Section 294
SOLE
SELLING AGENT
[1967] 37 COMP. CAS. 753 (GUJ)
V.
P
COMPANY APPLICATION NO. 24 OF 1964
COMPANY
PETITION NO.16 OF 1963
SEPTEMBER
26, 1966
JUDGMENT
This summons
has been taken out by the applicants for a direction that the respondent
company should pay to the applicants a sum of Rs. 39,619.87 under clause 6 of
the scheme of arrangement or compromise sanctioned by this court
by an order dated 6th December, 1962. Clause 6 of the scheme requires the
respondent to pay to the employees (including workmen, clerks, technicians,
officers, watch and ward staff) of the Bharathkhand
Textile Manufacturing Company Limited, arrears of wages and claim of the
applicants is that they were employees of the Bharathkhand
Textile Manufacturing Company Limited for the period 21st January, 1961 to 31st
March, 1962, and they are, therefore, entitled to recover from the respondent
the sum of Rs. 39,619.87 representing the arrears of wages due to them from the
Bharathkhand Textile Manufacturing Company Limited
(hereinafter referred to as to company) for work done during the said period.
The applicants are a partnership firm and they were appointed as dalals by the company for sale of cloth manufactured by the
company throughout the whole of
In order to
determine the legal relationship between the applicants and the company, it is
necessary to look at the agreement dated 10th April, 1961, which recorded the
terms and conditions on which the applicants were appointed as dalals by the company. The agreement in its opening part
declared that the company has appointed the applicants as its cloth dalals for the whole of India and the applicants have
agreed to their appointment as such for the purpose of selling cloth
manufactured by the company for the period commencing from 21st January, 1961,
and ending on 20th January, 1966, on the terms and conditions contained in the
agreement. Clause 1 and 2 of the agreement then proceeded to state as follows:
"(1) That the dalals shall have the sole and exclusive right of selling
the cloth manufactured by the company, provided that nothing herein contained
shall be deemed to prevent the company from supplying or selling the cloth
direct to persons or firms or concerns or creating other selling agencies for
any defined territories provided the dalals are paid
their dalali on such sales effected directly by the
company or through others.
(2) That the dalals guarantee the bona fides of the offers brought by
them and further guarantee that if the company accept
such offers the offerers will fulfil
his part of the contract for the sale resulting from such offer and its
acceptance."
Clause 3
provided that the offers brought by the applicants shall be deemed to have been
accepted by the company if and only if accepted by the company in writing and
clause 4 stipulated that the applicants shall not effect any sale under the
agreement except with the express consent of the company as to the terms or
otherwise. The applicants agreed under clause 5 of the agreement to be
responsible to the company to a limited extent for non-payment of any amount by
the merchants to whom the cloth of the company was sold by the applicants as dalals of the company. Clause 9 of the agreement made a
provision in regard to sales of cloth effected by the company to parties
outside
"That
notwithstanding anything contained therein the dalals
shall not be considered as agents for any purpose whatever with respect to
sales of cloth effected by the company to parties outside
Clause 10
provided for payment of dalali to the applicant at
the rate of half per cent. on met sale proceeds
received by the company on all sales of clothe effected either through the dalals or otherwise. And lastly clause 17 laid an
obligation on the applicants to carry out and abide by and faithfully follow
any instructions which might be given to them from time to time by the company
relating to the matters arising under the agreement. These were the relevant
provisions of the agreement and the question is whether the agreement
constituted the applicants employees of the company.
Now it is
difficult to see how any relationship of employer and employee can be spelt out
from these provisions of the agreement. It is clear beyond doubt that by the
agreement the applicants were appointed sole selling agents for the whole
The summons,
therefore, fails and is dismissed with costs.
companies act
[2005]
58 scl 97 (all.)
HIGH COURT OF
v.
Principal Officer C/o Arkay Wires (P.) Ltd.
R.K.
Agrawal and Prakash
IT Reference No. 175 of
1981
October 29, 2004
Selling and buying agents receiving commission and/ or
salary are also hit by provisions of section 314(1) of Companies Act, 1956
Section 314, read with section 294, of the
Companies Act, 1956 - Directors - Not to hold office or place of profit - Whether
words ‘office or place of profit’ in section 314(1) include selling and buying
agents receiving commission and/or salary - Held, yes - Company entered into
agreements with two firms for sale of its products in a particular State -
However, they had not been given exclusive right to sell all products of
company and, further, Central Government had not declared any one of them as
sole selling agent of company under section 294(6) - Whether, therefore, their
appointment did not come within purview of section 294(2) - Held, yes - Whether
however, since some of partners of two firms were related to directors of
company, their appointment even as selling agents amounted to holding an office
of profit and was hit by section 314 - Held, yes
Words and phrases :
‘Office or place of profit’ as occurring in section 314(1) of the Companies
Act, 1956
Facts
The respondent-company entered into a selling
agency agreement with a firm T.S. corporation (T.S.) whereby the said firm got
the selling agency right for sale of products manufactured by the company for
the State of
On appeal, the AAC held that though the
selling agency firms were rendering services to the respondent-company, the
payments in question were not allowable deductions under section 37 of the
Income-tax Act, 1961 because the said selling agents were, in fact, sole
selling agents and the agreements entered into with them were violative of the provisions of sections 294(2) and 314(1)(b). On further appeal, the Tribunal held that the
agreements in question were not sole selling agency agreements and, thus,
provisions of section 294(2) had not been violated. Further they were also not violative of section 314.
On reference:
Held
From the provisions of
sections 294 and 314, it is clear that a company cannot appoint a sole selling
agent for any area for a term exceeding five years at a time and the agreement
for appointment of sole selling agent has to be got ratified/approved by the
company in its first general meeting held after the date on which the
appointment is made, failing which it shall cease to be valid within the date
of the first general meeting and further, a director or any of his relative
where such director or the relative is partner in the firm cannot hold any
office or place of profit except with the consent of the company accorded by a
special resolution. The phrase ‘sole selling agent’ has not been defined under
the Act. In common parlance and in ordinary sense, it would mean the exclusive
and sole right to sell all the products of the principal to the exclusion of
all others. In the instant case, two companies under the separate agreements
had been described as selling agents and not sole selling agents. Further, they
had not been given exclusive right to sell all the products. Specific mention
of the word ‘for any area’ and omission to mention ‘any goods’ makes it
abundantly clear that there can be only one sole selling agent in an area in
respect of all the goods dealt with by the company. Further, the Central
Government had not declared under section 294(6) any one of the selling agents
as the sole selling agent of the company. Thus, they could not be treated as
sole selling agents. [
Under the agreements T.S. as
well as K.W. had not been appointed sole selling agents and were only
distributors/selling agents in respect of the specified goods. Their
appointment did not come within the purview of section 294(2). Even otherwise, as held by the Bombay High Court in the case of Arantee Mfg. Corpn. [1967]
2 CLJ 54, as the agreement did not contain a clause that the agreement would
cease to be valid if it was not approved by the company in general meeting held
after the date on which the appointment was made, it was void ab initio. [
The words ‘office or place of
profit’ occurring in section 314(1) does include selling and buying agents
receiving commission and/or salary. As in the instant case, the two firms which
had been appointed as the selling agents consisted of either the directors or
the relatives as their partners, a special resolution
was required to be passed by the company for their appointment in the absence
of which they could not have been appointed. [
As there was no dispute that
some of the partners of the two firms were related to the directors of the
company, the appointment even as selling agents amounted to holding an office
of profit and was hit by section 314. [
Cases
referred to
Arantee Manufacturing Corpn.
v. Bright Bolts (P.) Ltd. [1967] 2 Comp. L.J. 54 (para 4), Godavari Sugar Mills
Ltd. v. CIT [1963] 49 ITR 206 (Bom.) (para 5), Arantee
Mfg. Corpn. v. Bright Bolts (P.) Ltd.
AIR 1967 Bom. 440 (para
5), Nawabganj Sugar Mills Co. Ltd. v. CIT [1972] 86
ITR 44 (SC) (para 6), Lachminarayan
Madan Lal v. CIT [1972] 86
ITR 439 (SC) (para 5), Shalagram
Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706 (
Dhananjay Awasthi for the Applicant. S. Chatterjee
for the Respondent.
Judgment
R.K Agrawal, J. - The Income Tax Appellate Tribunal,
“1. Whether on the facts and in the
circumstances of the case, the Income-tax Appellate Tribunal was legally
justified in its opinion that the firms M/s. Techno Sales Corporation and M/s.
Kumar Wire and Conductors were not sole selling agents of the company and,
therefore, the provisions of section 294(2) were not attracted?
2. Whether on the facts and circumstances of
the case, the Tribunal was legally correct in holding that the provisions of
section 314(1)(b) of the Companies Act, 1956 were not
applicable?”
2. Briefly stated the facts giving rise to the
present reference are as follows:
The assessment year involved is 1973-74. The
respondent-assessee is a Private Limited Company,
hereinafter referred to as the Company. Its previous year for the assessment year
1973-74 commenced on 1st July, 1971 and ended on 30th June, 1972. It paid
selling agency commission to its selling agents as follows:—
1. M/s. Techno Sales Corporation Rs. 1,02,361
2. M/s. Kumar Wires & Conductors Rs. 16,992
The Company has been manufacturing galvanized
iron wire, mild steel wire on barbed wire from the previous year corresponding
to assessment year 1968-69. On 9th August, 1968, it entered into a selling
agency agreement with a firm styled as M/s. Techno Sales Corporation, Swarup Nagar,
|
|
1. |
Shri
Santosh Kumar s/o Shri Kishan Sarraf |
15% |
|
|
2. |
Smt.
Harmukhi Devi w/o Shri Kishan Sarraf |
15% |
|
|
3. |
Shri
Sudershan Kumar s/o Shri
R.K. Agarwal |
15% |
|
|
4. |
Smt.
Shushila Sarraf w/o Shri Vijay Kumar |
15% |
|
|
5. |
Smt.
Shashikanta Bansal w/o Shri M.C. Bansal |
10% |
|
|
6. |
Master Jitender Mohan s/o Shri H.K. Sarraf |
15% |
Many of the partners in the aforesaid firm
were related to the directors of the respondent as is clear from the following
list of the directors during the relevant previous year:—
1. Shri
R.K. Agarwal s/o Shri Mohan
Lal.
2. Shri H.K. Sarraf
s/o Shri Kishan Sarraf.
3. Smt.
Sushila Devi w/o Shri R.K. Agarwal.
4. Shri M.C. Bansal s/o Shri Pritam Chand.
3. It appears
that the selling agency agreement was not put up by the company before the
general meeting of its shareholders which was held immediately after the
execution of the said agreement or even thereafter till the Income-tax Officer
completed the assessment for the year under consideration. It was put up before
the general body meeting only thereafter on 28th June, 1975, when resolution
was passed confirming the appointment of M/s. Techno Sales Corporation as the
selling agency of the respondent company. However, the proposal of the
appointment of the aforesaid firm as selling agent was passed in the meeting of
the Board of Directors of the Company held on 10th January, 1969. It may be
mentioned here that the payment of commission of the aforesaid selling agency,
namely, M/s. Techno Sales Corporation by the Company in the previous years
corresponding to assessment years 1970-71, 1971-72 and 1972-73 was not objected
to by the Income-tax Officer during the course of the said assessment
proceeding. However, he raised the objection to the payment of commission in
the course of assessment proceedings under consideration. During the previous
year relevant to the assessment year in question, the Company also started
manufacturing aluminium conductors styled AAC &
ACSR. For promoting the sales of the aforesaid goods it appointed M/s. Kumar
Wires and Conductors as its selling agent for the state of Uttar Pradesh on 1st
April, 1972 pursuant to an agreement. For the services rendered by the said
agent, Company was to pay a commission at the rate of 1 per cent on all sales
of aluminium conductors either to market parties or
to the Government Departments. Even this selling agency agreement was not put
up by the Company for the approval of its 1st Annual General Body Meeting held
immediately after the execution of the said contract or even thereafter till
the assessment for the year was completed by the Income-tax Officer. It was
placed before the General Body Meeting for its approval in its meeting held on
28th June, 1975. The Board of Directors had, however confirmed the appointment
of the said agency vide resolution dated 25th January 1972. The following
persons were the partners of M/s. Kumar Wires and Conductors:—
1. Shri H.K. Sarraf.
2. Smt. Sushila Devi
Agarwal
3. Shri Vijai Kumar
4. Saroj
5. Shri Sudershan Kumar
6. Smt. Harmukhi Devi
3.1 It may be
mentioned here that M/s. Techno Sales Corporation were doing business of
selling agents not only for Company but others also. In fact, they had been
doing business since assessment year 1965-66 onwards for almost three years
prior to their agreement with Company. From the various documents and
correspondence placed on record by the respondent company it transpired that
M/s. Techno Sales Corporation were attending to opening of tenders on behalf of
the Company, obtaining the statements of prices, terms and conditions of various
tenders etc. and furnishing such information to Company. They were also
following up the collection for and on behalf of the Company from the various
Government Departments. The firm of Kumar Wires & Conductors, Kanpur were apart from the commission received from Company
had income from wire standing operations, which it was doing for and on behalf
of the Company. During the course of the assessment proceedings, the Income Tax
Officer examined the question of the deductibility of the selling agency commission
while computing the total income of the Company and came to the conclusion that
the payments in question could not be allowed as legitimate business deductions
for the following reasons:—
1. That the selling agency firms did not
render any services to the assessee-company to
justify the aforesaid payments.
2. That the agreement with M/s. Techno
Sales Corporation was a sole selling agency agreement and inasmuch as this
agreement was not ratified in the first Annual General Body Meeting of the
company held after the execution of the said contract, it was void ab initio in terms of sub-section
(2) of section 294 of the Companies Act, 1956.
3. That the agreement was also hit by the
provisions of section 314(1)(b) of the Companies Act,
and
4. That,
therefore, the payments to the selling agents were not allowable as business
expenditure under section 37 of the Income-tax Act, 1961.
4. The
Company feeling aggrieved preferred an appeal before the Appellate
Assistant Commissioner, who after examining the evidence on record, gave the
finding that the selling agency firms were rendering services to the respondent
company, but nevertheless he held that the payments in question were not
allowable deductions because the said selling agents were, in fact, sole
selling agents and inasmuch as the agreement entered into with them were violative of the provisions of sub-section (2) of section
294 and sub-section (1)(b) of section 314 of the Companies Act, 1956, the
payments made to them could not be allowed as legitimate business expenditure
under section 37 of the Act.
Feeling aggrieved by the said order, the
Revenue as well as the assessee preferred separate
appeals before the Tribunal. Before the Tribunal the two Members differed in
their opinion and, therefore, the matter was referred to the Third Member, who
after going to the various clauses of the agreement had held that the selling
agency agreement in question was not a sole selling agency agreement. According
to the third member the provisions of sub-section (2) of section 294 of the
Companies Act had not been violated by the Company and they were also not violative of section 314 of the Companies Act, 1956. Apart
from the fact that the Third Member had held that the agreement in question was
not sole selling agency agreement nor was violative
of section 314 of the Companies Act, he was of the opinion, that if the
agreements were held to be sole selling agency agreements they would be void
and of no effect following the decision of the Bombay High Court in the case of
Arantee Mfg. Corpn. v.
Bright Bolts (P.) Ltd. [1967] 2 Comp. L.J. 54. The
Tribunal in conformity with the opinion expressed by the Third Member allowed
the appeal filed by the respondent.
5. We have
heard Sri Dhananjay Awasthi,
learned Standing Counsel appearing for the Revenue and Sri S. Chatterjee learned counsel for the Company.
Learned counsel for the Revenue submitted that
the agreements in question are sole selling agency agreements and reiterated the
submissions made by the Department before the Tribunal, which are in following
terms:—
“1. That mention of the phrase “sole selling
agent” in the agreement of selling agency was not necessary to determine as to
whether or not a selling agent was a sole selling agent; all the facts and
attendant circumstances had to be looked into for determining the true nature
of the selling agent.
2. That M/s. Techno Sales Corporation
received commission with regard to all the sales of steel wire products in the
State of
3. That it was wrong to say that the sole
selling agency agreement had to be exclusive only with reference to territory;
it could be with reference to the different types of products also giving
exclusive rights to sell the specified products in a given territory.
4. That the products marketed through M/s.
Techno Sales Corporation and M/s. Kumar Wires & Conductors were not
similar; they were altogether different products; one of steel wire simpliciter, the other being aluminium
conductors. They were not only made of different metal; their use and nature
were also different.
5. That the selling agency agreements were
covered by the extended definition of “office or place of profit” as given in
sub-section (3) of section 314 of the Companies Act. In support of the above
proposition, reliance was placed on the following observations at page 577 of
2nd edition of Dutta’s Company Law:—
“The appointment of Managing Director
or a Director of company or its relative as sole selling agent is to be
regarded as office of profit under the company within the meaning of section 314
of the Act and requires a special resolution according consent of the company
for such appointment.”
6. That in view of the above position, M/s.
Techno Sales Corporation and M/s. Kumar Wires and Conductors have to be deemed
to have vacated their offices of sole selling agents under section 314 on the
dates next to the date of the first General Meeting held after the dates of the
respective agreements as their appointments were not approved therein, and that
later ratification of the agreements by the General Body Meeting on 28th June,
1975 was of no avail for what was void ab initio could not be validated by a subsequent act of
ratification.
7. That for determining the total income of
the Company, the Income-tax Officer could enquire whether certain payments
contravened the provisions of the Companies Act and whether or not they were
expenses in fact, incurred by the company and whether the same were incurred as
a trader or otherwise, and while doing so, the Income-tax Officer was not bound
to consult the Registrar, Joint Stock Companies or any other authority under
the Companies Act, for it was the sole prerogative of the Income-tax Officer to
determine the assessee’s total income.”
In support of his submissions he relied upon
the following decisions:—
1. Godavari
Sugar Mills Ltd. v. CIT [1963] 49 ITR 206 (Bom.).
2. Arantee Mfg. Corpn. v. Bright Bolts (P.) Ltd. AIR 1967
Bom. 440.
3. Nawabganj Sugar Mills Co. Ltd. v. CIT [1972] 86 ITR 44 (SC)
4. Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC)
6. Sri S. Chatterjee,
learned counsel for the respondent, however, submitted as follows:
1. That M/s. Techno Sales Corporation and
M/s. Kumar Wires and Conductors were not sole selling agents of the Company and
that, therefore, the provisions of sub-section (2) of section 294 and of
sub-section (1)(b) of section 314 of the Companies Act
did not apply to the contracts entered into by the Company with them.
2. That the agreements entered into with the
said parties were bona fide and were made in the interest of business and,
therefore, the payments in question were allowable under section 37 of the Act,
as having been laid out or expended wholly and exclusively for the purpose of
the assessee’s business.
3. That while determining the total income
of the Company, the Income-tax Officer could not travel beyond the terms of the
Act and that, if he came to the conclusion that the services were, in fact,
rendered, the expenditure will have to be allowed to the assessee
as a legitimate business deduction in terms of section 37 of the Act.
4. That the General Body of the shareholders
had passed a special resolution on 28-6-1975 ratifying the aforesaid two
agreements right from the very beginning and, therefore, whatever lacuna, if
any, was there had been made good and there could be no justification to uphold
the disallowance of the commission paid to by the Income-tax Officer merely on
the ground that the agreements in question had not been ratified by the General
Body Meeting earlier.
5. That section 314 of the Companies Act,
1956 did not cover the case of a selling agent did not derive a monthly
remuneration nor did it hold any office or place of profit under the company.
Reference was made to a circular issued by the Company Law Board. In view of
the above instructions of the Company Law Board, it was urged that it would be
wrong to apply section 314 to the selling agency agreements.
6. That the Income-tax Officer could not
exercise any powers under the Companies Act, 1956 and, therefore, could not
hold that the company had violated any of the provisions of the Companies Act.
This could be done only by the Company Law Board under section 10C of the
Companies Act or by the competent courts under section 10 of the said Act.
7. That the principle of quantum merit
worked against the Company and it could not recover the payments made to the
selling agents even if it was held that the said contracts were invalid for it
had accepted the services rendered by the agents and had made payments therefor.
7. Having
heard the learned counsel for the parties, we find that in the agreement
entered by the Company with M/s. Techno Sales Corporation on 9th August, 1968,
M/s. Techno Sales Corporation has been appointed as its selling agent for the
sale of mild steel wire, galvanized iron wire and other wire products in the
state of Uttar Pradesh. One of the terms and conditions of the agreement was
that the said agency shall be paid by the Company a commission of 1 per cent on
all sales effected by the Company of the goods
manufactured by them either to market parties or to the Government Department.
The relevant clauses (1) and (5) of the said agreement are reproduced below:—
“(1) The
Principal hereby appoint the Agent to be its Selling Agent for the Sale of Mild
Steel Wires, Galvanized Wires and other Wire Products manufactured by the
Principal, for the State of U.P. and the agent hereby agrees to act as such
selling agent on the terms and conditions mentioned herein.
(5) The
agent shall be paid by the Principal a commission of 1 per cent on all sales effected by the Principals of the goods manufactured by
them, either market parties or to Government Departments.”
8. In
respect of the agreement entered by the Company with M/s. Kumar Wires &
Conductors on 21st March, 1972, the terms and conditions except product
difference is the same. Clauses (1) and (5) of the said agreement are
reproduced below:—
“1. The Principal hereby appoint the Agent to
be selling Agent for the sale of AAC, ACSR Conductors & Other Aluminium conductors manufactured by the Principal and the
Agent hereby agrees to act as such selling agent on the terms and conditions
mentioned herein.
2. The Agents shall be paid by the Principal
a commission of 1 per cent on all sales effected by
the Principals of the Goods viz. AAC, ACSR and other conductors manufactured by
them, either market parties or to Government departments. The said commission
shall be payable at the end of each accounting year of the Principal.”
From the reading of the aforesaid clauses of
the two agreements we are of the considered opinion that the two parties have
been appointed as their selling agents to the exclusion of others in respect of
different products manufactured by the Company for the entire State of U.P. and
the said agents were entitled for payment of commission at the rate of 1 per
cent of sales of all such products within the State of U.P. either effected by
the agents or by the Company.
Section 294 of the Companies Act, 1956
prohibits the appointment of sole selling agent for any area for a term
exceeding five years at a time. Sub-section (2) provides that the appointment
of the sole selling agents for any area shall cease to be valid if it is not
approved by the Company in its first general meeting held after the date on
which the appointment is made. Section 294 of the Companies Act, 1956, insofar
as it is relevant for the purposes of the present reference is reproduced
below:—
“294. Appointment of sole selling agents to
require approval of company in general meeting.—(1) No company shall, after the
commencement of the Companies (Amendment) Act, 1960, appoint a sole selling
agent for any area for a term exceeding five years at a time:
Provided that nothing in this
sub-section shall be deemed to prohibit the re-appointment, or the extension of
the term of office, of any sole selling agent by further periods not exceeding
five years on each occasion.
(2) After
the commencement of the Companies (Amendment) Act, 1960, the Board of Directors
of a company shall not appoint a sole selling agent for any area except subject
to the condition that the appointment shall cease to be valid if it is not
approved by the company in the first general meeting held after the date on
which the appointment is made.
(2A)If the company in general meeting as
aforesaid disapproves the appointment, it shall cease to be valid with effect
from the date of that general meeting.”
9. Section
314 of the Companies Act, 1956 provides that except with the consent of the
company accorded by a special resolution a director shall not hold any office
or place of profit. Section 314(1) of the Companies Act, 1956 is reproduced
below for ready reference:—
“314. Director, etc. not to hold office or place
of profit.—(1) Except with the consent of the company
accorded by a special resolution,—
(a) no director of a company shall hold any office or place of
profit, and
(b) no partner, or relative of such director,
no firm in which such director, or a relative of such director, is a partner,
no private company of which such director is a director or member, and no
director, or manager of such a private company, shall hold any office or place
of profit carrying a total monthly remuneration of such sum as may be
prescribed.
Except that of managing director or manager, banker
or trustee for the holders of debentures of the company,—
(i) under the company; or
(ii) under any
subsidiary of the company, unless the remuneration received from such
subsidiary in respect of such office or place of profit is paid over to the company
or its holding company:
Provided
that it shall be sufficient if the special resolution according the consent of
the company is passed at the general meeting of the company held for the first
time after the holding of such office or place of profit:
Provided
further that where a relative of a director or a firm
in which such relative is a partner, is appointed to an office or place of
profit under the company or a subsidiary thereof without the knowledge of the
director, the company or a subsidiary thereof without the knowledge of the
director, the consent of the company may be obtained either in the general
meeting aforesaid or within three months from the date of the appointment,
whichever is later.
Explanation.—For the purpose of this
sub-section, a special resolution according consent shall be necessary for
every appointment in the first instance to an office or place of profit and to
every subsequent appointment to such office or place of profit on a higher
remuneration not covered by the special resolution, except where an appointment
on a time-scale has already been approved by the special resolution.”
From a conjoint reading of the provisions of
sections 294 and 314 of the Companies Act, 1956 it will be seen that a company
cannot appoint a sole selling agent for any area for a term exceeding five
years at a time and the agreement for appointment of sole selling agent has to
be got ratified/approved by the company in its first general meeting held after
the date on which the appointment is made failing which it shall cease to be
valid with the date of first general meeting and further a director or any of
his relative where such director or the relative is partner in the firm cannot
hold any office or place of profit except with the consent of the company
accorded by a special resolution. The phrase ‘sole selling agent’ has not been
defined under the Companies Act, 1956. In common parlance and in ordinary sense
it would mean that the exclusive and sole right to sell all the products of the
Principal to the exclusion of all others. In the present case two things under
the separate agreements have been described as selling agents and not sole
selling agents. Further, they have not been given exclusive right to sell all
the products. Specific mention of the word “for any area” and omission to
mention “any goods” make it abundantly clear that there can be only one sole
selling agent in an area in respect of all the goods dealt with by the company.
It may be mentioned here that under sub-section (6) of section 294 of the
Companies Act, 1956, the Central Government has been empowered to call for
information from the Company where there are more than one selling agents in a
particular area and to declare any one of them to be a sole selling agent of
the Company for such area or any of such areas. There is nothing on record to
show or suggest that the Central Government had declared any one of
aforementioned selling agents as the sole selling agent of the Company. Thus,
they cannot be treated as sole selling agents.
10. In the case
of Arantee Mfg. Corpn. (P.)
Ltd. (supra), the Bombay High Court has held that sub-section (2) of section
294 should be interpreted to mean that it contains a condition precedent that
attaches to the very act of making the appointment of a sole selling agent by
the Board of Directors. Therefore, if any appointment of a sole selling agent
is made by a Board of Directors without such a condition as mentioned in
sub-section (2), the same would be contrary to the said provisions and would be
void ab initio.
Similar view has been taken by the Calcutta
High Court in the case of Shalagram Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706 and the Kerala High
Court in the case of Kerala Chlorates & Chemicals
Ltd. v. Registrar of Companies [1988] 63 Comp. Cas.
175. The contract in question appears to be grant of contract of appointment as
distributor of the respondent’s products and, therefore, it need not be placed
before the company in general meeting. The Delhi High Court in the case of Globe
Motors Ltd. v. Mehta Teja Singh & Co. (Agencies)
[1984] 55 Comp. Cas. 445 has held that a
distributor’s contract is not a contract for appointment of a sole selling
agent and thus it is required to be placed before the company in general
meeting.
11. As we have
come to the conclusion that under the two agreements M/s. Techno Sales
Corporation as well as M/s. Kumar Wires & Conductors have not been
appointed sole selling agents and were only distributors/selling agents in
respect of the specified goods, their appointment does not come within the
purview of section 294(2) of the Companies Act, 1956. Even
otherwise, as held by the Bombay High Court in the case of Arantee
Mfg. Corpn. (supra)
as the agreement in question did not contain a clause that the agreement shall
cease to be valid if it is not approved by the Company in general meeting held
after the date on which the appointment is made, it is void ab
initio.
12. The words
“office or place of profit” occurring in sub-section (1) of section 314 does
include selling and buying agents receiving commission and/or salary. The sole
selling agency has been held to be an office of profit by the Bombay High Court
in the case of Firestone Tyre & Rubber Co. v.
Synthetic & Chemicals Ltd. [1971] 41 Comp. Cas.
377. As in the present case the two firms which have been appointed as the
selling agents consist of either the directors or the relatives as their
partners, a special resolution was required to be passed by the company for
their appointment in the absence of which they would not have been appointed.
13. In the case
of Godavari Sugar Mills Ltd. (supra) the Bombay High
Court has held that where the amount payable as dividends by the public
companies was restricted by the Public Companies (Limitation of Dividends) Ordinance,
1948, the company was not able to declare the percentage of dividends as
required by section 23A of the Indian Income-tax Act, 1922. The court has
further held that if a restriction is imposed by any law on a company in
respect of declaration of dividends at a particular point of time, then that
restriction would equally be applicable to the Income-tax Officer, if by his
order, he is creating a legal fiction of notional distribution of dividends at
that particular point of time.
14. In the case
of Nawabganj Sugar Mills Co. Ltd. (supra) the Apex
Court has held that the Appellate Tribunal has to act judicially in the sense
that it has to consider with due care all material facts and evidence in favour
of and against the assessee and record its finding on
all the contentions raised by the assessee and the
Commissioner in the light of the evidence and the relevant law.
15. In the case
of Lachminarayan Madan Lal’s (supra) the Apex Court has held that the mere existence
of an agreement between the assessee and its selling
agents or payment of certain amounts as commission, assuming there was such
payment, does not bind the Income-tax Officer to hold that the payment was made
exclusively and wholly for the purpose of the assessee’s
business. Although there might be such an agreement in existence and the
payments might have been made, it is still open to the Income Tax Officer to
consider the relevant facts and determine for himself whether the commission
said to have been paid to the selling agents or any part thereof is properly
deductible under section 37 of the Act. The decisions relied upon by the
learned counsel for the Revenue are not applicable in
the present case as the controversy raised in the present case is entirely
different.
16. As there is
no dispute that some of the partners of the two firms are related to the
directors of the Company, the appointment even selling agents amounts to
holding an office of profit and is hit by section 314 of the Companies Act,
1956.
17. In view of
the aforesaid discussion, we answer the first question referred to us in the
affirmative i.e., in favour of the assessee and
against the Revenue and the second question in negative i.e., in favour of the
Revenue and against the assessee. However, there
shall be no order as to costs.
[2001]
105 Comp. Cas. 0676 (Kar.)
HIGH COURT OF KARNATAKA
A.V. Kasargod
v.
Registrar of Companies
K.R. PRASADA RAO, J.
FEBRUARY 6, 2001
S.G. Bhagawan for the petitioner.
Y.
Hariprasad for the respondent.
K.R.
Prasada Rao, J.—This petition is filed by the
accused in C.C. No. 202 of 1998, on the file of the Special Court (Economic
Offences), Bangalore, seeking for quashing the above proceedings against them
for the offence punishable under section 629A of the Companies Act, 1956 (for
short "the Act").
The
respondent filed the above complaint registered as C.C. No. 202 of 1998 against
the petitioners before the
I
have heard the arguments advanced by learned counsel for the petitioners and
learned counsel for the respondent.
Learned
counsel for the petitioners raised the following contentions in the present
petitions:
1. Non compliance with the provisions of
section 294(2) of the Act, does not constitute an
offence punishable under section 629A of the Act. The consequence of
non-inclusion of the condition that the appointment of the sole selling agents
shall cease to be valid with effect from the date of the first general meeting
if their appointments are not approved by the company would be only to render those
appointments invalid from the date of the first general meeting.
2. Even assuming that such non-inclusion
is an offence, the offence is deemed to have been committed on the date of the
agreements and the offence is not a continuing offence and therefore, the
complaint is barred by limitation.
In
support of the above contentions, learned counsel for the petitioners have
relied upon a decision of the Bombay High Court in Arantee
Manufacturing Corporation v. Bright Bolts Private Ltd. [19671 57 Comp Cas 758, wherein it was held that (headnote):
"Subsection
(2) of section 294 of the Companies Act, 1956, contains a condition precedent
that attaches to the very act of making the appointment of a sole selling agent
by the board of directors. Therefore, if any appointment of a sole selling
agent is made by a board of directors without such a condition, namely, that
the appointment shall cease to be valid if it is not approved by the company in
the next general meeting of the company as is mentioned in sub-section (2), the
same would be contrary to the said provisions and would be void ab initio."
Placing
reliance on the above decision, he contended that the appointment of the above
sole selling agents in the instant case was void ab initio since the appointments were not approved by the
board of directors in the first general meeting held. Since there is no penalty
stipulated under section 294(2), for non-compliance with the said mandatory
requirements, he contended that it does not constitute an offence punishable
under omnibus provisions of section 629A of the Act. But, learned counsel for
the respondent pointed out that in the above referred decision at page 766, the
court observed that:
"On
a fair reading of the aforesaid provisions, it will at once become clear that
the provisions of sub-sections (1) and (2) shall have to be regarded as not
directory but mandatory having regard to the negative language employed
therein."
It
is further observed in the same para, that:
"However,
in my view, if regard be had to the manner in which the section is enacted, the
language used therein and the place at which the section appears in the entire
scheme of the Act, it will be clear that the conditions mentioned in
sub-section (2) will have to be regarded as a condition which attaches to the
very act of making the appointment of a sole selling agent by the board of
directors and, therefore, a condition precedent. The object of the section as I
have already indicated above, is to place restrictions
or curbs on the powers of the board of directors. The language employed in
sub-section (1) and sub-section (2) is clearly negative which suggest that the
provisions are to be regarded as mandatory. Sub-section (1) provides that 'No
company shall...appoint a sole selling agent for any area for a term exceeding
five years at a time.' The proviso makes it clear that the aforesaid absolute
prohibition will not apply to the re-appointment or re-extension of the term of
office of any sole selling agent, but that such re-appointment or extension of
term should not exceed the period of five years on any one occasion. In my
view, sub-section (1) puts an embargo upon the company by prohibiting the
company from making any appointment of a sole selling agent for any term
exceeding five years at a time. Similar is the position with regard to sub
section (2). Sub-section (2) provides that the board of directors of a company
shall not appoint a sole selling agent for any area except subject to the
condition that the appointment shall cease to be valid if it is not approved by
the company in the first general meeting held after the date on which the
appointment is made' Sub-section (2) also puts an embargo upon the board of
directors of a company by prohibiting the board from making any appointment of
a sole selling agent except subject to the condition mentioned therein. In
other words, the board of directors of a company are
only free to make appointment of a sole selling agent subject to the aforesaid
condition. The language used, viz., shall not appoint...except subject to the
condition' shows that the condition mentioned attaches to the very act of
making the appointment by the board of directors. It will thus be clear that,
if any appointment is made by the board of directors without such a condition,
the appointment will be contrary to the provisions of sub-section (2) and.
therefore, illegal and bad in law."
So,
placing reliance on the above observations of the court in the aforesaid
decision, learned counsel for the respondent vehemently contended that the
penal provisions of section 629A of the Act are attracted to the instant case,
since the above restrictions and mandatory directions provided under section
294(2) have not been complied with while appointing the sole selling agents by the
petitioners, under the above agreements entered into by them. It is further
contended by him that the provisions of section 629A of the Act will be
attracted where no specific penalty is provided elsewhere in the Act.
Having
regard to the language employed in section 294(2) of the Act, I have no
hesitation to hold that the directions and the restrictions imposed by the
Legislature are mandatory in nature as interpreted in the above decision.
Section 629A of the makes it clear that:
"If
a company or any other person contravenes any provision of the Act for which no
punishment is provided elsewhere in this Act or any condition, limitation or
restriction subject to which any approval, sanction, consent, confirmation,
recognition, direction or exemption in relation to any matter has been
accorded, given or granted, the company and every officer of the company who is
in default or such other person shall be punishable with fine which may extend
to five hundred rupees, and where the contravention is a continuing one, with a
further fine which may extend to fifty rupees for every day after the first
during which the contravention continues."
Since
no specific penalty is provided for the above provision under the provisions of
section 294 of the Act, in my view, the penalty provision under section 629A is
clearly attracted to the present case.
At
this stage, learned counsel for the petitioner has brought to my notice a
recent decision of this court reported in Anantha R. Hegde v. Capt. T.S. Gopalakrishna
[1998] 91 Comp Cas 312, wherein it was held that:
"Failure
to convene the requisitioned extraordinary general meeting as required under
the provisions of section 169 of the Companies Act does not constitute an
offence punishable under section 629A of the Act."
Placing
reliance on the above decision he contended that on the same analogy of the
above decision, in the instant case also, non-compliance with the above
mandatory directions and restrictions given in section 294(2) of the Act, does
not constitute an offence punishable under section 629A of the Act. On a
careful perusal of the above decision, it is found that the court observed as
under (page 327):
"That
in the event of failure by the board of directors to convene the meeting, an
alternative and efficacious remedy was provided under section 169(6) of the
Act."
It
is under those circumstances, this court has taken the view that the wording of
section 169 indicates that the Legislature never intended that the failure by
the board of directors to convene the meeting could be construed as an offence
because an alternative and efficacious remedy is provided under the Act. But,
in the instant case, since there is no other alternative remedy provided in the
Act in the event of non-compliance with the mandatory directions and
restrictions imposed in section 294(2) of the Act, I find that the above
decision is not applicable to the facts of this case.
It
is next contended by learned counsel for the petitioners that the complaint
filed by the respondent is barred by limitation, since the above offence is not
a continuing offence and since the complaint has not been filed within six
months from the dates, on which the offence has been committed, which are the
dates on which the above agreements appointing the sole selling agents are
signed i.e., on August 28, 1989, and August 31, 1989, and the date on which the
show-cause notice has been issued to the company of the petitioners, which is
March 13, 1993. In support of this contention, he relied upon the earlier
decision of this court in Chandra Spinning and Weaving Mills Pvt. Ltd. v.
Registrar of Companies [1988] ILR 149 Kar, wherein it
was held that:
"The
contravention of the provisions contained in section 220(1)(a)
of the Companies Act, is not a continuing contravention.
The
determination whether a given crime is a continuous offence is a matter of
statutory interpretation. But the judicial consensus is that the doctrine of
continuing offence should be applied only in limited circumstances. Since the
doctrine effectively extends the statute of limitations beyond its stated term.
A particular contravention or offence should not be deemed to be a continuous
one unless the explicit language of the substantive criminal statute compels
such a conclusion...the court should not be eager to hold that an act or
omission is a continuing wrong or default unless there are words in the statute
concerned which make out that such was the intention of the Legislature.
Section
220(1) of the Act by itself does not impose any liability the contravention of
which is susceptible of continuance. The default would be complete with a
failure to furnish the copies of balance-sheet and profit and loss account in
the manner and within the time stated therein. Such an offence is committed
once and for all as and when a person/s commit/s the default. A careful-reading
of section 220(1) of the Act would show that neither it envisages nor
contemplates that the obligation to submit the copies continues from day to day
until the copies are actually submitted."
Placing
reliance on the above decision, he contended that in the instant case also, the
offence is committed once and for all on the dates on which the agreements were
entered into with the sole selling agents and were signed without stipulating
the condition that their appointments shall cease to exist, if they are not
approved by the board of directors in the first general meeting called for.
But, in the instant case, the agreements were renewed subsequently for further
period of three years after the expiry of the period of three years fixed in
the original agreements. The dates of renewal of the agreements are clearly
mentioned in the complaint in para. 4 as from August
29, 1992, to August 27, 1995, in the case of Medley Marketing Private Limited
and from August 31, 1992, to August 30, 1995, in the case of P.V. Kuruvilla and the agreements were again renewed on
September 5, 1995, for a further period of three years, on the same terms and
conditions of the earlier agreements. Thus, it is clear that the non-compliance
with the mandatory directions contained in section 294(2) is found to be not
only in respect of the first agreement, but is also found to be in respect of
the second and third agreements. On the basis of these facts, I have no
hesitation to hold that the offences committed are of the nature of continuing
offences. Further, the question whether the complaint is barred by limitation,
is a matter which is to be considered by the trial court, in the first
instance, since the trial court is entitled to exercise its discretion in
condoning the delay, if any, in filing the complaint under the provisions of
section 473, Criminal Procedure Code, if it is satisfied on the facts and in
the circumstances of the case that the delay has been properly explained or
that it is necessary so to do in the interests of justice. In view of the said
discretion conferred on the trial court, in my view, it is premature to go into
the question of limitation by this court at this stage and I find it necessary
to keep the said question open, to be decided by the trial court in the first
instance. Learned counsel for the petitioners relied upon a decision of the
Supreme Court in State of
"Section
473 confers power on the court taking cognizance after the expiry of the period
of limitation, if it is satisfied on the facts and in the circumstances of the
case that the delay has been properly explained and that it is necessary so to do
in the interest of justice. Obviously, therefore in respect of the offences for
which a period of limitation has been provided in section 468, the power has
been conferred on the court taking cognizance to extend the said period of
limitation where a proper and satisfactory explanation of the delay is
available and where the court taking cognizance finds that it would be in the
interest of justice. This discretion conferred on the court has to be exercised
judicially and on well recognised principles. This
being a discretion conferred on the court taking cognizance, wherever the court
exercises this discretion, the same must be by a speaking order, indicating the
satisfaction of the court that the delay was satisfactorily explained and condonation of the same was in the interest of justice. In
the absence of a positive order to that effect, it may not be permissible for a
superior court to come the conclusion that the court must be deemed to have
taken cognizance by condoning the delay whenever the cognizance was barred and
yet the court took cognizance and proceeded with the trial of the
offence."
Placing
reliance on the above decision, it is submitted by him that in the instant
case, the trial court has not passed any speaking order for having condoned the
delay before taking cognizance of the offence. Since the trial court has not
applied its mind to the question of limitation and has not passed any order on
the said question, I find it necessary to give a direction to the trial court
to consider the question of limitation at the initial stage itself and
thereafter, to take cognizance of the offence if it is of the opinion that the
delay, if any, in filing the complaint can be condoned.
Learned
counsel for the petitioners next submitted that the above offence being a petty
offence, the trial court ought to have given summons in Form No. 30 and since
the said procedure has not been followed, the above proceedings are liable to
be quashed. But, merely because the summonses are not issued in Form No. 30, I
do not think that it constitutes a ground to quash the above proceedings. Since
the offence is compoundable, the petitioners are entitled to approach the
respondent seeking for compounding the offence alleged.
For
all the above reasons, this petition is dismissed giving liberty to the
petitioners to raise the question of limitation before the trial court and the
trial court is directed to decide the question of limitation after giving
opportunity to both the parties to submit their say in the matter, before taking
cognizance of the offences alleged and before proceeding further in the matter.
[1988] 63 COMP. CAS. 175 (KER)
HIGH COURT KERALA
Kerala Chlorates and
Chemicals Limited
v.
Registrar of Companies
K.T. THOMAS, J.
CRL. M.C. NO. 261 OF 1986
NOVEMBER 17, 1986
K.A. Nayar for the Petitioner.
The Registrar of Companies,
Kerala, filed a complaint against thirteen persons
before the Court of the Addl. Chief Judicial Magistrate (Economic Offences), Ernakulam. The learned Magistrate took cognizance of the
offence mentioned in the complaint (section 294(2) read with section 629A of
the Companies Act) and issued summons to the accused. The petitioner herein,
M/s. Keral a Chlorates and Chemicals Ltd. ("the
company", for short) is the first accused in the complaint. This petition
is filed under section 482 of the Code of Criminal Procedure to quash the said
complaint and other proceedings initiated thereon.
Accused Nos. 2 to 13 shown
in the complaint are the members of the board of directors of the first accused
company. The first accused appointed M/s. Shaw Wallace & Co. Ltd.
(hereinafter referred to as "Shaw Wallace") as its consignment agent
for marketing the products of the company with effect from March 16, 1982. It
is stated in the complaint that the company ought to have obtained the approval
for the appointment of Shaw Wallace in the first general meeting held after the
date of the appointment of Shaw Wallace and that the company failed to obtain
the approval and thereby the company violated the provisions of section 294(2)
of the Companies Act. When the Registrar of Companies required the company to
offer comments on the aforesaid dereliction, the company contended, inter alia, that Shaw Wallace is not a sole selling agent within
the meaning of section 294 of the Companies Act. The explanation was not
acceptable to the Registrar and hence he filed the complaint.
Shri K.A. Nayar, learned counsel for
the company, raised mainly two points in this court. The first is that the
prosecution is bad in law as the complaint is barred by limitation as provided
in section 468 of the Code of Criminal Procedure. According to him, Shaw
Wallace was appointed by the company on March 23, 1982, and the next annual
general meeting of the company was held on October 11, 1982. The complaint was
filed on February 9, 1986, which is far beyond the six months' period for
taking cognizance of the offence. I am not inclined to quash the complaint on
the aforesaid ground, even if the argument is correct, because the accused did
not raise such a contention before the trial Magistrate. Even if the complaint
was filed after the period of limitation, the trial court can consider whether
the delay has been properly explained. Even if there is no explanation for the
delay, the trial court can still consider whether it is necessary to take
cognizance of the offence in the interest of justice. It is so provided in
section 473 of the Code.
The second contention is
that no offence is disclosed in the complaint and hence no cognizance should
have been taken by the Magistrate.
Section 294(2) reads thus :
"After the
commencement of the Companies (Amendment) Act, 1960, the board of directors of
a company shall not appoint a sole selling agent for any area except subject to
the condition that the appointment shall cease to be valid if it is not
approved by the company in the first general meeting held after the date on
which the appointment is made."
Sub-section (2A) provides
that if the company in general meeting disapproves the appointment, it shall
cease to be valid with effect from the date of the general meeting. Section
629A of the Companies Act provides penalty for contravention of any of the
provisions of the Act.
So, in order to constitute
the offence of contravention of section 294(2) of the Act, there must be an
allegation in the complaint that the board of directors of the company
appointed Shaw Wallace as a sole selling agent without the condition that the
appointment shall cease to be valid if it is not approved by the company in the
first general meeting. There is no such allegation in the complaint. Even if no
such condition is specifically stated in the appointment order or in the
resolution by which the appointment is made, the consequence that the
appointment shall cease to be valid if it is not approved by the company in the
first general meeting cannot be averted. The learned Additional Central
Government Standing Counsel contended that it is the duty of the board of
directors to place the appointment for approval in the annual general meeting
held immediately subsequent to the date of appointment. No such duty is
enjoined on them by the provisions of the Companies Act and, therefore, the
omission to place the appointment cannot be deemed to be a contravention of any
provision of the Act. The learned standing counsel contended that what is
provided in section 294(2) is actually a condition imposed on the board of
directors to place the appointment for approval in the annual general meeting.
A reading of the sub-section will show that the condition mentioned therein is
not one which obliges the board of directors to place the appointment in the
annual general meeting. What is contemplated in the sub-section is that the
appointment shall be made subject to the above condition. In other words, the
appointment order should specify that the appointment is made subject to the
aforesaid condition. This is how Tulzapurkar J. has
interpreted the subsection
in Arantee Mfg. Corporation v. Bright Bolts P. Ltd.
[1967] 37 Comp Cas 758 (Bom).
A Division Bench of the Calcutta High Court in Shalagram
Jhajharia v. National Co. Ltd. [1965] 35 Comp Cas 706 (Cal) also placed
the same interpretation on section 294(2). I am in respectful agreement with
the aforesaid interpretation.
It is not stated in the
complaint that the appointment order (or the resolution by which the
appointment is made) is shorn of the condition specified in section 294(2).
Without such an averment in the complaint, no offence can be spelled out from
it and hence no cognizance of the offence should have been taken by the learned
Magistrate. When the facts stated in the complaint fail to disclose the
offence, this court will be justified in exercising the inherent powers to
quash the complaint.
Accordingly, I allow this
petition and quash the complaint in S.T. No. 37 of 1986 of the Additional Chief
Judicial Magistrate (Spl.), Ernakulam.
[1967] 37 COMP. CAS. 758 (BOM)
V.
Bright
Bolts (P.) Ltd.
TULZAPURKAR,
J.
ARBITRATION SUIT NO. 175 OF 1965
DECEMBER
6, 1965
JUDGMENT
TULZAPURKAR,
J.- This is a petition filed
by Arantee Manufacturing Corporation, a partnership
firm (plaintiffs) against Bright Bolts Private Limited (defendants) for an
order that the arbitration agreement contained in clause 12 of the sole selling
agency agreement, copy whereof has been annexed as exhibit F to the petition,
be filed in this court and for an order of reference referring all disputes and
differences between the plaintiffs and the defendants relating to the sole
selling agency agreement to the arbitration of Tan arbitrator or arbitrators in
accordance with clause 12 of the said agreement and for incidental reliefs.
The petition
is filed in the following circumstances: The plaintiffs have alleged that the
defendants, who are a private limited company manufacturing nuts, bolts, screws
and hardware, had negotiations with them for the purpose of appointing them as
their sole selling agents for the goods manufactured by them throughout India,
that between the beginning of October, 1964, and 19th October, 1964,
discussions took place between Mr. K. M. Mehta, a director of the defendants as
representing the defendants and the two partners of the plaintiffs-firm, that
during the course of the said discussions the terms and conditions on which the
plaintiffs were to be appointed as sole selling agents were discussed, and that
ultimately on or about 19th October, 1964, the said negotiations were finalised and a concluded contract was arrived at between
the parties as a result whereof the plaintiffs were appointed as sole selling
agents of the defendants for a period of three years commencing from 19th
October, 1964, for the whole of India in respect of the bolts and screws
manufactured by the defendants on terms and conditions that were subsequently
recorded in an agreement. The plaintiffs have further alleged that on 19th
October, 1964, in furtherance of the said agreement the plaintiffs deposited
with the defendants a sum of Rs. 35,000 as orally agreed upon between the
parties and that the said deposit was accepted by the defendants and the
defendants passed a deposit receipt in that behalf in plaintiffs' favour. The
plaintiffs have further alleged that in furtherance of the said agreement and
acting upon the same the defendants addressed letters to their several
customers informing them that they had appointed the plaintiffs as sole selling
agents for their goods and the customers were requested to make their inquiries
directly with the plaintiffs to enable the plaintiffs to give the said
customers their most competitive quotations. The plaintiffs have further
alleged that draft advertisements were forwarded by the defendants to them,
which the plaintiffs got published in newspapers such as "Times of India",
"Bombay Samachar" and "Janmabhumi" and that the said advertisements contained
statements that the defendants had appointed them as their sole selling agents.
It is further alleged by the plaintiffs that round about Divali
of 1964 they got their greeting cards printed, which contained statements to
the effect that the plaintiffs were the sole selling agents of the defendants
for all over India and that they also got calendars and diaries for the year
1965 printed which contained similar statements and that, in spite of copies of
the greeting cards and calendars and diaries having been sent to the
defendants, no objection was at any time raised by the defendants to the
statements contained in those greeting cards, calendars and diaries. It is
further alleged that in respect of the advertisements which were got published
by the plaintiffs they forwarded debit notes in respect of half of such costs
to the defendants but these debit notes were after a lapse of considerable time
returned by the defendants as rejected upon legal advice. It is further alleged
that in or about November, 1964, the plaintiffs' partner, Mr. Tribhuvan Shah, got prepared a draft agreement of the sole
selling agency containing the points discussed and agreed upon by the between
the parties and the said draft was approved by Shri
K. M. Mehta of the defendants on or about 2nd December, 1964, and Shri Mehta asked the plaintiffs' partner to get the said
agreement typed out on engrossment on the requisite stamp paper. It is the
plaintiffs' allegation further that as per the request of Mr. Mehta the draft
agreement was got engrossed in duplicate on the requisite stamp paper and both
the engrossments were delivered to Shri K. M. Mehta
on 3rd December, 1964, and Shri Mehta retained both
the engrossments stating that that day being Amas he
would execute the same on an auspicious day in a day or two thereafter. The
plaintiffs have further alleged that on 4th December, 1964, Shri
Mehta of the defendants told one of the partners of the plaintiffs that he wished
to make a couple of alterations in the engrossment and it is the plaintiff's
case further that the advocate, who had drafted the agreement, was sent for and
in the presence of the advocate certain alterations were suggested by Shri K.M. Metha and these
alterations and modifications were accepted by the plaintiffs. It is the
plaintiffs' case further that some of these alternations were written out on
the first page of the engrossment which was initialled
by Shri K. M. Mehta on behalf of the defendants and
as some of the alternations to be made on the second page were too lengthy
running into some lines their advocate told Shri
Mehta he would get the second page of the engrossment re-typed such
alterations. Accordingly, the second page of the engrossment was got re-typed
and thereafter a completed agreement containing all the terms and conditions
agreed upon by and between the parties was sent to the defendants for their
signature but the defendant on some pretext or the other refused to execute and
sign the said agreement. It is the plaintiffs' case further that the defendants
with a view to get out of the agreement addressed a letter dated 2nd January,
1965, to the plaintiffs falsely complaining about the plaintiffs' rates to
their customers being too high and making several other false allegations
therein. The plaintiffs by their reply dated 7th January, 1965, denied all
those allegations and contentions put forward by the defendants in their
aforesaid letter. It is the plaintiffs' case that, in the correspondence that
ensued between the parties, the defendants made it clear that they had never
appointed the plaintiffs as their sole selling agents, but on one occasion they
forwarded another draft agreement appointing the plaintiffs as one of their
selling agents and called upon the plaintiffs to approve of the same and
execute the same, which the plaintiffs refused to do. In the circumstances, the
plaintiffs have alleged that there is a concluded contract arrived at between
the parties whereunder the defendants have appointed
the plaintiffs as their sole selling agents in respect of their goods for the
whole of India and that the terms and conditions upon which they were so
appointed are contained in the agreement, a copy whereof is annexed as exhibit
F to the petition. The plaintiffs have further alleged that clause 12 of the
sole selling agency agreement (exhibit F to the petition) contains a provision
for a reference to arbitration and it is the plaintiffs' case that disputes and
differences have arisen between the parties including the question as to
whether the plaintiffs have been appointed as sole selling agents of the
defendants or not-all of which are liable to be referred to arbitration
pursuant to the arbitration clause contained in the said agreement. The
plaintiffs have, therefore, prayed for an order that the agreement be filed in
this court and that an order of reference referring all the disputes and
differences between the parties to an arbitration of arbitrators as per clause
12 of the agreement, be made.
The petition
is resisted by the defendants on several grounds. Though the defendants have
admitted that there were negotiations between the plaintiffs and the defendants
in the matter of appointing the former as their selling agents, they have
contended that there was no concluded contract arrived at between the parties.
The defendants have categorically denied that they have ever appointed the
plaintiffs as their selling agents, much less sole selling agents as alleged by
the plaintiffs. The defendants have further contended that during the course of
negotiations the plaintiffs offered to get a draft of the agreement for selling
agency prepared as the basis for negotiations between the parties, but since
the draft agreement as well as the engrossment purported to appoint the
plaintiffs as sole selling gents of the defendants they did not approve of the
same. As regards the sum of Rs. 35,000 deposited by the plaintiffs with them
the defendants have denied that the said amount was deposited in part
performance or acting upon any agreement. They have contended that the said sum
was deposited during the progress of the discussions for appointing the
plaintiffs as the selling agents and that the receipt passed in the plaintiffs'
favour also categorically stated that the deposit was for the selling agency.
The defendants have denied that they have written letters to their customers
intimating them that they had appointed the plaintiffs as their sole selling
agents. They have contended that during the course of the negotiations the
defendants addressed some letters to their customers, but in those letters they
had merely stated that the plaintiffs were being appointed as mere selling
agents. As regards the advertisements which appeared in newspapers the defendants
have denied that they forwarded any draft advertisements to the plaintiffs and
they contended that the said advertisements were inserted by the plaintiffs
without their consent or knowledge and after these advertisements were seen by
them Shri Mehta, the director of the defendants,
verbally protested to the plaintiffs and also told them that there was no sole
selling agency under discussion and that what was to be negotiated was only a
selling agency and that the plaintiffs promised not to repeat such
advertisements. The defendants have denied that the plaintiffs sent any
greeting cards to them or to any of their directors. The defendants have
categorically denied that Shri Mehta approved their
draft agreement shown to him by the plaintiffs' partner as alleged and they
have further denied that Mr. Mehta told the plaintiffs that the said draft
should be got typed out on a requisite stamp paper. The allegations about the
engrossments having been sent by the plaintiffs to the defendants and Shri Mehta having approved of the engrossment, etc., have
been specifically denied by the defendants. The defendants have denied that
they wrote their letter dated 2nd January, 1965, to the plaintiffs in
retaliation or with a view to make out a false case or in an attempt to get out
of any agreement. They have contended that no concluded agreement of sole
selling agency was at any time arrived at between the parties and that all that
they wanted to do was to appoint the plaintiffs as their selling agents only.
By their affidavit filed in reply the defendants have also raised legal
contentions based on the provisions of section 294 of the Companies Act, 1956.
The defendants have contended that in any case, the appointment of the
plaintiffs as sole selling agents as alleged by them is invalid and contrary o
the provisions of section 294, inasmuch as on their own showing the said
agreement has not been made subject to he condition that the appointment shall
cease to be valid if it is not approved of by the company in the first general
meeting held after the date on which the appointment is made. The defendants
have further contended that after the plaintiffs alleged that they had been
appointed as sole selling agents of the defendants all over India Shri Mehta called a general meeting of the defendants
company on 20th February, 1965, to place before the company the claim of the
plaintiffs and Shri Mehta requested the general
meeting either to approve or disapprove of the appointment as claimed by the
plaintiffs and accordingly the general body of the defendants company resolved
at the said meeting that the proposal of appointing the plaintiffs as the sole
selling agents was not in the interest of the company. It is, therefore,
contended that the company in its meeting not having approved of the
appointment of the plaintiffs on any terms or conditions, the plaintiffs' claim
is illegal and their appointment as such sole selling agents is invalid. The
defendants have pointed out that they have filed a suit in the City Civil Court
at Bombay being Suit No. 1135 of 1965 against the plaintiffs wherein they have
asked for an injunction against the plaintiffs restraining and prohibiting them
from alleging that they are sole selling agents of the defendants in respect of
any of the products of the defendants for India or from alleging themselves to
be such sole selling agents by advertisements in press, circulars or otherwise.
Upon these
rival pleadings the following issues were raised:
"(1) Whether there is a
concluded sole selling agency agreement between the parties to the suit on the
terms and conditions set out in exhibit F to the petition ?
(2) Whether the agreement
alleged by the plaintiffs, viz., exhibit F to the petition, is void ab initio for not containing the
condition that the appointment shall cease to be valid if it is not approved by
the company at the first general meetings held after the alleged date of the agreement ?
(3) Whether the appointment
alleged by the Plaintiffs has been approved of by the defendants-company in
their first general meeting held after the date of the alleged agreement and if
not whether the alleged agreement has ceased to be valid ?
and
(4) Whether there is a
valid and subsisting agreement of arbitration between the parties in terms of
clause 12 of the agreement (exhibit F to the petition )
?."
Out of these
issues it was agreed at the bar that issue No. 2, which raises a purely legal
contention, should be tried as a preliminary issue and accordingly arguments
have been advanced on behalf of the plaintiffs and defendants at great length
on that issue. From the rival pleadings, which I have mentioned above, it will
appear clear that on the one hand the plaintiffs have alleged that there was a
concluded contract of sole selling agency arrived at between the parties
whereby the defendants appointed the plaintiffs as their sole selling agents
for a period of three years in respect of certain goods manufactured by the
defendants. On the other hand, the defendants have raised a three-fold plea in
this behalf. In the first place it has been contended that on the factual
aspect no concluded contract was at any time arrived at between the parties as
alleged by the plaintiffs. Secondly, it is contended that even if it were
assumed for the purpose of argument that any such sole selling agency contract
had been concluded between the parties, the same would be bad in law, inasmuch
as admittedly the said agreement was not made subject to the condition that the
appointment shall cease to be valid if it was not approved by the company in
the first general meeting to be held after the date on which the appointment
was made. Thirdly it is contended that though the defendants denied that there
was any such appointment of the plaintiffs as sole selling agents Shri K. M. Mehta, a director of the defendants-company,
placed before the general meeting of the defendants-company held on 20th
February, 1965, all the correspondence and the plaintiffs' claim that they had
been so appointed as sole selling agents and he asked the company either to
approve or disapprove of such appointment and the company disapproved of such
appointment. On these three grounds the defendants have contended that the reliefs sought by the plaintiffs in this petition cannot be
granted for, if the contract of appointment itself is bad in law, clause 12
containing the provision for reference to arbitration must also fall to the
ground. As I have said above, out of these three contentions which have been
principally advanced by the defendants, the preliminary issue, being issue No.
2, covers the defendants' contention that the agreement alleged by the
petitioners is void ab initio
as being in contravention of the provisions of section 294 of the Companies
Act. It is clear that if this preliminary issue is decided in favour of the
defendants no further question will survive in the petition and if, on the
other hand, it is answered in the plaintiffs' favour, then
the further issues on facts will have to be gone into.
Mr. Nain, appearing on behalf of the defendants, strongly
relied upon sub-section (2) of section 294, which contains the relevant
provision to the effect that the board of directors of a company shall not
appoint a sole selling agent for any area except subject to the condition that
the appointment shall cease to be valid if it is not approved by the company in
the first general meeting held after the date on which the appointment is made.
He urged that this provision, which is to be found in section 294(2), is of a mandatory
character and that unless the appointment was made subject to the condition
mentioned therein the appointment would be void ab initio and in support of his contention he relied upon a
decision of the Calcutta High Court in the case of Shalagram
Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706. On the other hand, Mr. Thakkar
appearing on behalf of the plaintiffs has urged that it is not necessary that
the contract of appointment of a sole selling agent should contain a provision
as one of its conditions that the appointment shall cease to be valid if it is
not approved by the company in the first general meeting of the company held
after the date on which the appointment is made, but according to him all that
sub-section (2) of section 294 provides is that every appointment of a sole
selling agent made by the board of directors of a company will be subject to
that condition and as sub-section (2A) of section 294 clearly indicates the
appointment made by the board of directors shall cease to be valid only if the
company in the general meeting disapproved of the appointment and it shall
cease to be valid from the date of such general meeting where the appointment
is disapproved. He urged that the provisions of section 294 should be read as a
whole and, if they are so read, it will appear clear that the condition
mentioned in sub-section (2) of section 294, subject to which the appointment
of the sole selling agent is to be made, is not a condition precedent but at
the most would be a condition of defeasance, in the sense that if the condition
mentioned in sub-section (2) was not complied with by the company the
appointment shall cease to be valid. As regards the decision of the Calcutta
High Court on which reliance was placed by Mr. Nain,
it was urged by Mr. Thakkar that the decision could
be distinguished on facts and further the observations on which specific
reliance was placed by Mr. Nain in the case should be
regarded as obiter.
In order to
appreciate the rival submissions that have been made before me, it will be
necessary to consider the relevant provisions of section 294 as a whole as also
the setting in which the said section occurs in the Companies Act. Section 294
occurs in Chapter II dealing with "directors" in Part VI of the
Companies Act, which deals with the "management and administration of
companies." It is one in the group of sections which deals with powers of
the board of directors and it is clear that it is a section which puts
restrictions or curbs on the powers of the board of directors in the matter of
making appointment of sole selling agents for the company. The relevant
provisions are to be found in sub- sections (1), (2) and (2A) thereof and those
relevant provisions run as follows :
"294.
Appointment of sole selling agents to require approval of company in general
meeting.- (1) No company shall, after the commencement of the Companies
(Amendment) Act, 1960 (65 of 1960), appoint a sole sole
selling agent for any area for a term exceeding five years at a time:
Provided that
nothing in this sub-section shall be deemed to prohibit the re-appointment, or
the extension of the term of office, of any sole selling agent by further
periods not exceeding five years on each occasion.
(2) After the commencement
of the Companies (Amendment) Act, 1960 (65 of 1960), the board of directors of
a company shall not appoint a sole selling agent for any area except subject to
the condition that the appointment shall cease to be valid if it is not
approved by the company in the first general meeting held after the date on
which the appointment is made.
(2A) If
the company in general meeting as aforesaid disapproves the appointment, it
shall cease to be valid with effect from the date of that general
meeting."
On a fair
reading of the aforesaid provisions, it will at once become clear that the
provisions of sub-section (1) and sub-section (2) shall have to be regarded as
not directory but mandatory having regard to the negative language employed
therein. It was not disputed by Mr. Thakkar that the
provision in sub-section (2) will have to be regarded as mandatory provision
and he fairly conceded that any or every appointment of a sole selling agent
must be subject to the condition mentioned in sub-section (2), viz., that the
appointment shall cease to be valid if it is not approved by the company in the
first general meeting held after the date on which the appointment is made, but
his contention is that the said condition is not a condition precedent but
would be a condition of defeasance in the sense that every such appointment
though not made subject to that condition should be deemed to be so made , and
if the appointment is either not approved of by the company or expressly
disapproved by the company in the first general meeting that is held after the
date on which the appointment is made the appointment shall cease to be valid.
He argued that this interpretation of sub-section (2) is warranted by two
factors. In the first place, in sub-section (2) itself the words used are that
the appointment "shall cease to be valid", which indicate that the
appointment must be valid till the time it cases to be valid. Secondly,
sub-section (2A) expressly provides that if the appointment is disapproved by
the company in the first general meeting the appointment shall cease to be
valid "with effect from the date of that general meeting". He,
therefore, urged that the condition mentioned in sub-section (2) should be
regarded as a condition of defeasance. There is some force in this contention
of Mr. Thakkar. However, in my view, if regard be had
to the manner in which the section is enacted, the language used therein and
the place at which the section appears in the entire scheme of the Act, it will
be clear that the condition mentioned in sub-section (2) will have to be
regarded as a condition which attaches to the very act of making the
appointment of a sole selling agent by the board of directors and, therefore, a
condition precedent. The object of the section, as I have already indicated
above, is to place restrictions or curbs on the powers of the board of
directors. The language employed in sub-section (1) and sub-section (2) is
clearly negative which suggest that the provisions are to be regarded as
mandatory. Sub-section (1) provides that "No company shall....appoint a
sole selling agent for any area for a term exceeding five years at a
time." The proviso makes it clear that the aforesaid absolute prohibition
will not apply to the re-appointment or extension of the term of office of any
sole selling agent, but that such re-appointment or extension of term should
not exceed the period of five years on any one occasion. In my view,
sub-section (1) puts an embargo upon the company by prohibiting the company
from making any appointment of a sole selling agent for any term exceeding five
years at a time. Similar is the position with regard to sub-section (2).
Sub-section (2) provides that the board of directors of a company "shall
not appoint a sole selling agent for any area except subject to the condition that
the appointment shall cease to be valid if it is not approved by the company in
the first general meeting held after the date on which the appointment is
made." Sub-section (2) also puts an embargo upon the board of directors of
a company by prohibiting the board from making any appointment of a sole
selling agent except subject to the condition mentioned therein. In other
words, the board of directors of a company are only
free to make appointment of a sole selling agent subject to the aforesaid
condition. The language used, viz., "shall not appoint....except subject
to the condition" shows that the condition mentioned attaches to the very
act of making the appointment by the board of directors. It will thus be clear
that, if any appointment is made by the board of directors without such a
condition, the appointment will be contrary to the provisions of sub-section
(2) and, therefore, illegal and bad in law. In enacting that the board of
directors shall not appoint except subject to the condition, the Parliament, I
feel, has incorporated a condition precedent, which attaches to the very act of
the board of directors of making appointment and it is clear, therefore, that
if the board of directors make the appointment without complying with the
conditions, such appointment will be void ab initio. If Parliament wanted to incorporate a condition of
defeasance, as is sought to be urged by Mr. Thakkar,
nothing would have prevented it from making a provision to the effect that
every appointment of a sole selling agent by board of directors shall be deemed
to be subject to such a condition, and such provision could have been followed
by sub-section (2A). Under sub-section (2) as it stands, if an appointment of a
sole selling agent is made by the board of directors, subject to the condition
mentioned therein, it would be a valid appointment and if it is made without
such condition it would be invalid and void ab initio and it is only when a valid appointment is made by
the board of directors after complying with the condition mentioned in
sub-section (2) that such valid appointment has to be put before the general
meeting of the company for its approval and under sub-section (2A) if the
company in its general meeting disapproved such appointment then it shall cease
to be valid with effect from the date of that general meeting.
Mr. Thakkar on behalf of the plaintiffs invited my attention to
section 9 of the Companies Act, which gives an overriding effect to the
provisions of the Act and, relying upon that section, he contended that the
condition mentioned in sub-section (2) of section 294 should be deemed to be
incorporated in the contract of appointment of a sole selling agent, if any
made by the board of directors, when the same is silent on the point. Section 9
runs as follows.
"9. Act
to override memorandum, articles, etc.-Save as otherwise expressly provided in
the Act- (a) the provisions of this Act shall have effect notwithstanding
anything to the contrary contained in the memorandum or articles of a company,
or in any agreement executed by it, or in any resolution passed by the company
in general meeting or by its board of directors, whether the same be
registered, executed or passed, as the case may be, before or after the
commencement of this Act; and ]
(b) any provision
contained in the memorandum, articles, agreement or resolution aforesaid shall,
to the extent to which it is repugnant to the provisions of this Act, become or
be void, as the case may be."
What was urged
by Mr. Thakkar was that having regard to the aforesaid
provisions of section 9 the court should hold that if the agreement whereby the
plaintiffs were appointed sole selling agents in the present case was silent as
regards the condition mentioned in sub- section (2) of section 294, the said
condition should be deemed to have been incorporated in that agreement. He
urged that this also warranted an inference that the condition mentioned in
sub-section (2) of section 294 should be regarded as a condition of defeasance
and not a condition precedent attaching to the very making of the appointment.
It is not possible to accept Mr. Thakkar's contention
for, in my view, all that section 9 provides for is that if any provision is
contained in the memorandum or articles of a company or in any agreement which
is contrary to the Act then the provisions of the Act shall prevail over such
contrary provision and sub-section (2) further provides that to the extent to
which provision contained in the memorandum, articles or agreement is repugnant
to the Act, the same shall become or be void. I do not think that section 9 has
the effect of incorporating into the memorandum or articles or any agreement
the provisions of the Act where the memorandum or the articles or the agreement
is silent on the point. In the present case, if for instance, the agreement
appointing the plaintiffs as the sole selling agent were to contain a provision
that it was either not necessary for the company to approve the said
appointment in the general meeting or that notwithstanding the disapproval
expressed by the company the plaintiffs appointment shall continue, then such
provision in that agreement would have become void under section 9 of the
Companies Act, but it is not possible to accept Mr. Thakkar's
contention that because the agreement is silent on the point, under section 9
of the Companies Act, the condition mentioned in sub-section (2) of section 294
should be deemed to have been incorporated in the said agreement. In this view
of the matter, it is clear to me that sub- section (2) of section 294 should be
interpreted to mean that it contains a condition precedent that attaches to the
very act of making the appointment of a sole selling agent by the board of
directors. Therefore, if any appointment of a sole selling agent is made by a board
of directors without such a condition as mentioned in sub-section (2) the same
would be contrary to the said provisions and would be void ab
initio.
Turning to the
decision of the Calcutta High Court in the case of Shalagram
Jhajharia v. National Co. Ltd. [1965] 35 Comp. Cas. 706,738, it may be stated that the court held the
appointment of the sole selling agent to be bad on two grounds. In the first
place, admittedly, the agreement did not contain the condition that the
appointment shall cease to be valid if not approved at the first general
meeting to be held after the date of the appointment. Secondly, the two general
meetings that were held immediately after the appointment had been made did not
consider the item of the approval of this appointment of the sole selling agent
but it was only when the Registrar of Companies drew the attention of the
company to the fact that such approval had not been obtained the company
purported to hold a meeting and got the said appointment approved and ratified
by the general body of the shareholders. It was held that the agreement or the
contract of appointment was void ab initio, inasmuch as it did not contain the requisite
condition mentioned in sub-section (2) and, therefore, there was nothing which
could be approved of or ratified by the general body of the shareholders. It
was further held that, since the appointment of the sole selling agents was not
approved of at the first general meeting that was held by the company
immediately after the appointment had been made, the appointment had ceased to
be valid and there was nothing which the general body of shareholders could
approve or ratify at the subsequent general meeting. Mr. Nain,
appearing on behalf of the defendants, has strongly relied upon the observations
of Mr. Justice Mitter, who, after considering the
provisions of section 294, took the view that the provisions were of a
mandatory character and further held that, since the condition mentioned in
sub-section (2) had not been complied with, the appointment was bad ab initio. The relevant
observation on which reliance was placed by Mr. Nain
run as follows:
"It was
argued before us that section 294 was only directory and not mandatory as no
penal provision was attached thereto. I find myself unable to accept this
argument. The words of the statute are quite clear in that it prohibits the
directors from entering into a contract with a sole selling agent without being
obliged to bring the matter of the appointment before the company at the first
general meeting thereafter. The only limitation imposed on the company's power
of appointing a sole selling agent is that the period of agency must not exceed
five years. The clear provision in the Act that the
appointment by the directors is not to be valid unless approved by the company
in the first general meeting shows the obligatory nature of the enactment.
It is well known that the use of negative language generally leads to the
conclusion that the provision is mandatory..............
Therefore, if
the directors choose to enter into an agreement with a sole selling agent
without the condition that the appointment shall cease to be valid if not
approved by the company in the first general meeting held thereafter the
appointment is bad ab initio
and the directors can be injuncted from acting on it
in a properly framed suit because they would be doing something which the law
does not allow them to do. This is not a matter of mere internal
management."
Chief Justice
Bose, the other learned judge, who delivered a separate but concurring
judgment, has made the following observations (page 724):
"Section
294 enjoins that no appointment of a sole selling agent can be made except
subject to the condition that if it is not approved by the company in the first
general meeting held after the appointment, then it
shall cease to be valid. So in clear and unambiguous language it is indicated
in the section that the effect of non-approval of the appointment at the first
general meeting after appointment, is to render the appointment invalid. So
compliance of the provisions of the section is made a condition precedent to
the validity or legality of what is done and the neglect of the statutory
requisites would therefore obviously be fatal. In my opinion rigorous
observance of the provisions of the section is essential and since the
appointment was not made subject to the prescribed condition, and the
appointment was not approved at the first general meeting in express terms, the
appointment was rendered invalid."
As I have
indicated above, two points arose for consideration in that case; one was
whether an appointment of a sole selling agent made without the condition
prescribed in sub-section (2) was invalid or not and, secondly, whether if the
appointment of the sole selling agent had not been approved by the company at
its first general meeting held after the appointment was valid or not and it
appears that Mr. Justice Bose has more relied upon the latter aspect of the
matter and has held that since the appointment had not been approved by the
company in the fist general meeting that was held after the appointment, the
appointment was rendered invalid, though in passing he has also observed that
since the appointment was not made subject to the condition prescribed in sub-
section (2) the appointment was invalid. Mr. Justice Mitter
has, however, expressly dealt with the point with which I am concerned in the
present case and he has taken the view that since the appointment had been made
without the condition mentioned in sub-section (2) the appointment was to be
regarded as void ab initio.
In my view, the
Having regard
to the aforesaid discussion I am inclined to take the view that section 294(2)
should be interpreted to mean that the condition prescribed in the said section
is a condition precedent, which attaches to the very making of the contract of
appointment of sole selling agent and non-compliance thereof would render the
contract of appointment bad ab initio.
In this view of the matter the preliminary issue raised in this case is
answered in favour of the defendants. Consequently, the petition will have to
be dismissed.
Having regard
to the facts and circumstances of the case, the fair order as to costs would be
that each party will bear its own costs and I accordingly direct that each
party should bear its own costs.
The
undertaking which has been given by the defendants as regards keeping separate accounts, will continue to operate for a period of 3 weeks
from to-day.
[1984] 55 COMP. CAS. 445 (
HIGH COURT OF
v.
Mehta Teja
Singh and Co. (Agencies)
RAJINDER SACHAR AND D.R. KHANNA
JJ.
JULY 5, 1983
Mohinder Narain and V.V. Sastri for the appellant.
R.L. Gulati, for the respondents.
Sachar J.—This
is an appeal filed against the order of the learned single judge (Mehta Teja Singh and Co. (Agencies) v. Globe Motors Ltd. [1983] 54 Comp Cas 883 (Delhi)) by which
he allowed the application under s. 20 of the Arbitration Act filed by the
respondents.
The respondent's case was
that an agreement had been entered into with the appellant company which is now
under liquidation by means of an agreement dated June 1, 1967, on the terms
mentioned therein. In the said agreement it was also stated that any dispute or
difference arising in regard to any of the terms contained in the agreement,
shall be settled in accordance with the provisions of the Arbitration Act. The
application under s. 20 of the Arbitration Act was filed in November, 1973.
It may be noted that an
application for winding up of M/s. Globe Motors Ltd. was moved in March, 1968.
Globe Motors was having one of its industrial units manufacturing steel under
the name of Globe Steels. The agreement purports to appoint the respondents as
distributors for the sale and marketing 1/6th of the company's steel products.
Objection was taken by the official liquidator on various grounds. Broadly, the
grounds raised were: (i) whether the application
filed under s. 20 of the Arbitration Act was barred by limitation; (ii) whether
the agreement dated June 1, 1967, was valid; and (iii) the next question
related to whether the agreement was vitiated on the grounds of fraud and being
against the interest of the company. The learned single judge found all the
pleas against the appellant and in favour of the respondents, and has,
therefore, directed the matter to be referred to the arbitration. Hence the appeal by the official liquidator.
The first contention raised
by Mr. Andley, the learned counsel for the appellant,
is that as the agreement was entered into on June 1, 1967, the application
filed under s. 20 in November, 1973, is barred by time. It is common case that
art. 137 of the Schedule to the Limitation Act, 1963, which provides for a
period of three years is applicable to application filed under s. 20 of the
Arbitration Act. Mr. Andley urges that the right to
apply accrued when the first default took place in payment of the monthly
payment of Rs. 10,000 in terms of art. IV(b) of the
agreement and as admittedly the company made no payment, limitation would start
from August, 1967, and application had become barred by 1970. The learned
single judge, however, has held that the firm's claim was repudiated only on
April 29, 1971, therefore, the period of three years is to calculated from that
date, and if that is done the application filed in November, 1973, was within
time. We deem it unnecessary to examine whether the right to apply accrued from
the date of repudiation, namely, April 29, 1971, because even accepting the
argument of Mr. Andley that the period was to be
calculated and the right to apply accrued when the company defaulted in making
payment of Rs. 10,000 monthly, it is evident that limitation would start from
each default when it was committed. Thus, for defaults committed for
non-payment of monthly payments from October, 1970, would have to be treated
within time as the application was moved in November, 1973. The application for
arbitration on the ground of limitation, therefore, could not be thrown out for
the right to apply accrued for part of the claim only from October, 1970,
onwards, which was within time. Of course, it may have been open to the
appellant to urge before the arbitrator that the claim of the respondents for a
period prior to October, 1970, was barred by time. (We decide nothing on this
point because once it was held that the matter had to be referred to
arbitration the other question, namely, whether any particular part of the
claim is time barred or not, would evidently be a matter for the arbitrator to
decide. We, therefore, agree with the learned single judge that the application
was not time barred.
The next contention of the
appellant was that the agreement had not been put to the general body of the shareholders,
and, therefore, it was not valid. The learned single judge has, in our view,
rightly rejected this contention. It is true that Metha
Harnam Singh, with whom the agreement was entered
into, was a director of the board of the company. Section 299 of the Companies
Act provides that every director of a company who is in any way, whether
directly or indirectly, concerned or interested in a contract or arrangement,
or proposed contract or arrangement, entered into or to be entered into, by or
on behalf of the company, shall disclose the nature of his concern or interest
at a meeting of the board of directors. Reference to the agreement and the
resolution dated June 15, 1967, which was passed by the board of directors
shows that when the board approved the resolution in favour of the respondents,
it was specifically noted that some of the directors, mentioned therein, of the
company indicated their interest in the above arrangement and took part neither
in this discussion nor on the resolution. Amongst these, the name of Harnam Singh is included. Mr. Andley,
of course, seriously doubts whether any interest was disclosed and also
castigates the manner inasmuch as the five directors continued sitting in the
meeting when the decision was taken. Be that as it may, the fact remains that
interest in the agreement was disclosed by the director. It is not, therefore,
possible to accept the argument that there was any violation of s. 299 of the
Companies Act. The board having thus approved the agreement, the same is not in
any way invalid because there is no requirement of law to place this agreement
before the general body of the company. It has not been shown that the exercise
of power by the board of directors in approving this agreement was in any way
beyond the powers given to them under the articles of association.
It was then sought to be
contended that the agreement should have been put before the general body of
shareholders, and attempt was made to invoke s. 294 which lays down that no
company shall, after the commencement of the Companies (Amendment) Act, 1960,
appoint a sole selling agent for any area for a term exceeding five years at a
time, and to sub-s. (2) which provides that the board
of directors shall not appoint a sole-selling agent for any area except subject
to the condition that the appointment shall cease to be valid if it is not
approved by the company in the first general meeting held after the date on
which that appointment is made. This argument, however, assumes that the
arrangement which was approved by the board on June 15, 1967, and which is
recorded in the agreement of June 1, 1967, was that of a sole selling agent.
We, however, cannot so read the said agreement. The agreement is a straight
forward appointment of the respondents as their distributors for the sale and
marketing of the company's steel products to the extent of 1/6th of the total
proceeds of the sale of products. No specific area is earmarked for the
respondents in which the respondents could be shown to be the sole selling
agents. The learned judge was, therefore, right in his conclusion that the
agreement did not have to be put to the general body meeting for its
confirmation. The more serious objection raised by Mr. Andley,
counsel for the appellant, is to the finding of the learned single judge by
which he rejected the argument that the agreement was vitiated because of the
fraud or act of the directors acting in a manner so patently against the
benefit of the company. Now, it is not disputed and in fact the learned single
judge accepts that the directors have a fiduciary duty to the company-The
position of directors in their relationship to the company is no longer in
doubt. Directors are not only the agents but they are in some sense and to some
extent trustees or in the position of trustees. It is impossible now to dispute
the position that they are in some sense trustees, that position having been
established by a long series of cases (Vide Palmer's Company Precedents, 16th edition,
part I, pages 561 to 564).
The courts have been very
jealous in seeing that the fiduciary relationship of the directors with the
company is not abused. The directors have been held to be trustees of the
assets of the company and courts have directed them to reimburse the loss to
the company where it was found that directors had applied the company's money
in payment of an improper commission. The strictness with which the courts view
the responsibility and the sacredness of the trust reposed in the directors was
emphasised long time back in Imperial Mercantile Credit Association v.
Coleman [1873] LR 6 HL Cas
189. In that case, one Coleman, broker and a director of a financial company,
had contracted to place a large amount of railway debentures for a commission
of 5 per cent. He proposed that his company should undertake to place them for
a commission of 1½per cent. to the company. He was
held liable to account for 3½ per cent. In so deciding Malins
V.C. made the following observations, which were later on upheld by the House
of Lords:
"It is of the highest
importance that it should be distinctly understood that it is the duty of
directors of companies to use their best exertions for the benefit of those
whose interests are committed to their charge, and that they are bound to
disregard their own private interests whenever a regard to them conflicts with
the proper discharge of such duty".
These observations were
reiterated with approval in Regal (
"Whenever it can be
shown that the trustee has so arranged matters as to obtain an advantage
whether in money or money's worth to himself personally through the execution
of his trust, he will not be permitted to retain, but be compelled to make it
over to his constituent". (p. 389A)
Thus, it cannot be disputed
that the fiduciary duties of directors are basically the same as those of other
trustees and they are expected to display the utmost good faith towards the
company whether their dealings are with the company or on behalf of the
company. They should not use the company's money or other property or
information or other matters in their possession in their capacity of
directors, in order to gain any advantage to themselves at the expense of the
company, and if they make any profit for themselves or cause any damage to the
company, they will be liable to make good the same to the company. Similar
observations were made in the report of the High-Powered Expert Committee on
Companies and MRTP Acts [1978] which succinctly expresses the legal position of
the directors as follows (para. 5.14 at p. 42):
"Directors are
appointed to act in the interests of the company and an important area of their
legal responsibility stems from the law of trusts—they have a fiduciary
relationship with the company. The duties arising from this relationship are
well defined, viz., to exercise their powers for the benefit of the company, to
avoid a conflict of interests, and a duty not to restrict their right (by
contract or otherwise) to freely and fully exercise their duties and powers. In
addition to their fiduciary duties, directors also owe a duty of care to the
company not to act negligently in the management of its affairs—the standard
being that of a reasonable man in looking after his own affairs".
The learned judge in dealing with the aspect
whether the company now represented by the official liquidator was entitled to avoid
the agreement of June 1, 1967, has proceeded on the basis that the same could
only be done if fraud in execution of this agreement was proved and further
that the way this fraud is to be proved was in the same manner and by the same
test as in a civil suit. It is for this reason that the learned judge seems to
have placed over-emphasis on the enumeration of particulars if plea of fraud
was to be established. Apart from the fact that this position is not factually
correct (as we shall show later) this approach underestimates the importance of
the relationship of the directors with the company which being fiduciary has to
be judged by the tests broadly laid down for judging the conduct of a trustee.
In holding the director liable for misfeasance or having worked against the
interest of the company it is not necessary that fraud in the strictest term
has to be proved. 'Thus, a director may be shown to be so placed and to have
been so closely and so long associated personally with the management of the company
that he will be deemed to be not merely cognizant of but liable for fraud in
the conduct of the business of the company even though no specific act of
dishonesty is proved against him personally. He cannot shut his eyes to what
must be obvious to everyone who examines the affairs of the company even
superficially. If he does so he could be held liable for dereliction of duties
undertaken by him and compelled to make good the losses incurred by the company
due to his neglect even if he is not shown to be guilty of participating in the
commission of fraud (emphasis supplied). It is
enough if his negligence is of such a character as to enable frauds to be
committed and losses thereby incurred by the company". (Vide
Official Liquidator v. P.A. Tendolkar [1973] 43 Comp Cas 382 at p. 384).
A derivative action can be
brought against directors who are in control of the company to compel such
directors to account to the company for profits made by appropriating for
themselves a business opportunity which the company would otherwise have
enjoyed. (Vide Pennington's Company Law, 4th Edition, page 596);
Gower
in Company Law, 3rd edition, page 526, has noticed that because of the trustee-like position of the directors a contract
between the company with another firm of partnership of which one of the
directors was a partner have been avoided at the instance of the company
notwithstanding that its terms were perfectly fair and that in the words of Lord
Cranworth L.C. "so strictly is this principle
adhered to that no question is allowed to be raised as to the fairness or
unfairness of a contract so entered into........".
Thus the contract will be voidable at the instance of a company and any profits made
by the directors personally will be recoverable by the company (page 527 of
Gower).
Various remedies could be
resorted to by the company in case of a breach of duties by the directors.
Thus, one of the remedies provided to the company is rescission of a contract,
another is accounting for profits. The liability of the director may arise out
of a contract made between a director and a company. In such a case accounting
is a remedy additional to avoidance of contract and is normally available
whether or not is there rescission. (page 556 of Gower).
A resume of the law would
thus clearly show that no doubt the Companies Act does not forbid a contract
being entered into by the company with a firm in which one of the directors is
a partner, it is also true that the respondent director disclosed his interest
in the agreement when the same was approved by the board of directors at its
meeting held on June 15, 1967. But this fact by itself does not automatically
prove that the arrangement which had been entered into by the company was not
of such a nature which keeping in view the fiduciary relationship of Mehta Harnam Singh, a director of the company, should not have
been so entered into, thus giving a right to the company to avoid the contract
and to ask for the recovery of the profits made by the director. The test to be
applied in the present case is—had the company been a going concern and had
some payments in pursuance of this very agreement been made to the respondents
could the company have asked for rescission of the contract or in case any
payments had been made to the respondents Harnam
Singh and others, for the return of the same to the company. If the answer is
in the affirmative, the claim of the appellant must succeed.
We must now turn to the
examination of the agreement to find out whether its terms were such, which in
the words of the Supreme Court, would show that circumstances were such that
there could be no other conclusion than that the same was arrived at because of
the peculiar position, which the respondent, as director, enjoyed in the
company.
The first most important
thing to notice is that when the board met on June 15, 1967, at which it
approved this arrangement, it also approved two other agreements in which some
other directors were partners. All the three agreements were of more or less
identical nature.
Resolution No. 22 approved
the appointment of M/s. Parvinder Finance Corporation
as the distributors of l/6th of the products of Globe Steels. Narinder Singh Kohli, one of the
directors of the company, was a partner in M/s. Parvinder
Finance Corporation and was present at the said meeting.
Resolution No. 30 approved
the appointment of M/s. S.N.G. Agencies as distributors of 1/16th of the
products of Globe Steels. M/s. S.N.G. Agencies was a partnership-firm in which
Mr. C.L. Gulati, Mr. H.S. Saluja,
Mr. K.R. Saluja, Mr. S.L. Saluja
and Mr. Narinder Singh Kohli
were partners. All of them were present at that time in the board meeting.
Resolution
No. 21 deals with the present case in which it approved the appointment of M/s.
Teja Singh and Co. as distributors for 1/6th of the
products of M/s. Globe Steels. The
partnership consisted of Mehta Harnam Singh and his
two sons. Mehta Harnam Singh was a director of the
company and was present at the said board meeting.
It will thus be seen that
out of 13 directors who attended the board meeting on June 15, 1967, 6 of them
were interested in three agreements which were approved by the board on that
day. Technically we may accept what is recorded in the minutes of the board
that the directors had disclosed their interest in the agreement which was
being approved and also did not take part in the discussion or vote on the
resolution. Though, therefore, there may not be any technical objection to
these resolutions, yet we cannot overlook the patent incongruity of accepting
that unbiased mind was brought to bear on the merits of these agreements when
almost half of the board was interested in one or the other agreement. In such
a case, the criticism that this was nothing but mutual backslapping to enrich themselves does not sound improbable. As Gower on Company
Law, in commenting on such kind of disclosures says—'in marked contrast with
the basic equitable principle, the disclosure required is not to the general
meeting but to the board. It hardly seems over-cynical to suggest that
disclosure to one's cronies is a less effective restraint on self-seeking than
disclosures to those for whom one is a fiduciary. (page
530).
The learned single judge
was persuaded to accept the genuineness of the agreement by holding that the
respondent firm had injected Rs. 5 lakhs in the
company at the time the contract was entered into, apparently suggesting that
this was consideration for this agreement. A reference to the statement of Mr. Satinder Kohli, chief accountant
of the company, however, will show that this amount of Rs. 5 lakhs was in lieu of the transfer of shares from Parvinder Kohli to Mehta Harnam Singh and his sons. According to statement of this
witness, out of the shares standing in the name of Parvinder
Singh Kohli, 1,250 shares were transferred to Metha Harnam Singh and another
1,250 shares were transferred to Mr. Ravi Mehta, s/o
Mehta Harnam Singh, and still another 2,500 shares were
transferred to Mr. Vijay Mehta, another son of Harnam
Singh. These shares were transferred in the month of February and March, 1967.
This Rs. 5 lakhs, therefore, represented amount for
transfer of these shares. They had no relevancy to this agreement which was
executed in June, 1967. This money was not invested or loaned to the company,
but was the price paid for purchase of shares. Though the attorney appearing
for the respondents sought to suggest that these shares were transferred
against the consent of the respondents and they had not even asked for it, he
had to soon resile and admit that not only Mehta Harnam Singh and his sons had accepted these shares and
treated themselves as owners of these shares but had actually sold them to Mr. Mundra during the pendency of the
winding up petition for about Rs. 3 lakhs. The
attorney, however, made a grievance that these Rs. 5 lakhs
worth of shares were sold for Rs. 3 lakhs but soon
had to admit that the other shareholders had to part with their shares at 20% and
25% of the face value whereas Mehta Harnam Singh, etc.'s shares had been sold for over 60% of the face value.
Considering the penury condition of the company it cannot be said that the
respondent did badly at this price. Finding by the learned single judge, that
there was a consideration of Rs. 5 lakhs for this
agreement, is not supported by the record.
The learned single judge
has not accepted that the contract was without consideration. The learned judge
holds that it was a service contract for the purpose of employment to boost
sales and because of this service there was a good consideration even to paying
Rs. 1 lakh and 20 thousand per annum as a minimum
fee. Normally, if a party undertakes to boost sales and use his expertise for
this purpose on some minimum fee it is possible to say that there was a proper
consideration for the contract. But it was the official liquidator's case in
reply to the application for arbitration that none of these agencies including
the respondents had ever dealt with steel products or had any experience in the
line and that this device was fraudulently and collusively adopted to siphon
away the company's funds for the individual and personal benefits of the said
directors, at a time when the company to their full knowledge was passing
through a financial crisis beginning with July, 1966. It was also stated that
they had not rendered any service and the agreement had never been acted upon.
In fact Shri B.K. Bedi, the
chairman of the company, who had negotiated the sales originally was unable to
contradict that the plaintiff firm did not secure any business for the company.
He also admitted that the firm was not associated with any other steel unit or
any other manufacturing unit. He did not know that they had any experience as
manufacturer. The control and the influence that these persons could exercise
on the whole board is apparent from his admission that directors, Kirpa Ram Saluja, Narinder Singh Kohli and a few
other directors, were even on the finance committee of the company and this
committee had favoured the grant of selling agency to
the respondent. Thus, it is crystal clear that it is a case where the board of
13 approved of these agreements, which granted the distribution rights of the
company's steel products to 6 of themselves, of course, after complying with
the formality of disclosing their interest. Had the presence of directors been
the only objection but the terms on which the agreement was entered into showed
some kind of fairness and business arrangement normally expected of an ordinary
business man, it might have been still possible to uphold the agreement. But
the terms incorporated in the agreement leave no manner of doubt that the only
interest that was kept in view was the personal benefit and profit of these
directors and that too at great cost and to the gross detriment of the interest
of the company.
Now, the agreement by which
the respondents were appointed distributors was for a period of five years. Under art. 2 of the agreement distributors were obliged to
provide for the company the services of a selling organisation
whose duties included to promote the sale of products and to submit at regular
intervals reports. Clause 4 of article II is important and is reproduced:
'to
reimburse the Company for the sale promotion expenses incurred by it on behalf
of the Distributors in the promotion of the products of Globe Steels. The
amount of such expenses shall be certified by the governing director and
chairman of the Company Shri B.K. Bedi
and shall be subject to the maximum of two per cent. of
the one-sixth of the sales proceeds of the products of Globe Steels.'
Prima
facie, art. 2 read by itself may appear
to show that some duties had been cast on the distributors under which some
services were to be performed by them, they were even
expected to bear some expenses and even reimburse the company for the sale
promotion expenses incurred by it on behalf of distributors. But this
impression is a deliberate illusion created to fog the whole issue; a reference
to art. 4 of the agreement would immediately dispel it. Under
art. 4 allegedly in consideration of the services defined in art. 2, the
company was obligated to pay to the distributor a fee at the rate of 4.8% of
1/6th of total proceeds of sale of products of Globe Steels through
distributors or directly by the company, but if sale proceeds fell below 1.50
crores in any financial year, a sum of Rs. 1.20 lakhs
will be paid as a minimum fee in any financial year. Not only that the
agreement is so heavily weighed one way in favour of the respondents that cl. (b) of art. 4 lays down that the minimum fee of Rs. 1 lakh and 20 thousand shall be paid and allowed to the
distributors in equal monthly instalments of Rs.
10,000 each irrespective of the sales of each month. Here, we thus have a
situation where the company has agreed to pay Rs. 1 lakh
and 20 thousand as minimum fee irrespective of sale of even a rupee worth of
product. What can be the possible justification for entering into such an
unfair and one-sided agreement. Apparently, one may
assume that it is for expenses incurred by the distributors under the agreement
for sale promotion and running of offices, etc. But this impression would be
without taking into account the ingenuity of the director respondent, as is to
be found in terms incorporated in art. 4 of the agreement. By by cl. (2) of art. 4 the
company is obligated to reimburse the distributors for all expenses incurred in
the rendering of the services defined in art. II including those mentioned in cl. 4, art. II. It will be appreciated that art. 2 was the
one which obliged the distributors to incur certain expenses, but by cl. (2) of art. 4 all this is washed off; the company is
made liable to pay to the distributors for those expenses which it had undertaken
to do by art. II. In short, the effect of cl. (2) of
art. IV is the open unembarrassed taking over by the company of all the
expenses which were to be incurred by the distributors. Nothing at all was to
be spent by the distributors. There was thus nothing that the distributors were
to spend for which they were not immediately to be reimbursed by the company.
Though under the agreement the distributors were to promote the sale of
products and were expected to reimburse the company for sale promotion expenses,
this clause is nullified by art. 4, cl.
II, which required the company to reimburse the distributors for all expenses
including the expenses for sale promotion of the products. Not only
that, the company was to provide a free furnished office accommodation to the
distributors with a telephone connection. By cl. III
the company was also to make or cause to be made requisite advertisement for
the promotion of the business. In all these clauses of the agreement one looks
in vain for any service that was to be done by the distributors. Advertisement,
office, sales promotion expenses are all to be borne by the company. In that
context, we fail to see as to what conceivable service was to be performed by
the distributors for which such a heavy minimum amount of fee of Rs. 1.2 lakh per annum was being given to the respondents simply
because six of these directors present had interest in similar arrangements to
their advantage. In that view, to expect any of them to have considered the
benefit of the company, is to ignore the obvious. The Board on June 15, 1967,
did nothing but conveniently divide the assets of the company for the benefit
of some of the directors. The company was not only not
a penny gainer, but, was on the other hand, to be a loser in all respects. It
is not even a case where the respondents were professionally qualified people
who were expected to give their knowledge or experience of the trade to the
company. Bedi. the chairman of the company,
admitted that the respondents had no experience of manufacture in this line,
nor had they done anything in furtherance of the sale of the products. In these
circumstances the learned single judge was, and we say so with respect, in
error in holding that the directors acted bona fide and the agreement was for
the benefit of the company and the transaction was in good faith. The learned
judge seems to have assumed that because directors disclosed their interest and
did not vote for the resolution that was the end of the matter. But this is not
so. Disclosure of interest and not voting on the resolution is only a formal aspect of the compliance with the
statutory provision. The basic question is as to the conduct of directors and
whether it satisfies the test considering their fiduciary relationship to the
company.
We cannot but hold that the
terms of the agreement dated June 1,1967, as approved
by the board, were anything but to the detriment of the company. This was an
arrangement which was made simply to siphon off Rs. 1 lakh
and 20 thousand per annum as a minimum fee to the directors without doing a
single patch of work for the benefit of the company. This the
directors were able to do because of their close association and control over
the board of directors. This was not a case in which only one of the directors
was favoured by such arrangement. Six of the
directors out of 13 who attended the meeting were the beneficiaries of the
arrangement which was also agreed to by the 7th member who was the chairman of
the company. This was a case of such blatant unfairness against the company
that, as the Supreme Court, said that it would be obvious to any one who
examines the affairs of the company even superficially that there was not one
single redeeming feature in the agreement. In that view the company would have
been justified, had any benefit been taken by the respondents, to ask for the
account and the restoration of the amount. In the present case the respondents
chose to claim to have the matter referred to the arbitrator. It is interesting
to note that in the statement of claim filed before the arbitrator the
respondents have prayed for a payment of Rs. 6 lakhs
which is 'worked out at the rate of Rs. 10,000 per month for five years, no
suggestion of having done any work is even mentioned. This also would show the
untenable nature of the arrangement so far as the company was concerned. This
agreement is patently against the interest and benefit of the company.
We would, therefore, hold
that this agreement was vitiated and void and the official liquidator representing
the company is entitled to ask for its rescission. As we are satisfied that
this agreement of June 1, 1967, which was approved by the board of directors on
June 15, 1967, was not in the interest and benefit of the company, the same is,
therefore, liable to be avoided by the official liquidator. In that view of the
matter as the agreement is held not to be subsisting, being void, and as the
arbitration clause forms a part of the agreement will naturally not survive.
The effect would be that there is no existing arbitration agreement and the
respondents cannot ask for the matter to be referred to arbitration.
As a result, we would, in
the circumstances, allow the appeal, set aside the judgment of the learned
single judge and dismiss the application of the respondents filed under s. 20
of the Arbitration Act. The parties will bear their costs throughout.
We may note that the
learned single judge, while appointing an arbitrator had fixed his fee at Rs.
4,000 to be paid in equal shares by the official liquidator and the
respondents. We are given to understand by the official liquidator that the
said amount has been paid equally by both the parties to the arbitration.
Though we are dismissing the application filed by the respondents, we, however,
make it clear that the fee which has already been paid to the arbitrator will
not be sought to be refunded or claimed back. The arbitrator is entitled to
retain the fee of Rs. 4,000 paid to him. We are doing this because the matter
has remained with the arbitrator for a long time and he has had a number of
hearings and it is only proper that he should have been compensated though
inadequately for the work that he has done. The appeal is allowed as above.
Khanna J.—I
have perused the judgment delivered by my learned brother, and am in entire
agreement with the same. The fiduciary chracter of
directors to the company has been succinctly brought out. Normally, the guiding
factor in the appointment of distributing agent is to relieve the principal of
the labour and expense of substantial establishment
for augmenting sale. At the same time, services of established concerns and
persons who specialise in the technique and market
conditions of distribution and sale are availed of. Certain percentage of
commission is allowed to them by the principal resulting in substantial saving,
in turn, to him of the expenses otherwise inherent in the work of distribution
and sale. Another consideration which prevails in the appointment of such
agents is the assurance and better opening for larger sales and facility to
reach the market.
Now, the facts of the
present case bring out that the respondent-firm itself was created on the day
when the distribution agency was conferred. It had no experience or specialisation in the field of sale of steel. One of the
directors of the appellant company and his family members were the partners
therein. The company itself was passing through difficult financial times, and
not long thereafter came under liquidation. In spite of that, it was agreed to
pay rupees 1.2 lakhs as minimum commission to the
respondents. Normally, as an incentive for larger
sales, agents are conferred benefits which may be in the form of higher
commissions. The peculiar feature, in the present case, however, was that if
the sales fell below a particular limit, and that could primarily be attributed
to the agents not adequately obtaining sale market for the goods, the agents,
instead of being put to detriment in the form of not being allowed commission
at the agreed rate, were assured in any case of minimum commission of rupees 12
lakhs. Thus, even if the sales were nil the company
was saddled with the liability for that payment. By no stretch, this could be
treated as an act for the benefit of or in the interest of the company. It has
been rightly termed by the liquidator as fraud played upon the company, and a
sort of bounty extended to respondents to the detriment of the company's
interest.
The appellant has asserted
before us that no sales whatsoever were got effected by the respondents, and
even before the learned arbitrator they have simply put up a claim at the rate
of rupees 1.2 lakhs per year. The respondents when
enquired if they, in fact, effected any sales, were
entirely vague and stated that they must be recorded in the company's books
which are said to be with the police. They had not kept any documents or
accounts of the sales with themselves. This was highly unusual as the firm
which was entirely constituted for carrying on the distribution agency, and was
to conduct sales worth lakhs, if not crores, did not
choose to maintain any documents and accounts. This in a way reflects the
figurehead status of the respondents. One of the clauses in the agreement
specifically provided that the respondents would submit at regular intervals,
reports on market conditions and prepare estimates of
demand for the products of "Globe Steels". The respondents do not
possess any documents or copies thereof showing the submission of any such
reports or estimates of demand.
Another startling feature
in the present case has been that what the agency agreement in its earlier part
attempted to assign to the respondents was in the latter part entirely
converted as the liability of the company. Thus, arts.
II(4) and IV(2) read as under :—
"II(4):
to reimburse the company for the sale promotion expenses incurred by it on
behalf of the distributors in the promotion of the products of ' Globe Steels
'. The amount of such expenses shall be certified by the governing director and
chairman of the company, Shri B. K. Bedi, and shall be subject to the maximum of two per cent. of the one-sixth of the sales proceeds of the products of
Globe Steels".
"IV(2): to reimburse
the distributors for all expenses incurred in the rendering of the services
defined in article II including those mentioned in clause 4, article II".
These thus show that what
the distributors were to reimburse to the company was, in turn, to be
reimbursed by the company to the distributors. In other words, there were
hardly any expenses which the distributors were to incur, and the liability in
that regard was entirely that of the company. Not only that, one of the clauses
further mentioned that the company was to provide free furnished office
accommodation to the distributors with a telephone connection. These
circumstances amply bring out that this so-called distribution agency agreement
was a sham one collusively arrived at to injure in the interest of the company
and the share-holders, and ultimately, claim share in the distribution of the
assets of the company amongst its creditors. Such an agreement being fraud upon
the company has to be struck down as not sustainable in law under ss. 23 and 24 of the Indian Contract Act. In its sweep,
therefore, the arbitration clause forming part of the agreement must as well
fall.
So far as the investment of
rupees live lakhs in the purchase of shares was
concerned, the same took place a number of months before the entering into
agreement appointing the respondents as distributors. There is no mention at
all in the agreement that the said purchase constituted as part of
consideration for appointment of the respondents as distributors. Secondly, the
amount so paid was for the purchase of shares which itself was an independent
deal, and the concerned respondent did get those shares. Subsequently, they
were sold for valuable consideration. It was immaterial whether they fetched
the same price, as profit and loss are basically an incident of any transaction
of purchase and sale of shares. With due deference to the learned single judge,
there is nothing in the testimony of Mr. Satinder Kholi, chief accountant of the company which links the
injection of rupees five lakhs in the company by the
firm with the contract in dispute.
Appeal
allowed.
[1975]
45 Comp. Cas. 91 (Bom.)
High Court OF
v.
R.C. Dutt
Deshmukh AND Joshi, JJ.
APPEAL
NO. 23 OF 1966 IN MISC. PETITION NO. 308 OF 1965
February 27, 28, 1973
J.C. Bhat and J.J. Bhat for the
Appellant.
R.J.
Joshi and R.L. Dalal for the Respondent.
Deshmukh, J.—This is an appeal
by the original petitioners, who are a private limited company, against the
order of dismissal of their writ petition by the learned single judge
of this court. The facts that give rise to this appeal may be briefly noted :
The appellant is a private
limited company and its main business is selling various commodities on
commission basis or commercially dealing in many articles. Respondent No. 5 is
a public limited company which manufactures many chemicals amongst which are
the three articles, viz., sodium hydrosulphite,
caustic soda lye, chlorine and its by-products (excluding hydrochloric acid).
The appellant-company was
appointed as sole selling agent for the three commodities manufactured by the
respondent No. 5-company by a written agreement dated November 28, 1961,
exhibit A to the petition, operative with effect from 1st July, 1961. The
agreement covers a period of five years. It appears that the appellant-company
was already selling the same articles of respondent No. 5-company for an
earlier period of five years from 1956 to 1961. We will refer to the relevant
terms of this agreement a little later, but it may be noted that the territory
covered by the sole distributors was the entire Union of India and the
commission payable was 5% rebate on the sale price. The sole selling agents
were to make their best efforts to procure a market for sale of these
commodities and to establish a sales organisation
which would be helpful in conducting and expanding the sales of the commodities
of respondent No. 5-company. It may further be noted at this stage that the
appellant-company was to find out customers and effect sales only with the
prior confirmation of respondent No. 5-company and in case stocks of three
months lay undistributed, respondent No. 5-company had the right to directly
dispose of those goods.
It was also a term of the
agreement that, in exceptional circumstances, sale could be undertaken directly
by the respondent No. 5-company with the prior approval of the
appellant-company, but even on such sale the agreed commission of 5% was
payable to the appellant-company within a month of the effecting of that sale.
There was a further term of sixty days credit from the date of supply by the
manufacturers on the consignment basis. This being a sole selling agency
agreement covered by the provisions of section 294 of the Companies Act, 1956,
the approval of the general body of the shareholders was obtained which made
the contract lawful and effective for a period of five years from July 1, 1961.
The sole selling agency was being in this manner worked up to November, 1964,
when certain developments took place.
It appears that by 30th
May, 1964, three shareholders of respondent No. 5-company wrote a letter to the
Registrar of Companies and made a grievance about the terms and conditions of
the sole selling agent. According to the shareholders, the commodities for
which the appellant-company was appointed sole selling agent were in great
demand and in short supply in
The Registrar of Companies
wrote to respondent No. 5-company and called for its remarks on the letter of
the shareholders. Respondent No. 5-company by its
reply dated July 6, 1964, gave a detailed reply point-wise and para-wise to the letter written by the shareholders. In
this reply, amongst other points, respondent No. 5-company admitted that the
shareholders had made a representation that having entered into a contract of
sole selling agency for a period of five years during the subsistence of the
contract the company was not in a position to take any action. The other point
admitted by respondent No. 5-company was that there appears to be a seller's
market and it was quite possible for respondent No. 5-company to undertake the
sale of its commodities themselves. It appears that this correspondence was
forwarded by the Registrar of Companies to the Company Law Board and the
Secretary by his letter dated November 17, 1964, called for certain information
from respondent No. 5-company in terms of the provisions of clause (a) of
sub-section (5) of section 294 of the Companies Act (hereinafter referred to as
"the Act").
After the receipt of this
letter, respondent No. 5-company wrote to the. appellant
company by letter dated November 21,1964, accompanied by some extracts of the
Company Law Board's letter dated November 17, 1964. So far as the record goes,
the full text of the Company Law Board's letter does not seem to have been
forwarded by the respondent No 5-company to the appellant-company. Respondent
No. 5-company wrote to the Company Law Board on
December 10, 1964, giving detailed reply to the queries made and also sent
their own balance-sheet and audited accounts for three years. So far as the
audited accounts of the appellant-company were concerned, respondent No.
5-company wrote to the Company Law Board that the appellant-company was being
requested to forward the same directly to the Company Law Board. It appears
that the appellant-company gave its own reply to the Company Law Board on the
basis of the extracts received from respondent No. 5 and along with that reply
they also forwarded their own audited accounts and balance-sheets. This reply
bears the date 9/15-12-1964.
After considering this much
correspondence which amounted to information collected by the Company Law Board
under section 294(5)(a) of the Act, the Company Law Board issued a show-cause
notice dated February 16, 1965, to the respondent No. 5-company. In this
notice, three changes were proposed to be made in the sole selling agency
agreement of the appellant under the powers vested in the Company Law Board
under clause (c) of sub-section (5) of section 294 of the Act. The first change
proposed was that the rebate payable to the appellant-company on the sale of
the products sold pursuant to the agreement shall be reduced from 5% to 3.5%.
The second change proposed was that the appellant-company shall not be entitled
to any rebate on sales made directly by the principal company. The third
proposed change was that the sole distributors shall be responsible for
collection of sale proceeds and pay the same immediately on realisation
and in any case within 60 days from the date of despatch
of goods by the principal company, whether or not such proceeds have been realised by them. In case of payment made by the sole
distributors within thirty days from the date of despatch
by the principal company without realising the sale
proceeds from buyers, the sole distributors shall be entitled for interest at
6% for the period up to the 60th day from the despatch.
Respondent No. 5-company was directed to give its
reply on or before 15th March, 1965, failing which the Company Law Board would
assume that they did not wish to make any representation against the proposed
variations and action on the lines indicated above and the Company Law Board
would be free to act thereafter. It was also stated that if respondent No. 5-company
wanted to make a personal representation in this regard the officers of the
Company Law Board would be glad to meet their representatives on a suitable
date after the receipt of the written representations.
It appears that no direct
communication was ever made by the Company Law Board with the
appellant-company. The show-cause notice was forwarded by respondent No.
5-company to the appellant-company and on the basis of that show-cause notice,
the appellant-company made its own representations by a letter dated March 12,
1965, and made out its own grounds for not making the, proposed changes in the
sole selling agency agreement. Respondent No. 5-company
also gave its own reply dated March 13, 1965, and the reply in part creates an
impression that they have not much objection to the changes being effected to
the conditions of the agreement and in part, very feebly, they opposed the
proposed change. Respondent No. 5-company also asked
for a personal hearing and informed the Company Law Board that a representative
of the appellant-company would also accompany the representative of respondent
No. 5-company. Though the letter is not on record, it appears from the
pleadings of the parties that the Company Law Board fixed 9th April, 1965, as
the date for personal hearing and also informed respondent No. 5-company that
there would be no objection if the representative of the appellant-company
accompanies the representative of respondent No. 5-company. The two
representatives actually waited upon the Board and they were heard in person.
Thereafter, the impugned order dated April 20, 1965, came to be passed giving
effect to the proposed changes to the agreement of sole selling agency with
effect from the date of that order, viz., April 20, 1965.
By this order the Company
Law Board points out that they had collected information from respondent No.
5-company under section 294(5)(a) of the Act and on perusal of the information
furnished by the company and having considered the representations made by and
on behalf of the company, the Company Law Board was of the opinion that the
terms and conditions of appointment of the agency are prejudicial to the
interest of the company and as such in pursuance of the powers conferred upon
them by clause (c) of sub-section (5) of section 294 of the Act they varied the
terms and conditions of the appointment of sole selling agent as indicated in
the order. The first change effected was in consonance with the proposal at
point (i) in the show-cause notice about the rebate
payable at 5% to the petitioner-company which was reduced to 3.5%. In place of
the original clause (8) of the agreement, the Company Law Board proposed the
following clause :
"8. The sole
distributor shall be responsible for collection of sale proceeds and pay the same
immediately on realisation and in any case within 60
days from the date of despatch of goods by the
manufacturer, whether or not such proceeds have been realised
by them. In case of payments made by the sole distributors within thirty days
from the date of despatch by the manufacturer,
without realising them from the buyers, the sole
distributors shall be entitled for interest at the rate of 8 per cent. per annum for the period from the date of payment to the
60th day or the date of realisation from the buyer,
whichever is earlier".
So far as the original
proposal at point (iii) in the show cause-notice was concerned, the Company Law
Board directed that in the case of the existing clause 12 of the agreement, the
following shall be substituted :
"12. The manufacturer shall be free to sell
any of the said products direct to any dealer, consumer Government or
semi-Government institutions without reference to the sole distributors. The
sole distributors shall not be entitled to any rebate, commission or any other
remuneration on such direct sales".
Aggrieved by this order of
the Company Law Board, the present petition has been filed. In this petition,
the petitioners have raised four points to challenge the order of the Company
Law Board. According to the appellant-company, the provisions of sub-section
(5) of section 294 of the Act are discriminatory and violative
of the principles of article 14 of the Constitution of India. According to
them, arbitrary and uncanalised powers have been
vested in the Central Government to vary the terms and conditions of the
contract of solemn agreement arrived at between a public limited company and
the sole selling agent and that too after the proper approval of the general
body of the shareholders. Not only the classification is bad but in the absence
of any guidelines in the provisions, the Central Government or the Company Law
Board, to which can be delegated the function of the Central Government under
section 637 of the Act, have been vested with vast and arbitrary powers. Since
the section on the face of it is violative of the
principles of article 14, its vires are challenged.
The second point of attack is that proceedings under section 294(5) of the Act
are quasi-judicial in nature and not administrative. This being so, it was
necessary for the Company Law Board to give reasons for its order. In other
words the order not being a speaking one is defective on the face of it and
should be quashed. The next challenge is that, whether administrative or
quasi-judicial, the proceedings under section 294(5) of the Act resulted in
affecting the civil rights of the appellant-company and as such it was
absolutely necessary that a proper hearing is given to the appellant-company.
That hearing should have been as a matter of right, and in full observance of
the principles of natural justice. In the present case it is alleged that all
the relevant material before the Board was not made available to the
appellant-company and the appellant-company was not given any hearing in
respect of the entire matter which has ultimately influenced the Company Law
Board in passing the impugned order. The last challenge that is held out is
that granting that the provisions of sub-section (5) of section 294 of the Act
are intra vires, they only give a right to the
Company Law Board to vary the terms and conditions of the contract of the sole
selling agent but even after the variation the sole selling agent has to
survive in reality as a sole selling agent. This was the proposal in the
show-cause notice, but while passing the final order the Company Law Board has
acted beyond the show cause notice and has reduced the appellant-company to the
position of an ordinary agent, after doing away with its status as a sole
selling agent. This action is, therefore, bad for two reasons. The changes are
beyond the show-cause notice and, therefore, on the changes which are actually
effected there has been no hearing at all afforded to the appellant-company.
The second attack is that power at best is to change the terms and conditions
of appointment, but there is no power to reduce a sole selling agent to the
position of an ordinary agent. That has actually been done by the impugned
order and as such the order is far beyond the powers of the Company Law Board
under section 294(5) of the Act.
To such a petition are
joined respondents Nos. 1 to 3 who are the members of the Company Law Board.
Respondent No. 4 is the Union of India and respondent No. 5 is J.K. Chemicals
Ltd., the public limited company, which appointed the appellant-company as the
sole selling agent. In these proceedings respondent No. 5-company never
appeared and took no part. There is appearance on behalf of respondents Nos. 1
to 4 and out of them respondent No. 2 has filed a reply on behalf of himself
and respondent No. 4 which in fact purports to be on behalf of all the
respondents Nos. 1 to 4.
The position taken up in
the affidavit in reply by respondents Nos. 1 to 4 is that the appellant company
had no locus standi in the enquiry under section
294(5) of the Act. They had no right to be heard. However, as a matter of fact,
they were heard and all that was said in writing by them as also orally at the
hearing dated April 9, 1965, was considered along with the written and oral
representations of respondent No. 5-company. The affidavit in reply further
claims that the provisions of section 294(5) are intra vires
and asserts that the order passed is entirely administrative and not
quasi-judicial. In spite of the fact that it is an administrative order, the
Company Law Board, bearing the principles of natural justice in mind, gave
sufficient, adequate and full hearing to respondent No. 5-company as well as
the appellant-company. The order is thus within the powers vested in the
Company Law Board under section 294(5) of the Act and is in consonance with the
show-cause notice issued. There is neither irregularity nor illegality in the
matter of giving a hearing and observance of the principles of natural justice.
After taking into consideration the entire material before them, which has been
annexed to the reply, and after hearing the representatives of respondent No.
5-company as well as the appellant-company, the impugned order has been passed
so as to make the terms and conditions of appointment of the appellant-company
"no more prejudicial" to the interest of respondent No. 5-company.
This petition was heard by
a learned single judge of this court, who by his order dated 10th February,
1966, dismissed the petition. It has been held that
the provisions of section 294(5) of the Act are intra vires
and are not violative of the principles of article 14
of the Constitution. The learned single judge has not given any opinion as to
whether the proceedings under section 294(5) are administrative or
quasi-judicial. He has proceeded on the assumption that they may be treated as
quasi-judicial and found, in view of the case law then available in 1965 and
February, 1966, when the judgment was delivered, that observance of principles
of natural justice was enough before an order like the impugned order was to be
passed. The learned judge found that though the Company Law Board did not enter
into correspondence with the appellant-company and did not specifically deal
with them by giving them a show-cause notice, the evidence on record showed that the entire material which was considered by the
Board was made available to the appellant-company by respondent No. 5-company.
Not only that but. according to the learned judge, the
appellant-company and respondent No. 5-company were acting hand in glove. In
the circumstances there was sufficient notice to the appellant-company of the
entire material which was being considered by the Company Law Board. He further
held that as a representative of the respondent No. 5-company had accompanied
the representative of the appellant-company, a personal hearing was also given
to the appellant-company besides the consideration of the written
representations made by them. The learned single judge further found that the
term "vary" was given an artificial meaning by the Act in the
definition clause (50) of section 2 of the Act. According to this definition
"variation" shall include abrogation ; and
"vary" shall include abrogate. In view of this artificial meaning
given to the expression "variation" it was permissible for the
Company Law Board to abrogate the contract of the sole selling agent and as
such the impugned order was within the four corners of the authority vested in
the Board under section 294(5). This being the view of the learned judge, the
rule came to be discharged with costs. Being aggrieved, the petitioner-company
has filed this appeal.
In view of the arguments
addressed to us, the following points arise for our consideration : (1) whether
the provisions of section 294(5) of the Act are violative
of the principles of article 14 of the Constitution ; (2) whether the impugned
order is administrative or quasi-judicial; (3) if quasi-judicial, is it bad prima
facie for not being a speaking order, that is, the order not giving reasons in
support thereof ; (4) whether administrative or quasi-judicial, before the
order was passed, have the rules of natural justice been properly observed so
as to afford adequate and sufficient hearing to the appellant-company; and (5)
has the Company Law Board any right to so vary the terms of appointment of the
sole selling agent as to reduce him to the position of an ordinary agent. In
other words, is the impugned order beyond the scope of section 294(5) of the
Act and as such the principles of natural justice have not been observed so far
as the actual changes effected are concerned.
Having heard the learned
counsel on both the sides, we are not much impressed by the argument that the
provisions of section 294(5) of the Act are violative
of the principles of article 14 of the Constitution. It was argued that the
provisions of section 294(5) are discriminatory and pemit
the Company Law Board to pick and choose some of the parties who may be having
sole selling agency contracts to the exclusion of others who may be similarly
circumstanced. So far as the sole selling agency contracts are concerned, it
was stated that it was a common type of contract which many companies may be having
for selling their goods. There is no provision for making the Company Law Board
aware of the various contracts which many companies may be having. There is
also no provision by which contracts are required to be registered somewhere
nor any provisions are to be found for the appointment of the officer who will
examine such contracts and bring to the notice of the Company Law Board that
the the terms thereof appear to be prejudicial to the
interest of the company. The expression "prejudicial" used in the
section is also vague and does not convey any specific meaning. On the face of
it, therefore, an element of artificiality is prevalent in all these provisions
and there does not seem to be any classification which can be justified on a
rational ground. There are also no in-built safeguards or guiding principles
which are required to be observed by the Company Law Board before a decision is
taken. According to Shri Bhat,
this being prima facie a quasi-judicial enquiry as it affects the contractual
rights of the sole selling agent, the section indicates no settled norms which
ought to be observed by the Company Law Board before it makes up its mind to
pass a certain order. He points out that under the earlier part of section 294,
a sole selling agent can be appointed by the company, but unless the
appointment is approved in the first general body meeting held after the date
on which the appointment is made, the appointment ceases to be valid. This is
the effect of the provisions of sub-sections (2) and (2A) of section 294 of the
Act. It is, therefore, obvious that a solemn commercial contract has been
entered into by the two willing parties which has been
ratified by the general body of the shareholders.
However,
provisions of sub-section (5) of section 294 of the Act appear to give
uncontrolled and uncanalised powers to interfere with
such contracts and to vary them. For doing this there are no norms indicated,
nor any settled principles suggested on the basis of which the action
contemplated is to be taken. Incidentally, Mr. Bhat
also argued that the provisions appear to be vague as they do not clearly
indicate the point of time at which a certain sole selling agency contract
becomes "prejudicial". The provisions being so uncertain would serve
as a handle in the hands of unscrupulous companies to take the help of a sole
selling agent for a time when it suits them and to avoid the contract by
applying to the Company Law Board when the circumstances change and the help of
a sole selling agent is no more needed. The principles on which such a
challenge to the constitutionality of a provision can be considered have been
laid down in various judgments of the Supreme Court and they seem to be now
almost settled.
Shri Bhat argued that where the Act does not
prescribe the guidelines, to clothe an administrative or executive authority
with vast discretionary powers which can be misused, the Supreme Court has
struck down the provisions of the Act. He relies, for instance, on the judgment
of the Supreme Court in the case of State of
In a later judgment in Ram
Krishna Dalmia v. Justice S.R. Tendolkar ,
their Lordships had occasion to examine all case law on the subject available
then and thereafter pointed out the broad principles which seem to have been
well established from the proceedings examined. According to them, the result
of the examination of case law on the subject seems to indicate two broad
principles which must be fairly adhered to. The first is that the
classification must be based on an intelligible differentia which distinguishes
persons or things that are grouped together from others who are left out of the
group, and the second principle is that the differentia must have a rational
relation to the object sought to be achieved by the statute in question. By way
of further amplification of the principles it is pointed out that it would be
possible to conceive that a law would be constitutional even if a single
individual is classified as a class, if on account of some special
circumstances or reasons applicable to him and not applicable to others he
could be said to have formed a class of his own. They further point out that
when the challenge under article 14 is to be considered the court has to start
with the presumption in favour of the constitutionality of an enactment and the
burden is upon the person who attacks it to show that there has been a
transgression of the constitutional principles. It has to be assumed that the
legislature understands and appreciates the needs of its people correctly, that
the laws are directed to problems made manifest by experience and that its
discriminations are based on adequate grounds. It would also be legitimate to
assume that the legislature is free to recognise
degrees of harm and confine its restrictions to those cases where the need is
deemed to be the clearest. For sustaining the presumption of constitutionality
the court may take into account matters of common knowledge, matters of common
report, the history of the times and may assume every state of facts which can
be conceived existing at the time of legislation and that while good faith and
knowledge of the existing conditions on the part of a legislature are to be
presumed, if there is nothing on the face of the law or the surrounding
circumstances brought to the notice of the court on which the classification
may reasonably be regarded as based, the presumption of constitutionality
cannot be carried to the extent of always holding that there must be some
undisclosed and unknown reasons for subjecting certain individuals or
corporations to hostile or discriminating legislation. The Supreme Court has
also pointed out the various classifications which can be easily conceived of
on the basis of these principles, but it does not appear to be necessary to go
into the details of that discussion.
The position under the Constitution
may have to be examined in the light of these broad principles so far as the
classification is concerned. However, this is one part of the challenge. The
second point is how the legislation will indicate the limits of the power
vested in certain authorities and how will it indicate the policy of the Act as
also the propriety of classification. In that behalf it appears to be now well
understood that the policy of the law could be indicated in the provisions
themselves and it would not be advisable to accept a particular kind of wording
of the provisions and if from the provisions themselves the policy of the Act,
the classification and the conditions on which the power would be exercised are
sufficiently indicated, the law would be considered as valid. We may point out
that in the section which falls for interpretation, the policy of the law has
been indicated by one expression, viz., the Central Government or the Company
Law Board finds that a particular agreement of sole selling agency is "prejudicial"
to the interests of the company and that power is to be exercised by effecting
variations in those terms and conditions in such a manner as to make them
"no longer prejudicial" to the interests of the company.
Before we actually discuss
the implications of these provisions it may be useful to refer to two judgments
of the Supreme Court where this point has been considered. In the case of A. Thangal Kunju Musaliar
v. M. Venkatachalam Potti ,
provisions of the Travancore Taxation of Income
(Investigation Commission) Act were considered. It was permissible under the
provisions of section 6 of that Act to appoint an authorised
official to examine the cases where there had been "substantial"
evasion of taxes. When challenge was held out to the constitutionality of that
Act, as the expression used "substantial” was vague and undefined, the
Supreme Court while upholding the legality and constitutionality of the Act
pointed out that the word "substantial" by itself provides no
yardstick for concluding that so far as a particular individual was concerned,
the background and the circumstances under which the Act was passed indicate
with reasonable certainty the class of persons intended to be subjected to the
drastic procedure contemplated by the Act. In that context, it was further pointed out that the
expression "substantial" means big, considerable. They also
considered the arguments that there was a possibility of the Government
discriminating between individual and individual by using or in fact misusing
the provisions of that Act. This argument was met by pointing out that when
there was a ground to render the law invalid or void, if an individual case of
that type is brought to the notice of the court it would be a case of challenge
to the executive action and not to the constitutionality of law. It was
observed that there was a presumption that law would be enforced honestly and
not "with an evil eye and an unequal hand".
In
the same manner in the case of Jyoti Pershad v. Administrator for the Union Territory of Delhi ,
it has been clearly laid down that so long as the legislature indicated in the
operative provisions of the statute with certainty the policy and purpose of
the enactment, the mere fact that a discretion was skeletal, or the fact that
the discretion is left to those entrusted with administering the law, affords
no basis either for the contention that there has been an excessive delegation
of legislative power as to amount to an abdication of its functions, or that
the discretion vested is uncanalised and unguided as
to amount to a carte blanche to discriminate.
In
the light of these principles if the provisions of section 294(5) are examined,
we find that it is difficult to sustain the challenge under article 14 of the
Constitution of India. The provisions of sub-section (5) of section 294 of the
Act are obviously conceived of to eradicate one of the evils well-known to the
legislature. The principle on which this provision has been enacted can be well
imagined. There may be certain products manufactured by the companies which are
in such great demand and which are in such short
supply that selling of these articles poses no problem whatsoever. It is
possible to imagine that in such a case needy customers would be knocking at
the doors of the company to supply the goods. An average shareholder is neither
vigilant nor well informed of all the prevailing conditions of the market. It
may be that the shareholders on the basis of the information given to them
agree to the sanction and approval of the appointment of a sole selling agent
on certain terms and conditions. It may be that it was later on realised that there was hardly any need for the appointment
of a sole selling agent or at any rate it was not necessary to appoint any on
such liberal terms as to commission and other payments which are incorporated
in the contract. The contract itself as a whole or certain
terms thereof might be considered prejudicial to the interests of the
company. This would depend on a variety of circumstances present and a high
powered body like the Company Law Board may be in a position to discover which
contracts appear to be prejudicial to the
interests of the company and which do not. It may be noted that section 294
deals only with the sole selling agents and not with ordinary agents and
dealers or sub-dealers that may be appointed from time to time and whose terms
and conditions could also be varied from time to time. The sole selling agent
is recognised as a necessary institution but the
terms and conditions on which advantage of that organisation
could be taken must not be prejudicial to the interests of the company. Here is
therefore the first distinguishable feature which becomes apparent on the face
of the record, viz., that the class of companies which
are conceived of are those companies who have sole selling agents and whose
terms and conditions of appointment are prejudicial to the interests of the
company. This appears to us as a well defined class and should be understood as
a classification to the exclusion of other companies, who do not have either
sole selling agents at all or whose terms of appointment are not prejudicial to
the interests of the company. There is, therefore, a well recognised
classification to be reckoned under section 294(5).
Then again we find that the
guidelines are to be found within the provisions of clause (c) of sub-section
(5) of section 294 of the Act. It is not every contract that is open for
variation by the Company Law Board, but unless a contract is found to be
prejudicial, the Company Law Board does not seem to have any right or authority
to interfere with the agreements of sole selling agents. A finding to be
arrived at by the Company Law Board that a certain contract of a sole selling
agent is prejudicial to the interests of the company is the very foundation of
the jurisdiction of the Company Law Board. Whether a particular agreement of a
sole selling agent could be described as prejudicial or not prejudicial would
always depend upon the facts and circumstances of the case and various attending
circumstances. The expression seems to be difficult to define but it is quite
capable of being understood as providing a rational guideline for taking a
decision on the facts and circumstances of the case. A selling agency and its
utility as well as necessity are matters well-known to the commercial world and
the implications thereof could be easily deciphered by experienced persons. The
question does not pose either complicated investigation or a position of any
complex type. The simplest case that could be conceived of is where a commodity
is in so short supply that before it is manufactured and comes out of the
factory there are orders standing from buyers and the company finds it
difficult to meet the pending orders. Throwing away sizable commission or
rebate in favour of a sole selling agent in a case of this type might be at
once styled as highly prejudicial to the interests of the company. There may be
other cases where there is reasonable possibility of marketing a product but
there is fair amount of competition. It is well-known that a large section of
consumers usually accept goods which are generally available and are brought to
their doors by canvassing by competent and able salesmen. In the circumstances
mentioned in the second instance a competent and able sales organisation
would be a welcome help and giving them enough rebate so that they would push
their sales better would be conducive to the interests of the company and not
at all prejudicial.
We are not attempting to analyse the entire market conditions which would suggest
when a prejudice is caused and when it is not by the appointment of a sole
selling agent. This discussion is aimed at only pointing out that though the
section has used only one expression, viz., the contract becoming "prejudical", it is still
capable of providing a rational guideline for the exercise of the power by the
Company Law Board. Even after reading the provisions of clause (d) of
sub-section (5) of section 294 which speaks of regulation of the appointment of
the sole selling agent according to the terms and conditions varied by the
Company Law Board, we are of the view that the section inherently indicates
that the company which needs a sole selling agent can appoint him only on terms
which are not prejudicial to the interests of the company. If the terms and
conditions are so varied as to make then no more prejudical,
not only the interest of the company is served but a sole selling agent who had
procured rather hard terms in his favour is brought down to terms and
conditions which would be reasonable in the circumstances of the case. We are,
therefore satisfied that the provisions of section 294(5)(c)
are not open to challenge under article 14 of the Constitution. Agreeing with
the learned single judge we reject this part of the argument of Shri Bhat.
The next point that falls
for consideration is whether the impugned order passed by the Company Law Board
is passed in a jurisdiction which is administrative or quasi-judicial. Shri Bhat argued that the
jurisdiction exercised by the Company Law Board under sub-section (5), clause
(c) of section 294, is purely quasi-judicial in its character. The relevant
provisions of section 294 which fall for our consideration are as follows :
"294. (5)
(a) Where a company has a sole selling agent
(by whatever name called) for an area and it appears to the Central Government
that there is good reason so to do, the Central Government may require the
company to furnish to it such information regarding the terms and conditions of
the appointment of the sole selling agent as it considers necessary for the
purpose of determining whether or not such terms and conditions are prejudicial
to the interests of the company ;
(b) if the company
refuses or neglects to furnish any such information, the Central Government may
appoint a suitable person to investigate and report on the terms and conditions
of appointment of the sole selling agent;
(c) if after
perusal of the information furnished by the company or, as the case may be, the
report submitted by the person appointed under clause (b), the Central
Government is of the opinion that the terms and conditions of appointment of
the sole selling agent are prejudicial to the interests of the company, the
Central Government may, by order, make such variations in those terms and
conditions as would in its opinion make them no longer prejudicial to the
interests of the company ;
(d) as from
such date as may be specified by the Central Government in the order aforesaid,
the appointment of the sole selling agent shall be regulated by the terms and
conditions as varied by the Central Government".
The
section quoted above speaks of the Central Government but in view of the
provisions of section 637 of the Act, it is the Company Law Board that has
passed the impugned order in this, case and in our discussion we will
throughout refer to the Company Law Board only, though the provisions of the
Act refer to the Central Government. Under clause (a) above, if there is good
reason to do so, the Company Law Board may require the company to furnish such
information regarding the terms and conditions of the appointment of the sole
selling agent as it considers necessary for the purpose of coming to the
conclusion whether or not such terms and conditions are prejudicial to the
interests of the company. If the company refuses or neglects to furnish any
such information, the Company Law Board is authorised
to appoint a person to investigate and report on the terms and conditions of
appointment of the sole selling agent. This is provided by clause (b) of
sub-section (5) of section 294. When the information so became available either
in the form of information supplied by the company or in the form of a report
by the person appointed, the Company Law Board is called upon to peruse that
information and form its opinion that the terms and conditions of the
appointment of the sole selling agent are prejudicial to the interests of the
company. After such an opinion has been formed which on the face of it appears
to be subjective formation of opinion, the Company Law Board has to proceed to
pass an order and make such variations in the terms and conditions which would
in its opinion make them no longer prejudicial to the interests of the company.
These are the powers vested in the Company Law Board under clause (c) of the
same sub-section, and the effect of the variation and further relationship
between the company and the sole selling agent has been incorporated in clause
(d). Under this clause (d), as from the date specified by the Company Law Board
in the order, the appointment of the sole selling agent shall be regulated by
the terms and conditions as varied by the Company Law Board. It goes without
saying that the provisions of sub-section (5) of section 294 are attracted only
when there is a sole selling agent and not
otherwise. Apart from the real meaning and content of a sole selling agent, the
parties seem to agree here that there is a sole selling agent and, therefore,
the Company Law Board has exercised its jurisdiction to vary the terms and
conditions of appointment. After the variation is so made from the date
indicated, the appointment is to continue and is to be regulated by the amended
terms as per the order of the Company Law Board.
Large number
of cases were cited before us on either side to convince us that this
would be either quasi-judicial or administrative function of the Company Law
Board. The learned single judge has not decided this question but has proceeded
on the assumption that the inquiry may be assumed to be quasi-judicial. He,
however, felt and in view of the case law then available rightly, whether an
action is administrative or quasi-judicial, it is enough if principles of
natural justice are followed and full and proper hearing is given to a party.
With that approach the facts of this case were examined and, as we pointed out
earlier, a conclusion was reached that adequate and sufficient hearing was
given to the appellant-company in compliance of the observance of the
principles of natural justice. However, there has been of late further thinking
on the subject and it is no more a matter of doubt that whether an
administrative or judicial action, it must always be preceded with the
observance of the principles of natural justice. Apart from that, the dividing
line between an administrative power and a quasi-judicial power is quite thin
and is being gradually obliterated as pointed out by the Supreme Court in A.K. Kraipak v. Union of India .
For determining whether a power is an administrative power or a quasi-judicial
power one has to look to the nature of the power conferred, the person or
persons on whom it is conferred, the framework of the law conferring that power,
the consequences ensuing from the exercise of that power and the manner in
which that power is expected to be exercised. That in a welfare State like
With
these premises Mr. Bhat called upon us to decide
whether the powers exercised under section 294(5) are administrative or
quasi-judicial particularly in view of a new point which he raised before us,
and which we have permitted him to urge. The argument is that if the Company
Law Board was discharging quasi-judicial function in passing the impugned
order, it was bound to give reasons for the passing of that order. In other
words, the order of a quasi-judicial body must be a speaking order. A person
aggrieved by that order must know why the quasi-judicial authority has passed
that order so that if he wants to resort to a further remedy either by way of
the appellate jurisdiction of the Supreme Court under article 136 of the
Constitution or the supervisory jurisdiction of the High Court and the Supreme
Court under articles 226 and 227 and 32, respectively, he may do so. Unless he
knows why the order has gone against him it would be difficult for him to
convince the High Court or the Supreme Court about the correctness and legality
of his own case.
We
will at once point out that when an attempt was made to raise certain grounds
conducive to the development of this point, it was opposed by Mr. Joshi on
behalf of the respondents. After hearing the counsel on both the sides, we are
rejecting that objection. Mr. Joshi's objection on behalf of respondents Nos. 1
to 4 is that the petition pleads that the impugned order is quasi-judicial in
its nature. There is no pleading that the order is bad because it does not
incorporate reasons therein. This is a ground which should not be allowed to be
taken by adding to the pleading. So far as the technicality of amendment of the
petition is concerned, we are now rejecting the application. While indicating
our mind during arguments it was equally made clear at the Bar that even apart
from the amendment of pleadings if, on the basis of the case law and on the
facts and circumstances as they exist, it is possible for the appellant-company
to raise that challenge by way of a pure question of law, it would be permitted
to be argued. In fact an argument has been raised before us on these lines and
we are called upon to consider whether the impugned order could be declared as
void simply because it does not contain any reasons therefor.
Such a conclusion could be possible only if it is held that it is a
quasi-judicial order and further nothing beyond the order is expected to be
examined by the courts.
Mr.
Bhat placed strong reliance upon the judgment of the
Supreme Court in Travancore Rayons
Ltd. v. Union of India .
The cases on which Mr. Bhat
is relying, as the one cited just now, are mostly cases where there are either
statutory appeals or revisions provided to higher authorities from the order of
the initial authority that passed it. For instance, in the
case of Travancore Rayons
Ltd.
the Central Government had the right of revision under section 36, which provided an
aggrieved party the right to move the Central Government by way of a revision
application. After the final order of the Tribunal in a case of this type, the
party aggrieved is still entitled to invoke the supervisory jurisdiction of the
High Court under article 227 or the appellate jurisdiction of the Supreme Court
under article 136. In this context in para.
9 of its report, the Supreme Court observed that the court held in a number of
decisions cited in that para, that the decisions of
Tribunals in
We need not probe this
point any further. The reason will become apparent in the further part of our
judgment. However, since Mr. Bhat wanted to argue
that the absence of a speaking order is fatal in a quasi-judicial proceeding he
brought to our notice the above judgments. Before such an argument was to be
made there was an obstacle in his way that this was not specifically pleaded in
the petition. We find that there is good authority not only in the cases
falling under the Civil Procedure Code, section 100, but also in appeals
arising out of writ matters that the High Courts and the Supreme Court have
permitted arguments on pure questions of law when no new facts need be pleaded
or proved. In other words, if what is pleaded itself leads to the raising of a
question of law, it is not the requirement of the pleading that the law should
be pleaded. For instance, in the case of Bhagat Ram Patanga v. State of
The facts before us clearly
show that the order in question is being pointed out in the petition as a quasi-judicial
order. If that is a point of dispute, the further argument relating to the
necessity of incorporating reasons in the order now affords a point of law from
the subsequent judgments of the Supreme Court. These judgments were not
available to the parties at the time when the petition was presented or when it
was argued before the learned single judge. We do not think that the raising of
this point should be prevented on the technical plea that want of reasons has
not been specifically pleaded in the petition.
Before we again go to some
of the cases on which reliance is placed for pointing out that the proceedings
under section 294(5) are quasi-judicial proceedings it would be appropriate to
point out the broad distinction between quasi-judicial order and an
administrative order. In Radeshyam Khare v. State of Madhya Pradesh ,
the Supreme Court observed that there seem to be three requisites in order that
the act of a body may be said to be quasi-judicial act, viz., that the body of
persons, (1) must have legal authority, (2) to determine questions affecting
the rights of parties, and (3) must have the duty to act judicially. It is the
third condition which really distinguishes an administrative order from one
which is quasi-judicial. Even for an administrative order the body of persons
must be invested with powers and sometimes an administrative order can have
much more far reaching effects than the quasi-judicial orders. Affecting the
civil rights of persons can be a common feature of orders administrative as
well as quasi-judicial. Where there is a duty cast under the Act to act
judicially the order would tend to be quasi-judicial. This is not to suggest
that it is only in the case of quasi-judicial matters that there is a need to
act in a fair and just manner. Approach on the basis of observance of
principles of natural justice is common to both. That being a necessary
approach for the just decision of a controversial point whether the
administrative tribunal or the quasi-judicial tribunal needs to follow the
principles of natural justice, cannot be
over-emphasized. The learned counsel on both sides have
taken us through some cases which, according to them, have approached the
factual position which is similar to the one under section 294(5). They,
therefore, rely upon those cases to indicate that the order is either
administrative or quasi-judicial. Before we consider those cases it would be
appropriate that the provisions above-quoted of subsection (5) of section 294
are examined to find out what they really contain. Dealing with the provisions
of clause (a) it would be at once pointed out that the Company Law Board begins
to act for the purpose of collecting information regarding the terms and
conditions of appointment of a sole selling agent provided there is good reason
to do so. In a given case the Company Law Board may be apprised, as for
instance in our case, of a certain set of facts which may be described as
prejudicial to the interest of the company so far as the terms and conditions
of appointment of a sole selling agent are concerned. The provisions of clause
(a) clearly show that the terms and conditions incorporated in the contract of
agency as also such other incidental matters which may be necessary for the
purpose of determining the prejudicial character of the agreement is concerned,
are to be collected from the company itself. The reasons seem to be obvious. No
limited company would transact any business including appointment of sole
selling agent unless there is a well-maintained record of it. Sole selling
agent's appointment is required to be ratified by the general resolution of the
shareholders in the first general body meeting after the appointment is made.
That being so the text of the resolution ratifying the agreement and the
results which follow from the actual working of that agreement would be all
matters of record and could be easily obtained from the office of the company.
In case there is refusal or neglect by the company, suitable person could be
appointed to investigate and report. He would do the same thing, viz., search
the records of the company and get the factual information which would normally
partly consist of the terms and conditions of appointment and partly of a
statistical data indicating the gains and losses of the working of that
agreement. This is the material which is made the basis of the opinion about
the company by the Company Law Board. In clause (c) which immediately follows,
it is laid down that on perusal of that information the Company Law Board has
to form an opinion. The language used is that the Company Law Board "is of
the opinion that". The opinion that is conceived of is whether the terms
and conditions of the appointment of a sole selling agent are prejudicial to
the interest of the company. At this stage before the decision is taken,
undoubtedly some kind of hearing to the parties who will be adversely affected
by the opinion that has to be formed, seems to follow as a natural consequence
which is inherent in the process of forming the opinion itself. When the terms
and conditions of the sole selling agent are varied by which the prejudice
so-called to the company is relieved, it stands to reason that the order would
normally benefit the company and deprive the sole selling agent of some
advantage which he was getting under the terms and conditions of appointment.
When the provisions on the face of them have been vested in a body of persons
and that authority is calculated to be exercised in a manner which will affect
the rights of parties, civil consequences do seem to follow from the action
that is contemplated under clause (c) at the hands of the Company Law Board.
The first two requirements
thus being satisfied, the only question that remains to be considered is, does
the language and the contents of clause (c) show that the Company Law Board is
also further obliged to act judicially ? It is now
well settled that the need to act judicially could be seen from the express
provisions of the Act itself or could be inferred from the implied provisions
as also from the nature of the power, the nature of the body of persons who are
invested with it and consequences that must follow from the exercise thereof,
etc. In other words, if there is an imperative need to act judicially, from the
necessary implication and from the provisions and the attending circumstances,
the functions to be performed would have to be held quasi-judicial. In a case
falling under section 294(5) the information, as we pointed out earlier, is of
a very limited type and no particular kind of investigation or inquiry with
evidence, etc., seems to be necessary. Immediately thereafter—but in view of
the principles which the courts have developed—after hearing the party
affected, an opinion is permitted to be formed. In a process of this type
conceived of by clause (c) under consideration, it is difficult to read that
there is either express or implied provision for acting judicially. No elaborate
investigation is called for nor seems to be necessary. However, the Board must
hear those who are going to be affected and that hearing would be in the
observance of the principles of natural justice. We may here point out that the
principles of natural justice are not codified law but are well-recognised rules which are developed by the courts from
time to time. The Supreme Court has pointed out in A.K. Kraifiak's
case that the concept of natural justice has
undergone a great deal of change in recent years. In the past it was thought
that it included just two rules, viz., (1) no one shall be a judge in his own
case (nemo debet esse judex propria
causa), and (2) no decision shall be given against a
party without affording him a reasonable hearing (audi
alterant pattern). Very soon, thereafter, a third
rule was envisaged and that is that quasi-judicial enquiries must be held in
good faith, without bias and not arbitrarily or unreasonably. But, in the
course of years, many more subsidiary rules came to be added to the rules of
natural justice. It was thought till recently that unless the authority
concerned was required by the law under which it functioned to act judicially
there was no room for the application of the rules of natural justice. The
validity of that limitation is now questioned. If the purpose of the rules of
natural justice is to prevent miscarriage of justice one fails to see why those
rules should be made inapplicable to administrative enquiries also.
In
this limited sense a just decision by observance of certain rules of code of
conduct is not to be confused with the requirement of a law to act judicially.
Unless that is writ large either expressly or by necessary implication by the
provisions of law, it may not be possible to infer that the inquiry
contemplated is quasi-judicial. Looked at from that point of view and looking
to the purpose and function of sub-clause (c) of sub-section (5) of section 294
we find it difficult to persuade ourselves that the enquiry that the Company
Law Board must make before forming the opinion could be described as a
quasi-judicial one. On the material already collected as per clause (a) or (b)
and after hearing the parties on that material, the Company Law Board has to
form an honest and unbiased opinion and if that opinion really is that the
existing terms and conditions of the sole selling agent are prejudicial to the
interest of the company, it has at once to take a step which will bring about a
condition contemplated by the last portion of clause (c) of sub-section (5) of
section 294.
Shri Joshi for the respondents relied upon two judgments of the
Supreme Court in the case of Barium Chemicals Ltd. v. Company Law Board and Rohtas
Industries Ltd. v. S.D. Agarwal .
In both these cases the provision of the company law which was under
consideration was section 237 of the Act. We do not think that either of the
cases can be usefully considered for the interpretation of section 294(5) of
the Act for the simple reason that there is one distinct feature in the section
under consideration which was absent in section 237. Section
237 of the Act deals with the investigation of the company's affairs in certain
cases. The final result of the investigation, whatever that be, does not
seem to bind any one nor does it affect the rights of any party. If at all any
action is contemplated, civil, or criminal, as a result of the investigation
conducted under section 237, the matter has to be taken to a court of law.
However, section 294(5) of the Act directly affects the civil rights of a sole
selling agent like the appellant-company and we do not think, therefore, that
the conclusions of the Supreme Court that the orders under section 237 of the
Act are administrative in character can have any relevance while discussing the
provisions of section 294(5).
Shri Bhat, on the contrary, relies on the
judgment of the Supreme Court in Rampur Distillery
and Chemical Co. Ltd. v. Union of India .
That was a judgment under section 326 of the Act relating to the approval of
the Central Government to the appointment, etc., of the managing agents under
certain circumstances. These provisions were construed by the Supreme Court and
their Lordships held that the enquiry under that section is quasi-judicial. The
reasons seem to be obvious. A plain look at the provisions of section 326 will
show that the Central Government is called upon to accord its approval to the
appointment or reappointment of the managing agent only if the conditions
mentioned in clauses (a), (b) and (c), of sub-section (2) of section 326
existed. Out of these clauses, particularly clause (b) of sub-section (2)
requires the Central Government to form its opinion as to whether the managing
agent proposed is a fit and proper person to be appointed or reappointed and
that the conditions which are proposed are fair and reasonable. It is clear
that the suitability of a person to be appointed as a managing agent, would depend upon the consideration of all the
material that may be available about the person concerned. That person will
have a right to lead evidence and disprove certain allegations which are being
otherwise made against him. If he is made aware of the facts which are against
him and that seems to be necessary in any fair enquiry, he will lead evidence
to disprove what is being alleged against him, or he might point out the
circumstances under which these events occurred and the need to appreciate them
in the correct perspective. There is, therefore, no doubt on the face of it
that the section calls for a judicial disposal of the dispute. It may be that
the enquiry is by the Company Law Board and the only party is the person whose
status to be appointed as a managing agent is under enquiry. We do not think
that the provisions of section 326 could be said to be comparable to the
provisions of section 294. It is stated at the Bar that except for this
litigation there has been no occasion to consider the provisions of section
294. As we find that neither section 326 nor section 237 of the Act was
comparable to the provisions of section 294(5), we must decide the question raised before us by looking
at the section, its implication and the real import of the provisions in the
light of the broad principles which are well established.
In the circumstances, as we
have already pointed out, the provisions of clause (c) require a decision being
taken on facts which are directly collected from the company and in the light
of such other circumstances as maybe brought to the notice of the Board by the
parties who are going to be affected by the decision which is to be taken. We
do not think, therefore, that there is neither express nor implied provision in
the Act nor do any attending circumstances exist which
indicate the necessity to act judicially before the opinion contemplated is to
be formed. We would, therefore, hold that the impugned order which the Company
Law Board passed under section 294(5)(c) is administrative
in its character and not quasi-judicial.
In view of this conclusion,
it would be necessary for us to examine whether the Company Law Board has
observed the rules of natural justice and whether it has acted beyond its powers
under section 294. So far as the principles of natural justice are concerned,
the Supreme Court pointed out in A.K. Kraipak's case that they are not a set of embodied rules and
what particular rule of natural justice should apply to a given case must
depend to a great extent upon 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.
The grievance which has
been made out by Shri Bhat
in respect of the observance of the principles of natural justice is that the
Company Law Board has neither granted him all the material on which they have
acted nor have they heard him as a matter of right. The learned trial judge has
come to the conclusion that the appellant-company somehow appears to have
obtained all the material on which the Company Law Board acted. The learned
judge does admit that a part of the material, which was in fact important
portion of the material, was not made available by the Company Law Board to the
appellant. However, a conclusion has been reached that the appellant-company
has acted in close collaboration with respondent No. 5-company and there is
ground to infer that the appellant-company must have received all the material
from respondent No. 5-company. So far as the present petition is concerned, it
appears that respondents Nos. 1 to 3 have placed on record the material that
was available to them.
Out of this
material two important documents do not seem to have been made available to the
appellant-company by respondent No. 5-company. When the Registrar of Companies
wrote to respondent No. 5-company on the basis of the complaint of the
shareholders, a reply was sent by respondent No. 5-company to the Registrar of
Companies. That correspondence was ultimately referred to the Company Law
Board. However, neither the letter of the shareholders addressed to the
Registrar of Companies not the reply of the respondent No. 5-company to the
Registrar of Companies was made available to the appellant either by the
Company Law Board or by respondent No. 5-company. Shri
Bhat points out that the Company Law Board calls for
certain information from respondent No. 5-company, but the full text of that
letter was never made available to the appellant-company by respondent No. 5.
They sent only some extracts and on the strength of those extracts the
appellant-company sent a reply to the Company Law Board annexing along with it
its audited balance-sheet and accounts. Undoubtedly that was a letter under
section 294(5)(a) and even the extracts sent to the appellant by the respondent
No. 5-company made the appellant-company aware that the Company Law Board was
making enquiry into the matter under section 294(5). What is being argued and
held proved is that the appellant-company being the sole selling agent must
have known from the reference to section 294(5) that the enquiry is undoubtedly
for the purpose of examining the terms and conditions of the sole selling agent
and to decide whether they are in fact prejudicial to the interest of the
company. There is no doubt that there is some substance in this argument.
However, the reply given by
the appellant-company would show that they did not seem to be aware of the
allegations of the shareholders that there was a seller's market in respect of
all the three commodities for which the appellant-company was appointed a sole
selling agent. They make a general representation about such contracts and the
term being reasonable as usual in the chemical trade. The subsequent stage
arises when a show-cause notice is issued by the Company Law Board and
respondent No. 5-company is called upon to made its
written representation. So far as the record goes the show-cause notice has
been made available to the appellant-company by the respondent No. 5 –company,
but the reply of respondent No. 5-company is not made available to the
appellant-company. The representation of the appellant-company, if read
independently, creates an impression that the appellant-company was never made
aware of the fact that the allegation of existing seller's market was being
made not do they seem to be aware of another allegation that they had not put
up any sales organisation at all as required by the
original terms and conditions of the agreement. Obviously, therefore, we do not
find a detailed reply in respect of the sales organisation
nor do we find any reference at all to the question of seller's market. Even a
reference to the sales organisation is indirect with
a view to point out that the rate of commission was reasonable and comparable
to such other contracts in the field of chemical trade and that such commission
was necessary because it involves setting up of a sales organisation.
In the reply of the company to the show-cause notice there are certain
references which give the impression that the company is sitting on the fence
and neither wants to give up its selling agency nor does it want to take up an
attitude which could be attacked subsequently in a share-holders' meeting.
In the second paragraph of
their letter dated March 13, 1965, they point out to the Company Law Board that
the Board had not given the reasons for the proposed action and in the absence
of these reasons the respondent No. 5-company was unable to know the
circumstances which call for their intervention. The further part then deals
with the existing terms and conditions and the operation thereof. There is also
admission that the company has not fulfilled its obligation to the equity
shareholders and has only partly discharged its obligation towards the
cumulative preference shareholders. Regarding the proposed change No. (ii) in clause (12) of the
distributorship agreement, respondent No. 5-company makes a query whether it
was the intention of the Company Law Board that notwithstanding the above
clause (12) the company can sell directly and that on such sales and on sales
effected to the sub-distributors the sole distributors are not entitled to any
rebate. They asked for a clarification of the matter. It may be noted that in
the original clause (12) of the sole distributorship, the sole distributors
were entitled to the commission even on certain sales made directly in
exceptional circumstances by the manufacturers. When the show-cause notice was
issued and the change was proposed in that behalf, the wording of the
show-cause notice is as follows :
"M/s. Nanavati
and Company shall not be entitled to any rebate on sales made directly by the
principal company".
We must not forget that the
show-cause notice was not an independent document but it had direct relation to
the terms and conditions in the original agreement which were sought to be
varied under the powers vested in the Company Law Board under section 294(5).
There was one case of sales directly to be made by the manufacturers
contemplated by clause (12) of the original agreement and even in respect of
that sale the appellant-company was entitled to its 5% rebate. Read in that
context the proposal of the Company Law Board, prima facie, shows that in
respect of those sales effected under clause (12) the
appellant will not be entitled to its rebate. However, while giving the
explanation respondent No. 5-company seems to enlarge the basis of the proposal
and makes a query whether the proposed amendment is to be understood as a free
right of sale to sub-distributors also with no liability to pay rebate to the
appellant-company, the sole selling agent. This approach suggested in the reply
of respondent No. 5-company has ultimately been accepted by the Company Law
Board while passing the final order. The appellant-company, prima facie, is not
aware of this suggestion of respondent No. 5-compamy which is directly against
the interest of the appellant-company and also against the avowed terms of its
agreement. While furnishing information to the Company Law Board, respondent
No. 5-company in its earlier reply has pointed out that the appellant-company
has already earned a rebate of Rs. 13 lakhs over a period
of 3 to 4 years. It has also suggested there that if this rebate was not
payable to the appellant-company between the periods 1959-60 to 1965 there
would have been to that extent an improvement in the financial position of the
company.
In this manner these pieces
of information which tend to indicate that the terms and conditions of the
present agreement worked prejudicially against the interest of the company are
not made available to the appellant-company either by the Company Law Board or
respondent No. 5-company. However, from the two broad circumstances it is being
inferred that the appellant-company must have knowledge of this material placed
before the Company Law Board. It is being assumed that the appellant must have
read the full text of the letter dated November 17, 1964, as also the earlier
letter of the shareholders making a grievance against the sole selling agent
and the rebate paid to them. Some dates are considered as representing the
action taken by the appellant-company and respondent No. 5-company in close
collaboration of each other. The first reply by the appellant-company is dated
9/15th December, 1964, whereas the reply by respondent No. 5-company is dated
10th December, 1964. When the show-cause notice comes which calls upon the
respondent No. 5-company to give its representations before 15th March, 1965,
we find that the appellant-company gives a reply on 12th March, 1965, whereas
respondent No. 5 gives a reply on 13th March, 1965. From this conduct of the
two parties, viz., the appellant-company and respondent No. 5-company, of
giving replies near about the same date, an inference is sought to be drawn
that they must have consulted each other to the full and thereafter these
replies must have been given. When the appellant-company pleaded that in spite
of the appellant's letter to the Company Law Board they never acknowledged any
letter nor communicated any reply, the attitude in the affidavit-in-reply is
that the appellant had no locus standi and there was
no need to hear it at all.
This
has been the frame of mind of the Company Law Board right from the beginning
and continues to be so even during this litigation. However, the
appellant-company volunteered to send replies from time to time as it received
certain communications from the respondent No. 5-company. Those communications
were not full extracts of the material received from the
Company Law Board nor the communications including the replies given by
respondent No. 5-company. The explanations and representations of the
appellant-company are always confined to the points which appear in the
communications received by the company whether they are extracts or full texts.
So far as the show-cause notice is concerned, there is a full text available
but for the rest only extracts of the earlier letter and not even an extract of
the relevant portion of the shareholders' complaint to the Registrar of
Companies, which was also available to the Company Law Board.
Shri Bhat argued, and with considerable
emphasis, that it is not possible on the face of the record to infer that the
appellant has been fully made aware of the material that was placed before the
Company Law Board. Undoubtedly, the allegation of the market being the seller's
market for the commodities for which the agency was created and the absence of
any sales organisation worth the name by the
appellant-company, were two of the most important facts which could influence
the decision of the Company Law Board. On both these issues the appellant has
not furnished reply as he was prima facie not made aware of these allegations
from the documents that were made available to him. The next piece of
circumstance which has gone against the appellant-company is that it
voluntarily attended the personal hearing on March 9, 1965, when the respondent
No. 5-company was called for a personal hearing. The oral representations of
both the representatives were heard by the Company Law Board. Even the
appellant-company admits in its petition that it was given a personal hearing
along with the representative of respondent No. 5-company. What was the nature
of the discussion or address that took place, there is
no indication in the petition nor in the affidavit-in-reply. A general
statement has been made in the affidavit-in-reply that both the representatives
were fully heard. There is a further statement in the affidavit-in-reply that
after taking into consideration all the material before the Board together with
the points that were made out at the personal hearing, the Company Law Board
formed the requisite opinion under section 294(5)(c) of the Act. From the fact
of personal hearing it was sought to be argued on behalf of the respondents
that the question relating to the prejudice in the context of the complaint of
the shareholders and the explanation of the company must have been discussed.
It is only on the basis of
such inferences which are required to be drawn, a finding is sustained that
every point against the appellant-company was made known to it, and the
appellant-company was in fact heard on all the points. In a case of this type,
even though the order is administrative, Mr. Joshi for the respondents conceded
that the principles of natural justice ought to have been observed and in view
of the later development of case law, they must be observed. These principles
not being a fixed body of rules, the facts and circumstances of each case must
be analysed for finding out whether there has been
requisite compliance with these rules. In any case where adequate hearing is to
be given to a party before a decision is to be taken against it,
it seems to be necessary that the party is informed as to what is proposed to
be done so as to affect its rights. The party must be told why this was
proposed to be done and on what material the action was contemplated.
Thereafter, as a matter of right the party must be heard and this hearing may
consist of a mere written representation or personal hearing as the facts and
circumstances of the case may require. For the further application of the rules
of natural justice, the authority must consider the entire material that has
reached it and it must honestly decide on the merits without reference to the
expediency or policy. If that is done it can be said that natural justice has
been done. In a case under section 294 a sole selling agent in the position of
the appellant-company is entitled to know not only the nature of the changes
proposed but also the reasons therefor together with
the material on which the authority desires to act.
In the present case the basic
question that arises for consideration is as to who should be heard when action
is contemplated under section 294(5). The Company Law Board seems to think, and
as was stated during the course of arguments before us by Mr. Joshi, on advice,
that it is only the company which should be heard and not the sole selling
agent. If it is a basic principle of natural justice that a party whose rights
are going to be affected must be heard, it is impossible for us to conceive
that respondent No. 5-company is a company whose rights are going to be
affected adversely by the action called for. If at all relief was to be given
against terms which were considered prejudicial to the interest of respondent
No. 5-company, it was but natural that the appellant-company was entitled to
know all the material which was before the Board. Some advantages which the
appellant-company procured by the contract are sought to be varied and taken
away from it. In a case of this type, it is a sole selling agent who is
primarily adversely affected. When it is the view of the Company Law Board that
that party has no locus standi and they need not hear that party, the hearing
that has taken place in this case is the result of the voluntary action of the
appellant-company itself. The appellant-company has thrust itself upon the
Company Law Board and since they did not prevent the appellant from giving
written reply and also appearing at the personal hearing, this voluntary action
on the part of the appellant-company has been responsible for making available
to the appellant such hearing as it got. There is no doubt that in the
affidavit-in-reply filed by the Company Law Board they pleaded that the
appellant has been fully heard. It is also true that it is a high power body
but the real question is whether this affidavit can be accepted at its face
value. This is an affidavit of a body whose legal
contention as well as the frame of mind always was that the appellant-company
need not have been heard at all. Against this background and on the basis of
vague affidavits could it be inferred that full and free discussion must have
taken place on all material points. Could it be inferred that the
appellant-company was made fully aware of the allegations of the shareholders
and the half-way explanation of respondent No. 5-company, and was also given
enough
Even when the final order
is passed the language in which it is drafted is typical of the attitude of the
Company Law Board, in that they did not recognise the
appellant-company at all as any body concerned with this matter. In the second para, of the order the Company Law Board states that it
collected information from the company regarding the terms and conditions of
the appointment of the sole selling agent and then says as follows:
"And whereas after perusal of the
information furnished by the company and after considering the representations
made by and on behalf of the company, the Company Law Board is of the opinion
that the terms and conditions of appointment of the agent are prejudicial to
the interests of the company".
Thereafter, follows the
operative part of the order which introduces the changes in the terms and
conditions of the appointment of the sole selling agent. The pleading, however,
in this litigation is that though ex facie the orders refer to the information
furnished by the respondent No. 5-company and the hearing granted to the
company, viz., respondent No. 5-company, as a matter of fact they have heard
both the appellant-company as well as respondent No. 5-company. In fact
reliance is placed upon the admission of the appellant-company in the petition
that the representative of the appellant-company was given a hearing.
These are all the
circumstances on record so far as the facts are concerned. From the proximity
of time when the replies are given and from the fact that the representative of
the appellant-company was present at the personal hearing, we are not in a
position to conclude that the appellant and respondent No. 5-company were
acting in close collaboration or hand in glove. It may be that the
appellant-company is introduced by respondent No. 5 as sole selling agent and
it is normally the management of the company which makes contracts and places
them before the general body of the shareholders. However, at a point of time
when the Company Law Board was seized of the enquiry it is difficult to say
that the interest of the appellant-company and respondent No. 5-company or the
management thereof were not in conflict with each other. Those in management of
the company are fully aware of the various provisions of the Act and the
interference that is possible in the management of the company. If at all, we
find that their attitude exhibited in their conduct and return is not to oppose the proposed amendment very seriously nor to
support them wholeheartedly. In one place they point out that the commission
agreed is reasonable and the appellant-company has set out a sales organisation which seems to be necessary. In an earlier
reply they pointed out that Rs. 13 lakhs were paid as
commission and that amount could have been saved and the company's financial
position would have improved. They also suggest that a free hand in sales be
given without any rebate to appellant-company. It is, therefore, difficult for
us to see that there was collaboration between the two and that the entire
material which was available to the Company Law Board was also made available
to the appellant-company for making a representation. If that is so, then
undoubtedly, there has been a failure of the observance of the principles of
natural justice because sufficient and adequate opportunity has not been made
available to the appellant-company to present its case. We have also no means
to verify what precisely took place at the oral hearing as the pleadings do not
disclose specifically the points that could have been raised and discussed. We
do not have the advantage of being able to examine the notes of the hearing
that took place as none of them has been produced along with the affidavit of
respondents Nos. 1 to 3. We find in the case of Bhagat Ram Patanga
v. State of
Shri Bhat, counsel for the
appellant-company, tried to argue that the hearing that was given to the
appellant-company could not be described as proper and adequate hearing for
another reason. He said that the Company Law Board all along held the view that
the appellant-company has no locus standi and it need
not have been heard. The hearing that is contemplated as a part of the rules of
natural justice must be a hearing as of right and with consciousness, and the
authority is bound to consider seriously all that the party is representing.
Since the hearing given does not appear to be in that spirit, we should hold
that there was no adequate and proper hearing at all. Since we find that the
Company Law Board has in fact heard the appellant-company and they have said so
in their affidavit-in-reply, we do not attach much importance to this argument
of Shri Bhat. However, for
the earlier reasons stated by us we are of the view that there has been failure
of the observance of principles of natural justice.
The next point that must be
considered relates to the nature of the order passed by the Company Law Board.
According to Shri Bhat, the
Company Law Board is authorised under section 294(5)(c) to vary the terms of appointment of a sole selling
agent and when this is done the statutory consequence that follows from clause
(d) of the same section is that the appointment of the sole selling agent has
to be regulated from the date nominated, by the new terms and conditions, viz.,
the varied terms and conditions by the order of the Company Law Board. The
primary argument, therefore, is that the character of the sole selling agent
has to be retained as such, if the Company Law Board desires that the
appointment should still continue on the varied terms and conditions. This
point was also raised before the learned single judge but the conclusion
arrived at was that the word "variation" has been given an artificial
meaning by the definition clause (50) of section 2 of the Act. That clause says
that "variation" shall include abrogation, and "vary" shall
include abrogate.
What was argued and what is
argued before us is that the new terms and conditions changed the character of
the agent. Whereas under the original contract, the appellant-company was a
sole selling agent in the real sense of the term, it is now reduced to the
position of just an agent, that the principal being given all the liberty to
dispose of the goods in any manner whatsoever directly to consumers, dealers,
Government and semi-Government institutions. It has been found that since
variation means abrogation that was within the power of the Company Law Board,
the order does not suffer from any infirmity.
It is now being pointedly
argued that even assuming that a right to vary would be a right to abrogate,
viz., to repeal or cancel or terminate the contract, the provisions of clause
(c) do not authorise the Company Law Board in any manner to change the
character of the appointment of a sole selling agent into an ordinary agent
which many manufacturers appoint. Before we actually consider the validity of
this argument, it may be necessary to indicate what precisely is meant by the
sole selling agent as is conceived of by section 294. Since Shri
Joshi for the respondent raised an argument in that behalf, we will first
determine the real nature of the appointment of the appellant-company before we
consider the effect of the impugned order upon that appointment. The term
"sole selling agent" has not been defined by the Act. Text book
commentaries on company law merely say that the expression is well-known in the
commercial world. According to Shri Bhat, the present agreement of the sole selling agent
divests the manufacturers of their right to sell their own goods and vests that
right exclusively in the appellant-company. The area of the operation of this
agreement is the entire territory of the Union of India. In other words, the
manufacturers have no right to sell their own goods except through the agency
of the appellant-company. As against this Shri
Joshi's argument is that the word "sole "means one or only one, in
the sense that if at all respondent No. 5-company wants to have an agent it
will have only one agent, viz., the appellant-company. No other agent will be
appointed in the
When
we go to the terms of appointment, we find that clause (1) of the agreement
says that the manufacturers have appointed the appellant-company as the sole
distributors for the entire territory of the Republic of India for marketing
the three articles, which we have already noted earlier. The sole distributors
are enjoined with the responsibility of arranging sales to the customers in the
territory of the
We have summarised
all the relevant clauses for the purpose of finding out the real nature of the
sole selling agency. A mere look at these clauses would point out that the
manufacturers have parted with their right of selling the goods in favour of
the sole distributors with only two exceptions. One is the sale under
exceptional circumstances and the other is the right of selling when stocks in
excess of three months are not sold by the sole distributors. If, however, the
stocks are being exhausted month after month there will be no occasion for the
manufacturers to resort to clause (15A) and effect sales themselves. When an
exceptional occasion arises for effecting sales under clause (12), the
distributor will be appraised of it and his approval
obtained. He still gets his commission in respect of those sales. Under clause
(25) where the stock in excess of three months is permitted to be sold by the
company without any commission or rebate to the appellant-company, it merely
speaks of the inability to perform the contract as expected and, therefore,
restores all the original rights to sell, to the manufacturers. Reading the
clauses as a whole we are of the view that this is a contract of a sole selling
agent where the right to sell has been parted with by respondent No. 5-company
in favour of the appellant-company in accordance with the terms and conditions
agreed to in the contract. This is not a case where the appellant-company is
only just an agent and is to be called sole selling agent because there is no
other agent.
Having construed the terms
and conditions of the contract, we also find that there is enough authority to
hold that an agreement of sole selling agency in the real sense of the term as
understood in the commercial world is only that contract where the agent alone
has a right to sell the goods. Shri Joshi referred us
to Bowstead on Agency, 1968 edition, page 197. The
sole selling agents that are discussed there relate to the sale of real
property and the discussion does not relate to the sole selling agents
regarding the sale of merchandise by way of trade and commerce. Even if a sole
selling agent is appointed for selling real property, the onerous right to sell
of the principal is always there and cases are conceived of by the commentary
where on the terms and conditions the agent will have to be paid his commission
though the sale is effected during the period of his
agency through another agent.
In regard to commercial contract
of sole selling agency for the sale of merchandise, we find that there are two
judgments of the Calcutta High Court which have taken a similar view which we
are inclined to take about the real nature and content of the sole selling
agency. The two judgments really relate to the same suit where interlocutory
injunction asked for by the plaintiff was refused by the learned single judge
but was granted in a Letters Patent Appeal by a Division Bench. What is
relevant for us is the meaning of the word "sole selling agent", as
the plaintiff in that case claimed interim injunction on the basis of his right
as a sole selling agent. The learned single judge in Shalagram
Jhajharia v. National Company Ltd.
observes at page 34 as follows :
"To my mind it
appears that the meaning of 'sole selling agency' is that the agent alone has
been given the selling right in respect of the goods and such agency need not
be in respect of all classes of goods as long as a particular kind of goods or
a particular cammodity is provided as sole agency of
a person or a company. It is in my opinion sole selling agency of that
company".
We
do not find any elaborate discussion by the learned single judge on that
subject, but when the matter was carried in appeal by the plaintiff, the report
appears in the same case, Shalagram Jhajharia v. National Co. Ltd.
One of the questions raised was that the sole selling agent does not appear to
be an agent but appears to be a buyer of goods. Even assuming that that was so,
the view taken is that that would not determine the nature of the sole selling
agreement. In case where the sole selling agent was in fact a purchaser of
goods, a view was taken by the King's Bench that a sole selling agent still
remains a sole selling agent and the real nature and content of his agreement
must be found out from the construction of the contract. The learned judges of
the Division Bench referred to W.T. Lamb and Sons v. Goring Brick Co. Ltd.
This was a case where the sole selling agent in fact was a purchaser of the
goods by the company but on an overall consideration of all the clauses of the
contract it has been held that the manufacturers have parted with the right to
sell in favour of the plaintiff-company. Relying upon that judgment the
contract before the Calcutta High Court between the National Co. of Calcutta
and the B.M.T. Commodity Corporation of New York in the United States of
America was construed and it was held that within the territory of U.S.A. its
possessions, Canada and Mexico, for the sale of jute backing cloth and burlap
over a width of 100 inches manufactured by the National Co., the rights of
selling were operated in favour of the plaintiff. The various terms and
conditions of the contract are taken into account and on a proper construction
it is held that this amounts to parting with the right of selling which
ordinarily and primarily lies in the manufacturer. It, therefore, appears to us
that not only on the construction of the terms and conditions of the contract
before us but even on good authority, it is safe to hold that respondent No.
5-company had parted with its right of selling the three articles under
contract in favour of the appellant-company.
We
would now consider the effect of the impugned order on the sole selling agency
contract. Clause (12) of the original contract speaks of an exceptional case of
sale where the manufacturers could directly sell the goods but with prior
approval of the appellant-company and on payment of the agreed rebate of 5%. That
clause (12) is now substituted by the present clause (12) which is as follows :
"12. The manufacturer shall be free to sell
any of the said products direct to any dealer, consumer, Government and
semi-Government institution without reference to the sole distributors. The
sole distributors shall not be entitled to any rebate, commission or any other
remuneration on such direct sales".
On the face of it this
clause gives a free hand to the respondent No. 5-company to sell its goods
directly to any consumers, dealers, Government and
semi-Government institutions. We may incidentally refer to the reply given by
respondent No. 5-company to the show-cause notice issued by the Company Law
Board in which they dealt with clause (12). They quoted the proposed variation
and also quoted the original clause (12). Thereafter, the comment of the
company is as follows :
"Is it the intention of the Company Law
Board that notwithstanding the above clause (12) the company can sell directly
and that on such sales and on sales effected to the
sub-distributors the sole-distributors are not entitled for any rebate. This
matter may please be clarified".
It appears that it is this
reply of respondent No. 5-company which is partly responsible for the ultimate
shape that clause (12) has now taken in the order of the Company Law Board.
Such a variation, according to Shri Bhat, suffers from two vices. One is that such a variation
is far beyond the power of the Company Law Board under section 294(5) as also
it is beyond the scope of the show-cause notice itself. If such a variation was
really intended, the parties to be affected thereby should have been given
notice of it. This could be one more phase of the non-observance of the rules
of natural justice where a change is brought about without notice to the party
affected thereby.
Considering the first
question of acting beyond the powers under section 294(5) we find that there
seems to be considerable force in the argument. The word "vary" or
"variation" as defined by clause (50) of section 2 of the Act shall
include abrogation "Abrogate", as we find by reference to the Oxford
English Dictionary, means: "Abrogate (1) to repeal, (a law, or established
usage), to annul, to abolish authoritatively or formally, to cancel. (2) To do
away with, put an end to" The Law Lexicon by Mukherjee
and Singh, 1971 edition, gives the same meaning of the word
"abrogation" as the act of annulling or the repeal of a law. In
Corpus Juris Secundum we
find that the word "abrogate" has been defined as follows
:
"Abrogate. To abolish by the authority of the maker; to annul by an
authoritative Act; to repeal. The word has been distinguished from
'amend 'Phrase' Tax shall be abrogated, increased or diminished' ".
"Abrogation. The act of abrogating ; the
annulment or repeal of a law by authority of the legislative power ; it
expresses the idea of completely doing away with".
Even though we have quoted
the above meanings of the word "abrogation", we are not called upon
in this litigation to decide whether the authority acting under sub-section (5)
of section 294 has a right to annul, or to do away with, or abolish, the
appointment of a sole selling agent altogether. We are only called upon to
decide whether the present agreement is a mere variation, in the sense the
amended terms and conditions are laying down the character of the sole selling
agent or doing something else. The amended clause (12), as is clear, conceives
of a completely free hand to the manufacturers to sell their goods as they
liked. The original contract requires the sole selling agent to refer every
order to the manufacturers and only on confirmation by the manufacturers make
sale. That being so, if the present clause (12) gives full opportunity to the
manufacturers to dispose of goods either directly to the consumer or to the
dealer or Government or semi-Government institutions and if in a seller's
market, which is conceived of, there is direct demand with the manufacturers,
it is possible that nothing or very little will be sold through the sole
selling agent. In any case it will lead to conflict and litigation on the
appropriate construction of this clause in juxtaposition to the other clauses
which survive as a part of the contract. In that context we must think that,
prima facie, the new clause reduces the sole selling agent to the position of a
mere agent who may sell the goods as and when received from the manufacturers
who are otherwise entitled to sell directly to various customers. Is it the
intention of section 294(5) to so amend the contract as neither to retain the
appellant-company as a sole selling agent nor to abolish the contract altogether ? What is done is a third thing altogether, viz., the sole selling agent is reduced to the position of an
ordinary agent. We do not think that the scheme of this section permits the
mutilation of the contract in such manner as to change the character of the
agency. The terms and conditions may be varied in such a manner as to make them
no longer prejudicial to the company, but what is to be retained is a sole
selling agency. That will be apparent from the provisions of clause (d) of
section 294(5) which says that from the date of the varied order the
appointment of the sole selling agent shall be regulated with the terms and
conditions varied by the Company Law Board. In terms, therefore, the sole
selling agent has to remain a sole selling agent and there seems to be no
objection to vary certain terms of the contract but his relationship with the
company has to be regulated by the terms amended by the Company Law Board. A
reference to sub-section (6) of section 294 of the Act will also further
illustrate the same position. Under sub-clause (a) of subsection (6) where a
company has more selling agents than one (by whatever name called) in any area
or areas and it appears to the Company Law Board that there is good reason so
to do, they are entitled to call for information about the terms and conditions
of appointment of various agents for the purpose of determining whether any of
those selling agents should be declared as sole selling agent for that area.
Clause (b) is similar to clause (b) of sub-section (5). Clause (c) of section 6
authorises the Central Government to read the
information supplied by the company having regard to the terms and conditions
of appointment of any of the selling agents and to other relevant features, and
to declare that a particular selling agent be the sole agent of the company.
The position, therefore, is that under sub-section (5) a sole selling agent
whose terms and conditions of appointment are prejudicial to the interest of
the company, authority is given to change, amend or vary the terms and
conditions in such a manner as to retain the sole selling agent with the terms
and conditions which are no longer prejudicial to the interest of the company.
In another case where there is in fact a sole selling agent but he is not so
designated, but an appearance is put up that there are many agents of the
company, power is again given to the Central Government to investigate into
their position and declare a particular agent as a sole selling agent. The
scheme, therefore, seems to be that where the sole selling agent is considered
necessary for a company, the terms and conditions must be such as are not
prejudicial to the company; otherwise those terms and conditions are liable to
be interfered with by retaining the character of the sole selling agent as
such. It is, therefore, clear that, in passing the present order and
substituting with the new clause (12), the Company Law Board has acted beyond
the powers vested in it under sub-section (5) of section 294 of the Act.
For the purpose of this
appeal we are not called upon to decide whether under sub-section (5) the
Company Law Board could in fact terminate or cancel the appointment of a sole selling
agent. That power may be assumed for the time being. However, in view of the
compulsion on the sole selling agent to continue to function as such, and in
view of the provisions of sub-section (4), we are of the view that
transformation of a sole selling agent into just an ordinary agent is beyond
the scope of section 294, sub-section (5)(c).
Another aspect of the
question will be that the appellant-company was never made aware, apart from
the consequences which can flow under section 294(5) under which the
appellant-company would be compelled to act as an ordinary agent and would
cease to be the sole selling agent. For effecting such a change the proposed
clause in the show-cause notice does not give enough notice to the party, who
is being affected thereby. Consequently, no discussion was possible in the
personal hearing on this subject. There is, therefore, another breach of the
observance of the principles of natural justice in this case by taking action
which was never brought to the notice of the party affected and without an
In the view we take, the appeal succeeds and is
allowed. The impugned order dated 20th April, 1965, as amended by the order
dated 13th May, 1965, is quashed. The appellant-company will be entitled to its
costs throughout from respondents Nos. 1 to 4. The costs in the trial court to
be Rs. 250 as already quantified and the costs in this court be
fixed by the taxing master. No order as to costs in respect of respondent No.
5-company throughout.
Appeal
allowed.
[1995] 084 COMP. CAS 932
(MAD)
HIGH COURT OF
v.
Southern
Switchgear Ltd.
MISHRA AND ARUMUGHAM, JJ.
O.S.A. No. 158 of 1986.
DECEMBER 16, 1992
N. Srivathsamani for the appellant.
T.K. Seshadri for the respondent.
Mishra, J.—A private limited company carrying on
business as exporters of various goods and claiming to have been appointed as
the sole agent for export of switchgears by the defendant, a public limited
company, by letter dated September 2, 1967, has filed a suit for recovery of a
sum of Rs. 2,00,000 by way of damages and for costs. A learned single judge of
this court has dismissed the suit, holding that section 294(2A) of the
Companies Act, 1956, operated as a bar to the maintainability of the suit, and
that besides the force majeure clause in the
agreement completely answered the suit claim of damages. The plaintiff has
preferred this appeal.
The
plaintiff's case has been that the defendants who are manufacturers of
switchgear equipment, by its letter dated September 2, 1967, appointed the
plaintiff as its sole agents for export of switchgears. The plaintiff was
appointed as the sole agent to represent the defendant in the areas covered by
the Middle East, Africa and
The plaintiff
has then stated that it was only acting as an export agent of the defendant,
though this position is now being disputed by the defendant. The plaintiff has
relied on several circumstances and documents to demonstrate its position as
export agent of the defendant. According to the plaintiff, the total C and F
value of the unexecuted portion of the goods as on April 1, 1972, is
The
defendant, on appearance, stated first as follows :
The alleged appointment of the plaintiff as a sole selling agent of the
defendant ought to have been approved by the company at its next general
meeting after September 2, 1967. The company held a general meeting on September
9, 1968. The plaintiff's appointment as sole selling agent was not placed
before the said meeting and consequently the plaintiff ceased to be the sole
selling agent on and after September 9, 1968, and no commission was payable to
the plaintiff thereafter. It is also averred that without prejudice to the
foregoing, the defendant does not admit the averments in paragraph 3 of the
plaint that the plaintiff was appointed as the sole selling agent of the
defendant for export of switchgear. No appointment of the plaintiff as sole
selling agent in accordance with the provisions of the Companies Act, 1956, was
made at any time. The parties were, therefore, dealing as principal to
principal in respect of this transaction, the defendant having agreed to give the
plaintiff a discount of 5 per cent. on the f.o.b.
value of the order placed by the plaintiff with it. The defendant also pleaded
that the quotation of the defendant and communication addressed to the
plaintiff would establish that the contract between the parties was subject to
the usual force majeure clause in and by which the
defendant was relieved of all the obligations under the contract if the
performance thereof was prevented by force majeure.
The defendant denied the other allegations in the plaint and contested
practically every item of the claim made by the plaintiff in the suit. On the
issue, however, as to the quantum of damages to be awarded to the plaintiff, in
case the defendant is found to have committed breach of the agreement, the
learned single judge has found that the plaintiff is entitled to damages of Rs.
30,403.82 towards the unexecuted portion of the goods as on April 1, 1972, and
Rs. 2,915.32 being the commission due to it in respect of the shipment already
made, the total being Rs. 33,319.14.
As to the
counter-claim made by the defendants in the written statement, the learned
single judge has stated as follows :
"In view
of the admission made by PW-1 in cross-examination and exhibit D-6, the
plaintiff is bound to tender account in respect of 2,589 sterling pounds to the
defendant."
The learned
single judge has also held that the defendant is not entitled to call upon the
plaintiff to pay any sum as damages.
Learned
counsel for the appellant has attacked the findings recorded by the learned
single judge on the issue whether the provisions of section 294(2A) of the
Companies Act would operate as a bar to the maintainability of the suit on the
ground, inter alia, that section 294(1) and (2A) of
the Companies Act read together ceased the validity of the appointment of a
sole selling agent for any area with effect from the date of a general meeting
of the company which disapproved the appointment or did not approve the
appointment, but operated as no bar to the maintainability of the suit which in
common law and the law of contract were/are available to the plaintiff. He has,
for the said purpose, drawn our attention to section 294(1) substituted by Act
65 of 1960. Section 294(1), (2) and (2A) read :
"294.
Appointment of sole selling agents to require approval of company in general
meeting.––(1) No company shall, after the commencement of the Companies
(Amendment) Act, 1960, appoint a sole selling agent for any area for a term
exceeding five years at a time :
Provided that
nothing in this sub-section shall be deemed to prohibit the re-appointment, or
the extension of the term of office, of any sole selling agent by further
periods not exceeding five years on each occasion.
(2) After the
commencement of the Companies (Amendment) Act, 1960, the board of directors of
a company shall not appoint a sole selling agent for any area except subject to
the condition that the appointment shall cease to be valid if it is not
approved by the company in the first general meeting held after the date on
which the appointment is made :
(2A) If the company in general meeting as aforesaid disapproves
the appointment, it shall cease to be valid with effect from the date of that
general meeting."
There is no
definition of "sole agent" under any provision of the Companies Act.
But it has been understood to mean any individual (firm or company) who is
given exclusive rights to sell in a particular area the goods of the company
concerned to the exclusion of even the company. It is, however, a legal
relationship of principal and agent and not that of employer and employee. The
executive power of the company's board of directors to appoint a sole selling
agent has been subjected to the condition that the appointment shall cease to
be valid if it is not approved by the company in the first general meeting held
after the date on which the appointment is made and the invalidity shall be
effective from the date of that general meeting. Courts, however, have
construed this condition of approval of the appointment of the sole selling
agent at the general meeting as a mandatory condition in all appointments of
sole selling agents and have gone further to say that if any appointment is
made without containing such a clause, the appointment is void ab initio. We, however, do not
think it necessary in the instant case to go into any details on this aspect of
the law as engrafted in section 294 of the Act, aforequoted,
for whether a sole selling agent's appointment would fall within the mischief
of section 294 of the Act and when shall it become inoperative, do not appear
to be beyond the terms and conditions of the appointment of a certain person as
the agent of another and in case there is a claim of sole selling agency, it
would depend upon the fulfilment of the condition of
approval by the company in the first general meeting held after the date on
which the appointment is made, upon which would depend whether the appointment
would be valid or cease to be valid.
What is
noticeable in the instant case is, however, that the defendant has not disputed
the de facto transaction of business with the foreign buyers through the
plaintiff and conceded that it did give to the plaintiff the contract which
contract, according to the plaintiff, was the plaintiff's appointment as the
sole agent for export of such orders in the areas covered by the Middle East,
Africa and South East Asia. According to the defendant, the company held a
general meeting on September 9, 1968 (after the defendant's appointment on
September 2, 1967), and the plaintiff's appointment as the sole selling agent
was not placed before the said meeting and consequently the plaintiff ceased to
be the sole selling agent on and after September 9, 1968 and/or there was no
appointment of the plaintiff as the sole selling agent in accordance with the
provisions of the Companies Act, 1956, and/or the parties (plaintiff and
defendant) were dealing as principal to principal.
The learned
single judge has stated :
"It is
not in dispute that the said appointment under exhibit P-1 was not placed in
the general body meeting of the company of the defendant and there is no
reference at all about the placing of the same in the general body meeting in
exhibit P-1."
He also
noticed the fact that there was no mention in the agreement that it was subject
to the approval of the company in the general body meeting and that it would
cease to be valid if not approved as per section 294(2A) of the Companies Act.
He has, on that basis, held :
"In exhibit P-1
agreement under which the plaintiffs were appointed as the sole selling agent
for the defendant-company, there is no reference at all about the placing of
the said agreement before the next general body meeting of the
defendant-company. Further, admittedly it was not so placed before the general
body meeting held on September 9, 1968. The said agreement itself is void ab initio and as such the claim
based on that agency agreement is bound to fail."
Learned
counsel for the respondent has supported the aforesaid finding mainly on the
ground that once it is found that the agreement is void ab
initio, it is right to contend that no claim can be
based on a void contract. The principle that the courts will refuse to enforce
an illegal agreement at the instance of a person who is himself a party to the
illegality or fraud is expressed in the maxim in pari
delicto potior est conditio
defendentis. But there are exceptions to that. The
Supreme Court, in the case of Sita Ram v. Radha Bai, AIR 1968 SC 534, 537,
has said :
"But as
stated in Anson's Principles of the English haw of Contract, 22nd edition, page
343: 'there are exceptional cases in which a man will be relieved of the
consequences of an illegal contract into which he has entered—cases to which
the maxim does not apply. They fall into three classes :
(a) where the illegal purpose has not yet been substantially carried into
effect before it is sought to recover money paid or goods delivered in
furtherance of it; (b) where the plaintiff is not in pari
delicto with the defendant ; (c) where the plaintiff
does not have to rely on the illegality to make out his claim'."
In this
judgment, the Supreme Court has further added (at page 537):
"It is
settled law that 'Where the parties are not in pari delicto, the less guilty party may be able to recover money
paid, or property transferred, under the contract.
This
possibility may arise in three situations.
First, the
contract may be of a kind made illegal by statute in the interests of a
particular class of persons of whom the plaintiff is one.
Secondly, the
plaintiff must have been induced to enter into the contract by fraud or strong
pressure.
Thirdly,
there is some authority for the view that a person who is under a fiduciary
duty to the plaintiff will not be allowed to retain property, or to refuse to
account for moneys received, on the ground that the property or the moneys have
come into his hands as the proceeds of an illegal transaction.'—See Anson's
Principles of the English Law of Contract, page 346."
In the Indian
Contract Act, we have in section 64, the consequences of rescission of a voidable contract and in section 65, the
obligation of persons who have received advantage under a void agreement or a
contract that became void. Section 64 of the Contract Act says that when a
person at whose option a contract is voidable
rescinds it, the other party thereto need not perform any promise therein
contained in which he is a promisor. The party
rescinding a voidable contract shall, if he has
received any benefit thereunder from another party to
such contract, restore such benefit, so far as may be, to person from whom it
was received. Section 65 spells out the obligation of the person who has
received advantage under a void agreement or a contract that becomes void in
these words :
"When an
agreement is discovered to be void or when a contract becomes void, any person
who has received any advantage under such agreement or contract is bound to
restore it, or to make compensation for it, to the person from whom he received
it."
The Supreme
Court, as in the case in Kuju Collieries Ltd. v. Jharkhand Mines Ltd., AIR 1974 SC 1892, examined the scope
of section 65 of the Contract Act and stated as follows (headnote):
"Section
65 makes a distinction between an agreement and a contract. According to section
2 of the Contract Act, an agreement which is enforceable by law is a contract
and an agreement which is not enforceable by law is said to be void. Therefore,
when the earlier part of section 65 speaks of an agreement being discovered to
be void, it means that the agreement is not enforceable and is, therefore, not
a contract. It means that it was void. It may be that the parties or one of the
parties to the agreement may not have, when they entered into the agreement,
known that the agreement was in law not enforceable. They might have come to
know later that the agreement was not enforceable. The second part of the
section refers to a contract becoming void. That refers to a case where an
agreement which was originally enforceable and was, therefore, a contract,
becomes void due to subsequent happenings. In both these cases, any person who
has received any advantage under such agreement or contract is bound to restore
such advantage, or to make compensation for it to the person from whom he
received it. But where even at the time when the agreement is entered into both
the parties knew that it was not lawful and, therefore, void, there was no
contract but only an agreement and it is not a case where it is discovered to
be void subsequently. Nor is it a case of the contract becoming void due to
subsequent happenings."
The Supreme
Court has in the case of Kuju Collieries Ltd. v. Jharkhand Mines Ltd., AIR 1974 SC 1892, approved the
decision of the Andhra Pradesh High Court in the case of Sivaramakrishnaiah
v.Venkata Narahari Rao, AIR 1960 AP 186, in which it is stated (at page 1895)
:
"In
order to invoke section 65 the invalidity of the contract or agreement should
be discovered subsequent to the making of it. This cannot be taken advantage of
by parties who knew from the beginning the illegality thereof. It only applies
to a case where one of the parties enters into an agreement under the belief
that it was a legal agreement, i.e., without the knowledge that the agreement
is forbidden by law or opposed to public policy and as such illegal. The effect
of section 65 is that, in such a situation, it enables a person not in pari delicto to claim restoration
since it is not based on an illegal contract but dissociated from it. That is
permissible by reason of the section because the action is not founded on
dealings which are contaminated by illegality. The party is only seeking to be
restored to the status quo ante. Section 65 also does not recognise
the distinction between a contract being illegal by reason of its being opposed
to public policy or morality or a contract void for other reasons. Even
agreements, the performance of which is attended with penal consequences, are
not outside the scope of section 65. At the same time, courts will not render
assistance to persons who induce innocent parties to enter into contracts of
that nature by playing fraud on them to retain the benefit which they obtained
by their wrong."
The Supreme
Court has clearly laid down that an agreement on being discovered void and
which is not enforceable as a contract can give to a person a right to
restoration or compensation and have all the advantages derived by another if
they are parties to the agreement and if the agreement was not invalid in the
sense that it was a valid contract until it ceased to be valid for the reason
of statute or otherwise, any person who has received any advantage under such a
contract is bound to restore such advantage or to make compensation for it to
the person from whom he received it. Courts usually in these matters also bear
in mind that no one should be allowed to retain the benefit which he obtained
by his own wrong. In other words, no one should be given any premium on his own
recalcitrance.
In a Full
Bench decision of this court in Kanniappa (S.M.) v. Karuppiah (K.K.), AIR 1962 Mad 240, the respondent who had
obtained licence under the provisions of the Central
Excises and Salt Act, 1944, was carrying on business in the manufacture and
sale of safety matches under the name and style of Sarada
Match Works, Ramalingapuram. He admitted the
appellant as a partner in the business which both agreed to run for a minimum
period of six years. The agreement which was reduced to writing on July 16,
1955, expressly stipulated that the partners were to obtain an amendment of the
existing licence in favour of one of them in their
joint names and that the appellant should contribute capital in a sum of Rs.
10,000. The firm was duly registered under the Indian Partnership Act. The
appellant advanced on various dates a sum of Rs. 10,000 to the respondent. The
appellant and his son were put in charge of a section of the business. But, by
the rules framed under the Central Excises and Salt Act, a licensee who admits
a partner in his business should intimate the fact to the licensing authority
within 30 days thereof. The respondent did not do so and the business continued
as before till the parties fell out and the respondent expelled the appellant
from the business. The latter instituted the suit.
The principal
point for determination in the above case was whether the suit partnership was
illegal, in that it contravened the provisions of the Central Excises and Salt
Act, 1944, and whether even if the partnership was illegal, the appellant would
be entitled to the alternative relief of restitution of the moneys paid to him
for the business. The trial court as well as the first appellate court accepted
the defence that the contract of partnership which
enabled the appellant to join the business without an appropriate licence was prohibited by the statute and, therefore,
illegal.
They also negatived the appellant's prayer for the alternative relief
on the ground that it was a mere equitable claim which, did not deserve to be
granted in the light of the circumstances that the appellant was put in charge
of the business for some time.
The two
contentions which were before the court, however, were based on the appellant's
claim for accounts in two ways: (1) that the partnership was not illegal, in
that one of the parties had a licence and business
could be done under it; (2) further as under that rule the parties had 30 days
time to intimate the authorities about the formation of the partnership, the
firm should be considered to be legally constituted for that period of 30 days.
The Full Bench observed (at page 241):
"The
second of the two contentions cannot be sustained, for the obvious reason that
no contract between the parties to have a partnership for 30 days existed and
indeed there could be none as what the agreement envisaged was the carrying on
of the business by the firm only on obtaining a joint licence;
if the licence was not obtained the contract itself
would fail on account of impossibility of performance or the non-fulfilment of the basic condition thereof."
The Full
Bench then noticed that the District Judge rejected both the contentions on the
authority of the decision in Govindaraj v. Kandaswami [1956] 2 MLJ 578; AIR 1957 Mad 186, as also took
notice of the reference ordered by a Bench of this court that an earlier Full
Bench of this court in the case of Velu Padayachi v. Sivasooriam, ILR
1950 Mad 987; AIR 1950 Mad 444, required consideration and that the decision in
the case of Govindaraj v. Kandaswami
[1956] 2 MLJ 578; AIR 1957 Mad 186, was incorrect and then said as follows (at
page 242) :
"It can
be taken as settled law that if a contract is forbidden by a statute either
expressly or by necessary implication or the contract itself is ex facie
illegal or where the contract though legal can be performed only illegally or
was intended to be so performed neither party would be entitled either directly
or indirectly to enforce his rights under such a contract. The question then is
whether the parties in the present case intended to do anything which was
prohibited by law or was in contravention of the provisions of the Central
Excises and Salt Act of 1944 by entering into a partnership for the sale and
manufacture of safety matches. Entering into partnership by a licensee cannot
be held to be per se illegal. Rule 178 of the rules framed under the Central
Excises and Salt Act impliedly recognises that when
it states that a licensee on entering into such partnership shall report the
fact to the licensing authority within 30 days of his entering thereto. It
assumes that the partnership can be entered into even before the licence is amended under rule 178(4). In the instant case,
it was the respondent who under the terms of the contract and under rule 178
was to apply for an appropriate amendment of the licence;
and he failed to do so. He, therefore, committed a breach of the terms of the
agreement which disabled further performance. He will normally be under a duty
to restore the benefits received under the contract which had been put an end
to."
The Full Bench
also referred to the judgment of the Privy Council in the case of Muralidhar Chatterjee v.
International Film Co. Ltd., AIR 1943 PC 34 to say as follows (at page 243):
"In Muralidhar Chatterjee v.
International Film Co. Ltd. [1943] 2 MLJ 369; AIR 1943 PC 34, Sir George Rankin
in delivering the judgment of the Privy Council analysed
the various provisions of the Indian Contract Act and held that money received
by a party to a contract in part discharge of the consideration due or to
become due, though applied for defraying the expenses of carrying out this part
of the contract and spent for that purpose was nevertheless a benefit or
advantage had by him, liable to be restored under section 64, on his recission of the contract by reason of breach thereof. It
would follow that where an agreement of partnership like the present one has
either become impossible of performance by reason of the fact that no joint licence had been obtained in favour of both the partners or
by reason of the recission by one party or the other
to the contract the party in the position of the appellant will be entitled to
restitution of the monies paid by him towards the contract."
When we
advert to the facts of the instant case, however, we have to say that on the
pleadings of the, parties, it has to be held that a certain agreement was
entered into between the plaintiff and the defendant in which, according to the
former, the latter appointed it as the sole agent for export of switchgears and
according to the latter, the former's appointment as
sole selling agent of the defendant ought to have been approved by the company
at its next general meeting which meeting was held, but the appointment of the
plaintiff as the sole selling agent was not placed before the said meeting and
consequently the plaintiff ceased to be the sole selling agent on or after the
said meeting and/or there was no appointment of the plaintiff as the sole
selling agent in accordance with the provisions of the Companies Act, 1956, the
parties were, therefore, dealing as principal to principal in respect of the
transaction.
We have
already noticed in the judgment of the learned single judge a reference to this
controversy between the parties and said that in exhibit P-1 agreement under
which the plaintiff was appointed as the sole selling agent for the defendant,
there was no reference at all about the placing of the said agreement before
the next general body meeting of the defendant company and admittedly it was
not so placed before the general body meeting held on September 9, 1968. Thus,
the said agreement itself was void ab initio and as such the claim based thereon is void ab initio and is bound to fail.
None of the parties, however, addressed the court on the question whether the
kind of invalidity as attached to the agreement will give to the plaintiff, if
no other rights, at least the right to realise the
obligations to the extent of the advantages received by the defendant in terms
of section 64 or section 65 of the Contract Act. It appears that, at no stage
in the course of the trial, any one took notice of the admitted existence of
the agreement between the plaintiff and the defendant and the exceptions to the
rule in pari delicto potior est conditio
defendentis, so that the court could test the facts
and circumstances of the case to find out, whether actually the plaintiff and
the defendant were in pari delicto,
for if the defendant was to perform a certain act and did not do so, the
defendant is the wrong-doer and the plaintiff was wronged by what it did in the
sense that the defendant failed to bring on the agenda of the meeting of the
company after the agreement was entered into, the question of approval thereof.
Dealing with
the clause "delays due to causes beyond control (force majeure)
will not be liable to penalties, provided, however, that such causes will have
been immediately notified by registered letter", exhibit P-2 purchase
order and the mention under exhibit P-3 that the same general conditions will
equally apply to the pay order and other evidence in this behalf, the learned
single judge has stated :
"It must
be noted that even though details of the circumstances under which the
defendants were prevented from fulfilling the contract are not mentioned, yet
the defendants have been consistently urging that it was only because of the
reasons beyond their control, they are relying on the force majeure
clause and that they could not fulfil the agreement
and in support of the same, they can certainly rely on the document produced by
the plaintiffs. It is not in dispute that time has been periodically extended
on a number of occasions till March 31, 1972, and even after March 31, 1972,
the plaintiffs themselves have admitted in the correspondence under exhibit
D-15 that the same situation continued. In exhibit D-15 they have given details
of various circumstances, which were responsible for the non-fulfilment of the agreement. They have stated that the
circumstances are beyond the control of the defendants and sought for extension
of time till August, 1972. For all these reasons, I am of the view that the
defendants have satisfactorily established that they can rely on the force majeure clause in the agreement as a complete answer to the
suit claim and accordingly this issue is answered in favour of the defendants."
We are not
required to go into many details, either of the facts or the principles of law
in this behalf, as, according to the pleadings of the defendant, its failure to
perform its part of the contract was occasioned for reasons beyond its control,
meaning thereby it was not possible for it to fulfil
its obligations under the contract/agreement. In S.M. Kanniappa
v. K.K. Karuppiah, AIR 1962 Mad 240, the Full Bench
of this court has also gone into this aspect and said if it is a case of the
agreement becoming impossible of performance for the reasons beyond the control
of the defendant, still the law will protect the plaintiff to the extent of the
obligations of the defendant as in sections 64 and 65 of the Contract Act. It
is surprising how without asking the defendant whether it notified by
registered letter to the plaintiff the causes as contemplated in the agreement,
the learned single judge has accepted the case of the defendant that the force majeure clause in the agreement is a complete answer to the
suit claim. Since we have good reasons t6 interfere with the findings of the
learned single judge that the provisions of section 294 of the Companies Act
operate as a bar to the maintainability of the suit and for the reason that
there has been no examination by the learned single judge of the question
falling under sections 64 and 65 of the Indian Contract Act, and exceptions to
the rule, in pan delicto potior
est conditio defendentis and whether the plaintiff and the defendant are
in pari delicto for which
specific issues are necessary, we propose to remand the case. We do not proceed
to examine the evidence on the question whether the defendant can rely on the
force majeure clause in the agreement as a complete
answer to the suit claim ourselves. We think our recording that the finding in
this behalf by the learned single judge in the judgment is without sufficient
consideration of the principles of law and the evidence on the subject will be
enough for the limited purpose of remand. There are findings recorded in the
impugned judgment with respect to certain claims and a certain quantum of
damages has also been determined by the learned single judge. The learned
single judge, as we have already noticed, has also examined the counter claim
of the defendant and found that the claim of accounting is justifiable but not
any damages on account of penalty levied for the delayed delivery and collected
by the foreign buyers. The case of the parties in this regard, however, will
have to be redetermined as damages for the alleged
breach of contract and compensation in terms of sections 64 and 65 of the
Contract Act create different kinds of obligations and
require different kinds of evidence. Since we are interfering with the impugned
judgment and remitting the case for a fresh hearing, after reframing the issues
in the light of the observations made above, we think it proper to reopen the
determination of the issues as to the quantum of compensation to either side or
accounting, as the case may be.
In view of what has been found by us, we have no
hesitation in setting aside the impugned judgment and remitting the case to the
trial court for rehearing in accordance with law after reframing the issues and
if necessary affording opportunity to the parties to adduce evidence, if any.
In the result, the appeal is allowed, the impugned judgment
is set aside and the case is remitted for trial and disposal in the light of
the observations made above. there shall be no order
as to costs. court fee paid on the memorandum of
appeal will be refunded in accordance with law.