be retained by the ordinary and
the deferred shareholders have come out of the concession of Rs. 13 lakhs made
by the managing agents.
The
scheme was approved at the separate class meeting of preference shareholders.
At that meeting no one voted against the resolution. The appellant was
represented at the meeting but its representative chose to remain neutral. The
appellant now accepts the position that the minutes of the meeting correctly
represents what happened at that meeting. Having done that the appellant does
not explain why the appellant did not then oppose the resolution.
In
these circumstances, I have come to the conclusion that the reduction of
capital and the scheme of arrangement cannot be pronounced to be unfair and
inequitable on the first ground advanced by Mr. Mitra.
I
will now deal with the second branch of Mr. Mitra's argument on this point. he
suggested that the scheme of arrangement has been proposed in order to prevent
investigation in winding up with regard to the huge loss. The affidavit filed
on behalf of the appellant suggests that the company should be wound up. Yet I
find that the appellant has not chosen to present a petition to this court for
winding up of this company. Mr. Mitra suggested that the allotment of the block
of ordinary shares of the value of Rs. 13 lakhs will bring back the managing
agents into power. The managing agents appear already to be in power. The
managing agents have been with this company through all its lean times. They
have advanced to it the huge sum of Rs. 75 lakhs. the object of the allotment
of the shares of about the value of rs. 12 lakhs is to reduce the indebtedness
of the company to the managing agents. There is reasonable chance of the
company making profits if the company is allowed to function and to raise
further capital. The total loss amount to Rs. 36 lakhs. By the reduction of capital
a sum of Rs. 22,51,720 becomes available for partially wiping out this loss. A
further sum of Rs. 13 lakhs is being foregone by the managing agents. The
effect of sanctioning the scheme of arrangement is that almost the entire loss
is being wiped out. BOSE J., has by his order imposed the further safeguard
that if the company does not or is unable to pay any dividend to the
shareholders by December 31, 1961, that fact may be brought to the notice of
the court and the court may give directions for changing the management of the
company if it thinks fir to do so. Considering all the materials on the record,
I have come to the conclusion that the scheme of the class of arrangement is
such that an independent and honest man, a member of the class concerned,
namely the class of preferential shareholders and acting in respect of his
interest might reasonably approve and might reasonably consider to be fair and
equitable.
The
scheme of arrangement is in the interest of the creditors. All the sundry
creditors will be paid by the managing agents. The other creditors do not
object to the scheme of arrangement.
In
these circumstances, I have come to the conclusion that the court in the
exercise of its discretionary power ought to confirm the reduction of capital
and ought also to sanction the scheme of arrangement.
I
have, therefore, come to the conclusion that the two orders passed by BOSE J.
ought to be sustained and both these appeals should be dismissed.
In
appeal No. 129 of 1958, I propose that the following orders be passed.
The
appeal be dismissed. Each party do pay and bear its own costs of the appeal. We
direct that the time fixed by the order of BOSE J., by which the managing
agents are to pay off the sundry creditors be extended up to three months from
today. We further direct that the condition imposed by BOSE J., that if the
appellant company does not or is unable to pay any dividend to its shareholders
by December 31, 1961, the same may be brought to the notice of the court and
the court will then be at liberty to give directions, be modified and that the
condition be read as a condition that if the appellant company does not or is
unable to pay any dividends to its shareholders by 28th February 1963, the same
may be brought to the notice of the court and the court will then at liberty to
give directions.
In
appeal No. 130 of 1958, I propose that the following order be passed.
The
appeal be dismissed. Each party do pay and bear its own costs of the appeal.
LAHIRI
J. - I agree.
[1998] 92 Comp. Cas. 730 (AP)
High
Court OF Andhra Pradesh
v.
State
S. DASARADHARAMA REDDY J.
Criminal Petitions Nos. 5871 to 5874 of 1995.
JANUARY 20, 1997
S. Ravi for
the petitioner.
S.
Dasaradharama Reddy J.—These
are petitions filed by the petitioner-company, a Government of India
undertaking, for quashing the proceedings in S.T.C. Nos. 11 to 14 of 1995, on
the file of the Special Judge for Economic Offences, Hyderabad, seeking
prosecution of the company for the following offences launched under the
Companies Act (for short "the Act"):
|
|
Case No. |
|
Offence |
Section under which complaint is filed |
Punishment
prescribed |
|
STC |
11 of |
1995 |
Failure to
comply with section 49(1)(a) of the Act |
Section 49(9) |
Fine up to
Rs. 5,000 |
|
STC |
12 of |
1995 |
Violation of
section 292 r/w. article 85(XII) of the articles of association |
Section 629A |
Fine up to
Rs. 500 |
|
STC |
13 of |
1995 |
Violation of
section 292(1)(d) of the Act |
do. |
do |
|
STC |
14 of |
1995 |
Violation of
section 292(3) |
do. |
do. |
The averments
in the petitions are as follows:
The Joint
Director of Inspection in the office of the Department of Company Affairs,
Ministry of Law, Justice and Company Affairs, Government of India (for short
referred to as "the Department"), issued notice of inspection on
August 19, 1994, under section 209A of the Act calling for certain particulars
to which the petitioner gave a reply on September 16, 1994, furnishing all the
particulars required. On May 3, 1995, the Registrar of Companies issued a
show-cause notice alleging that in the meeting of the board of directors held
on July 20, 1989, the managing director/director (finance) was authorised to
deal with the surplus funds without specifying the total amounts up to which
the funds may be invested and without indicating the nature of the investment,
thus violating section 292(3) of
the Act. It was also alleged that the company made investment in non-banking
financial institutions as against the authorisation of the board of directors
for investment in short-term deposits in public sector undertakings, financial
institutions, Can Bank Mutual Funds, etc., thus violating section 292(1)(d) of
the Act. It was also alleged that deposits in SBI Capital Markets Ltd.
amounting to Rs. 735 lakhs and Rs. 1,965 lakhs in the years 1990-91 and 1991-92
respectively and of Rs. 310.55 lakhs in ANZ Grindlays Bank being in the nature
of portfolio management scheme were not kept in the name of the company and
there was no physical delivery of documents contravening section 49(1)(a) of
the Act. It was also alleged that the funds of the company were invested
without approval of the President of India as required by article 85(XII) of
the articles of the company, thus violating section 292. The notice refers to
offences for failure to comply with section 49(7) and section 211 which are not
relevant for the purpose of these petitions. The company replied on May 29,
1995, denying the allegations and stating that the amounts were deposited as
short term deposits for reasonable interest and cannot be termed as investments
in the nature of portfolio management scheme, contemplated under section 292(3)
of the Act. It was also stated that the deposits were authorised by the
resolution of the board of directors passed on July 20, 1989, and that there is
no provision in the Act to treat the short term deposits as investments.
Evidently, not satisfied with the explanation of the petitioner, the Registrar
of Companies has launched prosecution as stated above. The petitioner contends
that even if the allegations in the complaints are taken as true, they do not
constitute the offences alleged and that in any event, the complaints are
barred by limitation under section 468(2)(a) of the Criminal Procedure Code,
1973 (for short "the Crl. P.C.").
The Registrar
of Companies has filed a counter contending that section 292 of the Act does
not distinguish short-term deposits and long-term investments and the
resolution passed by the board of directors on July 20, 1989, authorised the
deployment of funds in short-term deposits only in public sector undertakings,
financial institutions, Can Bank Mutual Funds, etc., and not investment in any
non-banking financial institutions such as SBI Capital Markets Ltd., and ANZ
Grindlays Bank, which is a foreign bank. The counter reiterates the allegations
made in the notice. Regarding the limitation, it is contended that the
Registrar of Companies had knowledge of the offence on March 30, 1995, when he
received the communication dated March 29, 1995, from the Department and hence
the complaints are within limitation of six months as per the provisions
of section 468(2)(a) read with section
469(1)(b) of the Criminal Procedure Code, 1973.
It may be
noticed that in the complaints, only the company is shown as accused and the
directors are not impleaded, evidently in view of the stay order obtained by
them in Company Application No. 170 of 1995, dated September 7, 1995, in C.P.
No. 47 of 1995, filed under section 633(2) of the Act.
The first
ground urged by Mr. S. Ravi, learned counsel for the petitioner, is that the
complaints are barred by limitation since they were filed on September 20,
1995, beyond six months from the date of knowledge of the offence, viz.,
October 14, 1991, and October 19, 1992, the dates when the petitioner has filed
balance-sheets before the Registrar of Companies for the years 1990-91 and
1991-92, respectively. Alternatively, it is submitted that the limitation must
be computed from September 19, 1994, the date on which the Department in
It is
submitted by both the sides that as the offences are punishable with fine only,
the limitation for prosecution under section 468(2)(a) of the Criminal
Procedure Code, 1973, is six months. Under section 468(1), no court shall take
cognizance of the offence of the category specified in sub-section (2) after
the expiry of the period of limitation.
Regarding the
first contention that the date of knowledge of the Registrar is the date when
the balance-sheets were filed by the company for 1990-91 and 1991-92 i.e.,
October 14, 1991, and October 19, 1992, respectively, Mr. Ravi relied on the
decision of Sri V. Rajagopala Reddy J. in ITC Agro Tech Ltd. v. Registrar of
Companies [1996] 86 Comp Cas 170 (AP). But a close reading of the judgment does
not support the contention of Mr. Ravi. In that case, for the years ending
March 31, 1991, and March 31, 1992, the company filed its balance-sheets with
the Registrar of Companies on August 21, 1991, and in August, 1992,
respectively. After the Deputy
Director of Inspection conducted an inspection of the books of the company in
March, 1993, a show-cause notice dated April 27, 1993, was issued alleging that
the company had contravened the provisions of section 370(1) of the Act since
it has made intercorporate deposits in certain companies in excess of the
limits prescribed. The company replied on May 24, 1993, denying the offence. By
notice dated July 5, 1994, the Registrar of Companies required the company to
show cause against prosecution for violation of section 370(1) of the Act, and
thereafter the complaint was filed on September 26, 1994. Allowing the petition
filed to quash the complaint, the learned judge held that notice dated April
27, 1993, has to be treated as the date on which the offence has come to the
knowledge of the Registrar and from which date the limitation starts running
and as the complaint was filed beyond one year, it was barred by limitation.
The learned
judge observed as follows (page 174):
"It is
seen from the above that the petitioners have admittedly filed balance-sheets
before the complainant on August 21, 1991, and August 19, 1992, respectively,
with regard to the two relevant financial years. The first respondent being an
authority enjoined under the Act to see that the provisions of the Act are
properly followed by the companies, is expected to scrutinize the accounts,
with the assistance of his competent officers, that are filed before him and
find out the irregularities committed by the company, at least from the date of
the filing of the balance-sheets. The filing of balance-sheets is a legal
requirement and not a mere formality. It is also admitted that an inspection
has been made by the inspection wing on March 10, 1993, and on detection of
non-compliance with section 370(1) of the Act, a notice dated April 27, 1993,
has been issued and the reply has been received by the first respondent on May
25, 1993. At least from the date of receipt of the reply, the knowledge of the
commission of offence shall be presumed, if not from the date of notice.
Knowledge is an inferential fact from the facts established, depending upon
circumstances of each case. On coming to know of the violation of section
370(1) of the Act, by the petitioners, the inspection wing issued the
show-cause notice dated April 27, 1993. This date should be treated as the
'first day on which such offence comes to the knowledge', as mentioned in
clause (b) of sub-section (1) of section 469 of the Code. From that day, the
limitation started running (emphasis supplied).
Therefore, as per the admitted events, the complaint is barred by limitation
having been filed beyond one year after the complainant had knowledge of the
offence."
Though the
learned judge has made a passing observation that the Registrar of Companies is
expected to scrutinise the accounts with the assistance of his competent
officers and find out irregularities committed by the company, at least from
the date of filing of balance-sheets which is a legal requirement and not a
mere formality, the learned judge has not rested his conclusion treating the
date of filing of balance-sheet as the date of knowledge of the Registrar. In
fact, the learned judge categorically stated that the date of issue of notice
by the Registrar after inspection is the date on which the Registrar is deemed
to have knowledge. No doubt, the learned judge referred to the decision of the
Madras High Court in Asst, Registrar of Companies v. H.C. Kothari [1992] 75
Comp Cas 688, where the Madras High Court held that the Registrar of Companies
is deemed to have knowledge of the contents of the balance-sheet, which
constitute any particular offence, on the date when they were filed in his
office. Though the learned judge in ITC Agro Tech Ltd. v. Registrar of
Companies [1996] 86 Comp Cas 170 (AP) agreed with this decision, he has not
based his conclusion on this reasoning. Hence, I am of the opinion that there
is no necessity to refer the case to the Division Bench. Mere filing of the
balance-sheets with voluminous annexures does not necessarily mean that the
offence can be detected by the Registrar immediately. As there are a number of
limited companies, it is humanly impossible for the Registrar to closely
scrutinise each and every balance-sheet the moment it is filed and to find out
whether any offence has been committed by a particular company. It is only
after close scrutiny, which is done as in the case of inspection, that any
offence committed by the company can be detected. Moreover, whether the
particular deployment of funds is in the nature of investment or deposit cannot
be detected by a mere look at the balance-sheets with its annexures and can be
detected only after due inspection and close scrutiny. Thus, I respectfully
disagree with the decision of the Madras High Court in Asst. Registrar of
Companies v. H.C. Kothari [1992] 75 Comp Cas 688. Accordingly, the first
contentions of Mr. S. Ravi is rejected.
The next
contention of Mr. Ravi is that in any event, the Registrar is deemed to have
knowledge of commission of the alleged offence on September 19, 1994, the date
when the Department must have received reply given by the petitioner in
response to the notice issued by it on August 19, 1994. The date of receipt of
this reply is not available from the record. But in the normal course, the
reply dated September 16, 1994, would have reached the Department in the
Mr. Ramesh on
the other hand relied on the decision of the Supreme Court in United Bank of
India v. Kananbala Devi [1987] 62 Comp Cas 705, where it has held that notice
to one branch of a bank cannot be treated as notice to all its branches. In
that case, a customer died and one of the branches of the bank had notice of
the death of the customer. Another branch had earlier filed suit against the
customer and eight years thereafter that bank filed application before the High
Court for impleading the legal representatives of the customer and for setting
aside abatement on the ground that it had no knowledge of the death of the
customer. The argument of the bank was that in the days when banking business
has expanded by leaps and bounds with branches spread over large areas, it
would not be possible for a particular branch to know of the death of one of
its customers if that branch had not been informed of the death, and in the
absence of highly technical modern methods of computerised information to all
the branches about their customers and their details, no branch of a bank can
be presumed to know whether a particular customer is alive or not unless the
bank is given necessary information. Accepting the contention of the bank, the
Supreme Court held that the submission that all the branches of a bank should
be imputed with constructive knowledge of the death of a customer simply
because one of the branches had been informed of it, would result in adverse
consequences and would defeat action by banks for recovery of dues and would
work great loss to banks and would harm public interest. Accordingly, the
Supreme Court condoned the delay and set aside the abatement. I fail to see how
this decision helps the respondent. Under section 469 of the Criminal Procedure Code, 1973, the period
of limitation commences from the date of the offence or where the commission of
the offence was not known to the person aggrieved by the offence, the first
date on which such offence comes to the knowledge of such person. In this case,
the person aggrieved by the offence is the Department which acts through the
Registrar of Companies and which ordered inspection. Thus, the decision cited
by Mr. Ramesh is distinguishable since one of the branches of a bank cannot be
said to be an agent of another branch. Further, the decision of the Supreme
Court was in the context of condoning the delay in setting aside the abatement
and in bringing legal representatives on record in the suit filed by the bank
for recovery of dues whereas we are concerned with the concept of limitation
for launching prosecution and the observations of the Supreme Court in State of
Punjab v. Sarwan Singh, AIR 1981 SC 1054, 1055 are apposite (headnote):
"The
object of the Criminal Procedure Code in putting a bar of limitation on
prosecutions was clearly to prevent the parties from filing cases after a long
time, as a result of which material evidence may disappear and also to prevent
abuse of the process of the court by filing vexatious and belated prosecutions
long after the date of the offence. The object which the statutes seek to
subserve is clearly in consonance with the concept of fairness of trial as
enshrined in article 21 of the Constitution of India. It is, therefore, of the
utmost importance that any prosecution whether by the State or on a private
complaint must abide by the letter of law or take the risk of the prosecution
failing on the ground of limitation."
Mr. Ramesh
further relied on Bhanumathi (P.) v. Smt. Premalatha [1979] Crl. LJ 257, where
it was held that if the delay is properly explained, the court can take
cognizance of the offence even after the expiry of the period of limitation,
giving reasons for condonation of the delay. But this case is distinguishable
as no reason is mentioned for the delay. In fact, the plea of the Department is
that there was no delay and the complaints are within limitation.
Thus, the
Registrar of Companies, who is part of the Department is deemed to have
knowledge of the offences on the date when the Department had knowledge.
Alternatively, as the Registrar is the agent of the Department which launched
prosecution through its agent, the knowledge of the principal has to be taken
into account. Accordingly, the contention of Mr. Ravi has to be upheld and if
the date of receipt of the reply given by the company to the Department
(September 19, 1994) is taken as knowledge of the offence, the limitation expires by March 19, 1995, and
complaints which are filed on September 28, 1995, will be barred by limitation.
As the
complaints are held to be barred by limitation, the next contention of Mr. Ravi
that even if the complaints are taken as true, the offences alleged are not
made out, need not be gone into.
In the
result, the criminal petitions are allowed.