Section 294AA
SOLE-SELLING
AGENTS, POWERS OF CENTRAL GOVERNMENT
[1990] 69 COMP. CAS. 33 (DELHI)
HIGH COURT OF
v.
Union of
MS. SUNANDA BHANDARE J.
AUGUST 4, 1987
Kapil Sibal, S.N. Sanjanwala,
P.H. Parekh, Pinaki Misra and Ashok Gupta for the Petitioner.
Aruneshwar
Gupta, Anil B. Diwan and R.P. Bhatt, B.V. Desai, Ms. Madhvi Gupta, Dr. L.M.
Singhvi, Ashwin L. Shah, Dr. A.M. Singhvi and Ms. Radha Rangaswamy for the
Respondents.
Ms.
Sunanda Bhandare, J.—Sayaji Mills Ltd., respondent No. 3 (hereinafter referred to as
"the company"), registered under the Companies Act was incorporated
in the year 1941. It is engaged in the manufacture of starches and its
derivatives, liquid glucose, dextrose, sorbitol and other byproducts. Since its
inception, the company has been selling its products through a sole selling
agent, C. Doctor and Company, a private limited company in starch business
since 1914. On the amendment of the Companies Act, 1956, by the Amending Act of
1974, it is necessary to seek approval of the Central Government for
appointment of sole selling agents. Respondent No. 3 applied and obtained the
approval of the Central Government to the appointment of C. Doctor and Company
as its sole selling agents for the periods 1972-77, 1977-82 and 1982-87. C.
Doctor and Company was a family concern of Sayaji Mills Ltd. inasmuch as the
directors of C. Doctor and Company were closely related to the chairman of
respondent No. 3 company. In January, 1982, a family arrangement was arrived at
by way of a memorandum of understanding between two sons of the family of Shri
V.L. Mehta, who was the then chairman-cum-managing director of the company.
Shri B.V. Mehta and his branch got the management of respondent No. 3 company
and other assets and Shri S.V. Mehta and his branch got other companies of the
family including C. Doctor and Company. C. Doctor and Company had two separate
divisions, namely; (1) starch division and (2) engineering division. Since C. Doctor
and Company had vested with Shri S.V. Mehta and his branch, it was decided to
separate the starch division which was agreed to be taken over by a new
company, namely, L.G. and Doctor Associates P. Ltd., respondent No. 4 herein.
By a separate agreement, the entire staff of the starch division of C. Doctor
and Company was to be taken over by L.G. and Doctor Associates Pvt. Ltd. Since
the sole selling agency agreement with C. Doctor and Company for the period
1982-87 was approved by the Company Law Board in the year 1982 in view of the
change in the constitution of C. Doctor and Company and incorporation of L.G.
and Doctor Associates Pvt. Ltd., respondent No. 3 company proposed to appoint
L.G. and Doctor Associates P. Ltd., respondent No. 4, as its sole selling
agents. Respondent No. 3 company, at its annual general meeting on September
29, 1983, obtained the consent of the shareholders to that effect by a special
resolution. Respondent No. 3 company applied to the Central Government under
section 294AA of the Companies Act, 1956 (hereinafter referred to as "the
Act"), for grant of approval for the appointment of respondent No. 4 as
its sole selling agent with effect from October 16, 1983. One Shri P.K. Vyas
objected to the appointment of respondent No. 4 as sole selling agent of
respondent No. 3 company before the Company Law Board. The Company Law Board,
after giving a hearing to the company, L.G. and Doctor Associates Pvt. Ltd.,
and Shri P.K. Vyas rejected the application for approval by its order dated May
31,1984.
The
relevant portion of the order reads thus :
(a) The sole selling agency company has been
incorporated very recently on August 26, 1982, and its entire share capital is
held by Shri B.V. Mehta, his wife, son, daughter and HUF. Shri B.V. Mehta is
the chairman of the sole selling agency company. The sole selling agency
company has an authorised share capital of Rs. 5 lakhs and a paid-up share
capital of Rs. 4 lakhs. The entire share capital has been invested (Rs.
3,89,749) by it in the shares of the applicant company, viz., Sayaji Mills Ltd.
The sole selling agency company has, thus, no financial resources for carrying
on its business of the nature contemplated. The sole selling agent also does
not have substantial infrastructural facilities of their own, inasmuch as they
are substantially using the facilities of the premises, telephones, vehicles,
etc., owned by the applicant company. Even the office furniture has been bought
by this sole selling agency company from the applicant company, Sayaji Mills
Ltd., as secondhand old furniture for a nominal sum of Rs.. 5,000. Being
recently established, the sole selling agency company also does not have a
proper staff organisation of its own ; however, services of certain staff
members of another company, C. Doctor and Company Pvt. Ltd., have since been
obtained by them.
The proposed
arrangement involves handling of a turnover of about Rs. 20 crores of the
applicant company. As per the projections made, the commission receivable by
the sole selling agent is expected to be of the order of Rs. 60 lakhs in the
first year and Rs. 66 lakhs in the second year and after meeting the expenses,
the sole selling agent is expected to earn a profit of Rs, 6.24 lakhs in the
first year and Rs. 7.17 lakhs in the second year (on a meagre paid up share
capital of Rs. 4 lakhs, as aforesaid).
(b) The applicant company is an old
established large-size public limited company in existence for the last over 40
years. About 33% of its share capital is held by the proposed sole selling
agent and its directors and their relatives. The proposed sole selling agent,
thus have quite a substantial interest in the applicant company. Shri B.V.
Mehta who is the chairman of the sole selling agency company, is also the
managing director of the applicant company.
(c) 67% of the paid-up share capital of the
applicant company is held by the general public and a financial institution
(48% by the general public and 19% by the financial institution). The manner in
which the affairs of the company are managed, therefore, have a significant
bearing on public interest.
On
the basis of the above facts, the Board felt that the proposed sole selling
agency arrangement is not an arm's length dealing, having regard to the fact
that the applicant company is managed by the same person (Shri B.V. Mehta) who
is the chairman of the sole selling agency company (which is a closely held
family concern of the same person). It was also felt that the proposed sole
selling agency arrangement is a device to supplement the income of Shri B.V.
Mehta (and his family members) through the media of the sole selling agency
company, ostensibly with a view to circumvent the provisions of sections 198
and 309 of the Companies Act, 1956.
"After
careful consideration of the material on record and having regard to all the
facts and circumstances of the case, the Board held that the proposed sole
selling agency arrangement is not conducive to the interest of the applicant
company, apart from the fact that the proposed sole selling agent does not seem
to be in a position to undertake the marketing of the products of the applicant
company. The proposal made by the applicant company was accordingly
rejected".
Thereafter,
respondent No. 3 company made an application for review dated August 13, 1984,
on the ground that certain new facts had emerged. The Company Law Board,
however, wrote back to respondent No. 3 company on August 25, 1984, that if
there were changes, the company was free to file a fresh application and,
therefore, respondent No. 3 company submitted a second application on August
31, 1984, for fresh consideration of its application for approval of the
appointment of respondent No. 4 as its sole selling agent with effect from
October 13, 1983. The Company Law Board, thereafter sought some further
clarifications from the company and also wrote to the Registrar of Companies,
The
validity and legality of the impugned order will, to a large extent, depend on
the nature of jurisdiction exercised and the power conferred on the Central
Government/Company Law Board while granting or rejecting approval to the
appointment of a sole selling agent under section 294AA(3) of the Act. Section
294AA, which was inserted by the Companies Amendment Act, 1974, with effect
from February 1, 1975, gives power to the Central Government to prohibit the
appointment of sole selling agents in certain cases. The powers and functions
of the Central Government under this section have been delegated to the Company
Law Board as provided under section 637 of the Act by a notification dated June
24, 1975. Before examining the rival contentions urged on behalf of the
parties, it will be convenient to set out the relevant provisions of the Act.
Section 294AA(1), (2) and (3) read thus :
"294AA.
(1) Where the
Central Government is of opinion that the demand for goods of any category, to
be specified by that Government, is substantially in excess of the production
or supply of such goods and that the services of sole selling agents will not
be necessary to create a market for such goods, the Central Government may, by
notification in the Official Gazette, declare that sole selling agents shall
not be appointed by a company for the sale of such goods for such period as may
be specified in the declaration.
(2) No company
shall appoint any individual, firm or body corporate, who or which has a
substantial interest in the company, as sole selling agent of that company
unless such appointment has been previously approved by the Central Government.
(3) No company
having a paid-up share capital of rupees fifty lakhs or more shall appoint a
sole selling agent except with the consent of the company accorded by a special
resolution and the approval of the Central Government".
On
a plain reading of this section, it is clear that whereas under subsection (1)
of section 294AA, if the Central Government is of the opinion that the demand
for goods of any category is substantially in excess of the production or
supply of such goods and that the services of sole selling agents will not be
necessary to create a market for such goods, it can by a notification in the
Official Gazette prohibit appointment of sole selling agents for the sale of
such goods for a period specified in the notification. Sub-section (2) of
section 294AA provides that no company can appoint any individual, firm or a
body corporate as a sole selling agent who or which has a substantial interest
in the company without obtaining the previous approval of the Central
Government. Sub-section (3) of section 294AA deals with appointment of a sole
selling agent by a company having a paid up share capital of Rs. 50 lakhs or
more. There are two conditions imposed in this sub-section for appointment of a
sole selling agent; (i) consent of the company accorded by a special resolution
; and (ii) approval of the Central Government.
It
is the common case of the parties that in the present case, since the paid-up
share capital of the company is more than Rs. 50 lakhs, both the conditions as
envisaged in sub-section (3) of section 294AA would have to be fulfilled before
appointment of a sole selling agent is made by the company.
Mr.
Sibal, learned counsel for the petitioners, contended that the power of the
Central Government under sub-section (3) of section 294AA is quasi-judicial in
nature inasmuch as the act of approval requires the ascertainment of facts,
investigation as to the veracity of the facts stated in the application filed
by the company and also the application of mind to the relevant considerations
resulting in a favourable conviction. The further submission which is a
corollary of the previous one is that the power being in discharge of a
quasi-judicial function, the Company Law Board is duty bound to give reasons
for its decision and since in the present case, the Company Law Board failed to
give reasons for granting approval in the impugned order, the order is liable
to be struck down on that ground alone. Considerable reliance was placed by
learned counsel on the judgment of the Supreme Court in Rampur Distillery and
Chemical Co. Ltd. v. Company Law Board [1970] 40 Comp Cas 916. It was submitted
that under sub-section (5) of section 294AA, a company seeking approval, is
required to furnish such particulars as may be prescribed. Though the section
itself does not give any guidelines for approval, the Company Law Board has
issued departmental guidelines to be followed for this purpose and the Company
Law Board cannot grant the approval if the case does not fall within the
guidelines. The decision of the Central Government affects not only the company
and the proposed sole selling agent but also the shareholders and results in
civil consequences and thus the power is quasi-judicial in nature.
On
the other hand, it was submitted by Mr. Diwan, learned counsel appearing on
behalf of the company-respondent No. 3 that the function of the Company Law
Board under this sub-section is purely administrative in nature inasmuch as
there is no inter-party dispute to be resolved between the shareholders on the
one hand and the company, on the other hand or the company on the one hand and
the sole selling agent on the other hand. Though the Company Law Board has
issued circulars and guidelines from time to time, these guidelines do not have
any statutory force and, therefore, the Central Government can deviate from
these guidelines if it is found that the appointment of the sole selling agent
is otherwise in the interest of the company. Strong reliance was placed by
learned counsel on the judgment of the Bombay High Court in Nanavati and Co.
(Pvt.) Ltd. v. R.C. Dutt [1975] 45 Comp Cas 91 to support his contention that
the function performed is purely administrative in nature.
In
Rampur Distillery's case [1970] 40 Comp Cas 916, the Supreme Court was dealing
with the power of the Company Law Board under section 326, sub-section (2), of the
Act which invested the Central Government with the power to decide whether it
is against public interest to allow the company to have a managing agent;
whether the person proposed is proper or fit to be appointed or reappointed as
managing agent and whether the conditions of the managing agency agreement
proposed are fair and reasonable and whether the proposed managing agent has
fulfilled the conditions which the Central Government has required him to
fulfil. The Supreme Court held that the power conferred upon the Central
Government by that section is restrictive of valuable rights of a company and
of the proposed managing agent and severely restricts the liberty of contract.
The scheme of the section envisages investigation and a decision on the matter
set out therein. The section specifically lays down conditions in which the
Central Government may override the resolution of the general body of
shareholders on the existence of the ground on which the satisfaction is to be
founded. The satisfaction has to be oh the basis of certain objective facts
and, therefore, the power is quasi-judicial in nature.
The
Division Bench of the Bombay High Court in Nanavati's case [1975] 45 Comp Cas
91, analysing the section which concerned the court in that case held that the
power of the Company Law Board under section 294(5) was purely administrative
in nature.
Section
294(5) of the Act confers power on the Central Government to require
information regarding the terms and conditions of appointment of a sole selling
agent to come to a conclusion whether or not such terms and conditions are
prejudicial to the interests of the company. Clause(b) of sub-section(5)
empowers the Central Government to appoint a person to investigate and report
on the terms and conditions of appointment of sole selling agent in case the
company refuses or neglects to furnish the information asked for by the Central
Government. Under Clause(c) of sub-section(5), the Company Law Board is called
upon to peruse the information furnished by the company in the form of a report
by the person appointed by the Company Law Board and form its opinion whether
the terms and conditions of appointment of the sole selling agent are
prejudicial to the interests of the company. The Central Government has the further
power 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. Power is also given to the Central Government to regulate the
terms and conditions. The court, while construing this section, observed that a
just disposal of the dispute is necessary since the provisions of Clause(c) of
section 294(5) require that the Central Government takes a decision on facts
directly collected from the company and in the light of such other
circumstances as may be brought to the notice of the Board by the parties who
are going to be affected by the decision which is to be taken, however, there
being neither an express nor an implied provision in the Act nor any attending
circumstances which indicate the necessity to act judicially before the opinion
contemplated is formed, the power under this section is administrative in its
character and not quasi-judicial.
In
my view, it is not necessary for me for the reasons I shall indicate
hereinafter, to embark upon the exercise of classifying the function of the
Central Government/Company Law Board under section 294AA of the Act as
quasi-judicial or purely administrative. In my opinion, in the present case,
the principles of natural justice require that reasons be disclosed for the
decision.
The
classification of administrative action as purely administrative or
quasi-judicial poses a most difficult problem, because different tests apply
for different situations. However, it is now well-settled that an authority or
a body which has been given the power to determine questions affecting the
rights of a citizen must exercise such a power in a just and fair manner in
conformity with the principles of natural justice. Initially, in the case of
Province of Bombay v. Khushaldas S. Advani, AIR 1950 SC 222, wherein the
Supreme Court held that there was nothing in the Bombay Land Requisition
Ordinance, 1947, which empowered the Provincial Government to requisition any
property, if in its opinion it was necessary and expedient to do so for any
public purpose which required the Government to act judicially. Following
Advani's case, AIR 1950 SC 222, the Supreme Court in a number of cases observed
that an inference whether an authority acting under a statute has to act
judicially will depend on the express provisions of the statute read along with
the nature of the rights affected, the manner of disposal provided, the
objective criteria, if any, to be adopted, the effect of the decision on the person
affected and other indicia afforded by the statute. This judicial thinking
changed following the landmark judgment of the House of Lords in Ridge v.
"The
dividing line between an administrative power and a quasi-judicial power is quite
thin and is being gradually obliterated. 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. In a welfare State like ours it is inevitable that the organ of the
State under our Constitution is regulated and controlled by the rule of law. In
a welfare State like ours it is inevitable that the jurisdiction of the
administrative bodies is increasing at a rapid rate. The concept of rule of law
would lose its validity if the instrumentalities of the State are not charged
with the duty of discharging their functions in a fair and just manner. The
requirement of acting judicially in essence is nothing but a requirement to act
justly and fairly and not arbitrarily or capriciously. The procedures which are
considered inherent in the exercise of a judicial power are merely those which
facilitate if not ensure a just and fair decision. In recent years, the concept
of quasi-judicial power has been undergoing a radical change. What was
considered as an administrative power some years back is now being considered
as a quasi-judicial power...
The
aim of the rules of natural justice is to secure justice or to put it
negatively to prevent miscarriage of justice. These rules can operate only in
areas not covered by any law validly made. In other words, they do not supplant
the law of the land but supplement it. 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, namely, (1) no one shall be a judge in his own
cause (nemo debet esse judex propria causa), and (2) no decision shall be given
against a party without affording him a reasonable hearing (audi alteram
partem). 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., Till very recently it was the opinion
of the courts 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 not
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. Often times it is not easy to draw
the line that demarcates administrative enquiries from quasi-judicial enquiries.
Enquiries which were considered administrative at one time are now being
considered as quasi-judicial in character. Arriving at a just decision is the
aim of both quasi-judicial enquiries as well as administrative enquiries. An
unjust decision in an administrative enquiry may have more far reaching effect
than a decision in a quasi-judicial enquiry".
This
position was further emphasized by the Supreme Court in Smt. Maneka Gandhi v.
Union of India, AIR 1978 SC 597, wherein it was held that natural justice is a
great humanising principle intended to invest law with fairness and to secure
justice and over the years it has grown into a widely pervasive rule affecting
large areas of administrative action. The proliferation of administrative law
promoted considerable fresh thinking on the subject. It is by now well
recognised that "fair play in action" requires that in administrative
proceedings also the doctrine of natural justice must be held to be applicable
and thus no distinction can be made between an administrative and a
quasi-judicial proceedings for the purpose of applicability of the doctrine of
natural justice. Bhagwati, J., expressing the majority view, observed (at page
626) :
"The
inquiry must, therefore, always be : does fairness in action demand that an
opportunity to be heard should be given to the person affected?
Now,
if this be the test of applicability of the doctrine of natural justice, there
can be no distinction between a quasi-judicial function and an administrative
function for this purpose. The aim of both administrative inquiry as well as
quasi-judicial inquiry is to arrive at a just decision and if a rule of natural
justice is calculated to secure justice, or to put it negatively, to prevent
miscarriage of justice, it is difficult to see why it should be applicable to a
quasi-judicial inquiry and not to administrative inquiry. It must logically
apply to both. On what principle can distinction be made between one and the
other? Can it be said that the requirement of 'fair play in action' is any the
less in an administrative inquiry than in a quasi-judicial one? Sometimes, an
unjust decision in an administrative inquiry may have far more serious
consequences than a decision in a quasi-judicial inquiry and hence the rules of
natural justice must apply equally in an administrative inquiry which entails
civil consequences".
Now,
natural justice demands that a person who is likely to be directly affected by
an administrative action should be given adequate notice of the action proposed
so that an adequate representation can be made to effectively meet the points
raised and the opportunity so given must be reasonable. Again, what is a
reasonable opportunity depends on the nature of the power so exercised and the
extent of the right so affected. As observed by Lord Denning in
The
Supreme Court in A.K. Roy v. Union of India, AIR 1982 SC 710, has observed thus
(at page 749) :
"Two
fundamental principles of natural justice are commonly recognised, namely, that
an adjudicator should be disinterested and unbiased (nemo judex in cause sua)
and that the parties must be given adequate notice and opportunity to be heard
(audi alteram partem). There is no fixed or certain standard of natural
justice, substantive or procedural, and in two English cases the expression
'natural justice' was described as one 'sadly lacking in precision', [1914] 1
KB 160 at page 199 and as 'vacuous', Local Government Board v. Arlidge [1915]
AC 120, 138. The principles of natural justice, are in fact, mostly evolved
from case to case, according to the broad requirements of justice in the given case.
We
do not suggest that the principles of natural justice, vague and variable as
they may be, are not worthy of preservation. As observed by Lord Reid in Ridge
v. Baldwin [1964] AC 40, 64-65, the view that 'natural justice is so vague as
to be practically meaningless' is tainted by 'the perennial fallacy that
because something cannot be cut and dried or nicely weighed or measured,
therefore, it does not exist.' But the importance of the realisation that the
rules of natural justice are not rigid norms of unchanging content, consists in
the fact that the ambit of those rules must vary according to the context and
they have to be tailored to suit the nature of the proceeding in relation to
which the particular right is claimed as a component of natural justice".
Bhagwati,
J., speaking for the court in Siemens Engineering and Manufacturing Co. of
India Ltd. v. Union of India, AIR 1976 SC 1785, observed that (at page 1789) :
"The
rule requiring reasons to be given in support of an order is, like the
principle of audi alteram partem, a basic principle of natural justice which
must inform every quasi-judicial process"...
The
court, therefore, has to maintain a pragmatic balance looking at the object for
which the Legislature has vested the power in the authority. This can be done
by examining the statutory scheme in question and the rights of the party
affected by the exercise of such power. Since principles of natural justice
have to be followed by administrative authorities while performing purely
administrative functions as well and the rule requiring reasons to be given in
support of an order is like the principle of audi alteram partem, a basic
principle of natural justice, in a given set of circumstances, refusal to give
reasons for a decision may amount to denial of natural
justice. In fact, when administrative authorities exercise discretionary power,
it is helpful if they give reasons because these orders are also subject to
judicial review.
As observed by the Supreme
Court in Union of India v. M.L. Capoor, AIR 1974 SC 87, 98, "Reasons are
the links between the materials on which certain conclusions are based and the
actual conclusions. They disclose how the mind is applied to the subject-matter
for a decision whether it is purely administrative or quasi-judicial. They
should reveal a rational nexus between the facts considered and the conclusions
reached. Only in this way can opinions or decisions recorded be shown to be
manifestly just and reasonable".
Thus, irrespective of
whether the power is purely administrative or quasi-judicial, if the principles
of natural justice so require, the authority must give reasons for its
decision.
It is necessary at this
stage to consider the statutory scheme in the light of the object for which
Parliament conferred this power on the Central Government/Company Law Board.
The section permits interference with the right of a company to enter into a
contract with the object of protecting the interests of the company and
preventing unnecessary expenditure. The section requires that a company having
a paid up share capital of Rs. 50 lakhs or more shall appoint a sole selling
agent only after obtaining the consent of the company accorded by a special
resolution and further after obtaining the approval of the Central Government
in that regard. Therefore, if the appointment of a sole-selling agent is found
to be prejudicial to the interests of the company, under this section the
Central Government may refuse to grant approval for such an appointment even if
the company has accorded its sanction by way of a special resolution. The
section itself does not indicate the guidelines to be followed while dealing
with such an application. However, the Company Law Board has been following its
own guidelines. These
guidelines read as follows :
"(a) where the involvement of the proposed
appointee either through himself or through his family members in the selling
agency is quite substantial, the Board does not approve the said appointment;
(b) where, however, the interest of the proposed appointee and/or his
family members in the selling agency is nominal, then the Board approves the
appointment but with certain conditions to safeguard the interests of the
company ;
(c) where it is found that the appointment of the selling agency
company, as also the persons proposed as managing or whole-time director is essential for the efficient
conduct of the business of the company, the Board, while fixing his managerial
remuneration, takes into account the monetary benefits which the appointee
concerned directly or indirectly will be getting from the selling agency".
The
Central Government has framed rules in exercise of the powers conferred by
section 294AA read with Clause(a) of sub-section(1) of section 642 of the
Companies Act called the Companies (Appointment of Sole Selling Agents) Rules,
1975. Under these Rules, every company seeking approval of the Central
Government for the appointment of sole selling agents or selling agents for the
buying or purchasing of goods on behalf of the company under section 294AA of
the Act is required to apply as per the form prescribed. The application for
approval of the Central Government to the appointment of sole selling agents by
a company is to be made as prescribed in Form I. This form contains about 41
clauses and requires the company to give details of the sole selling agent
proposed to be appointed and the necessity of appointing a sole selling agent
for the sale of the products, of the company. The Company Law Board makes a
detailed inquiry into the genuineness of the agreement with the sole selling
agency and also the necessity of appointing a sole selling agent for the
purposes of the sale of the products of the company.
It
is the right of every party affected by a decision to know the reasons. In a
case where the right of a company to enter into a contract and carry on
business is affected, the company has a right to know why it is not allowed to
enter into that particular business transaction or contract and to show that
the appointment of the sole selling agent would not entail unnecessary
expenditure and is in the interest of the company. Though there are
administrative guidelines issued, the section itself gives very wide discretion
and if this power has to be reasonable, the authority must be required to give
reasons.
Now,
the next question to be considered is whether the petitioners as shareholders
of the company can complain of violation of natural justice and insist on
knowing the reasons for grant of approval.
It
was argued by Mr. Diwan on behalf of respondent No. 3 that the shareholders as
a class are not a party and are not entitled to insist upon knowing the
reasons. In fact, they have no legal right or standing and are not entitled to
insist upon natural justice at all or even to contend that natural justice is
not complied with and/or reasons have not been given in the order passed by the
Company Law Board. It was submitted that this contention flows from the
language of section 294AA of the Act read with section 640 B of the Act. Under
section 640B, a company is required to inform its members by advertisement
about its intention to make an application to the Central Government under the
specified sections of the Act. Section 294AA is not included in section 640B of
the Act. As far as section 294AA is concerned, there is a departure from the
pattern of section 640B. It was submitted that all sections mentioned in
section 640B even do not necessarily imply a quasi-judicial power but in case
of section 294AA, there is no doubt that the shareholders are not in the
position of a party at all. The statute is silent inspite of the fact that the
Legislature is aware of a different pattern between Monopolies and Restrictive
Trade Practices Act, 1969, and the Companies Act. Reference was also made to
section 29 of the Monopolies and Restrictive Trade Practices Act applicable to
sections 21 to 23 of the Monopolies and Restrictive Trade Practices Act and
section 640B applicable to sections 259, 268, 269, 310, 311, 408, 409, etc. It
was further argued that there is no lis or dispute between the shareholders and
the applicant company or sole selling agents or the Company Law Board because
there is no legal right of the shareholders in the proceedings for approval. To
support this argument, great emphasis was laid on the rights of the
shareholders in a company. It was submitted that the legal rights of the
shareholders are limited. They have a right to sell their shares, attend
general meetings and vote thereat, give proxies, receive dividends and get a
share in winding up after all liabilities are discharged. The shareholders have
no right to interfere with the management of the company even by a unanimous
resolution. It was submitted that if the directors lose their confidence, the
shareholders have a right to remove them according to law or not to re-elect
them.
On
the other hand, Mr. Sibal, learned counsel appearing for the petitioners,
contended that the duty to give reasons did not depend on the shareholders'
right to object and the existence of a "lis" inasmuch as the court in
exercise of its power under article 226 of the Constitution of India interferes
not only where reasons are not given but also where reasons are unsatisfactory
and considering the objective of the enactment, since a shareholder has the
locus standi to file a petition and challenge the order by way of a petition
under article 226 of the Constitution of India, he has also a right to know the
reason. Reliance was placed by learned counsel on the judgment of the Gujarat
High Court dated November 19, 1981, in the case of Company Petition No. 49 of
1978 (Shri Narendra Gordhan Bhain Shodhan v. Shri Arbudha Mills Limited,
Ahmedabad) in support of this contention. It was submitted that in this case it
was held that in proceedings for confirmation under sections 101 and 102,
shareholders being interested parties must be heard and have locus standi to
object to the scheme of reduction of share capital though there is no statutory
right given to the shareholders to object and the same logic applies to
proceedings under section 294AA of the Act and the shareholders can object to
the approval though the statute is not explicit in that behalf.
I
find substantial force in the argument of Mr. Diwan that there is no lis or
dispute between the petitioners and the Company Law Board or the company or the
proposed sole selling agent in a case for approval under section 294AA of the
Act. In my opinion, in granting approvals, the policy content of the Government
is larger as compared to the position of the petitioners. This is clear from
the fact that though guidelines are issued by the Department dealing with the
application, the statute itself does not give any guideline nor does it provide
for notice to the shareholders or the creditors inviting them to file their
objections. As observed by the Supreme Court in Life Insurance Corporation of
India v. Escorts Ltd. [1986] 59 Comp Cas 548, the rights of the shareholders
are (i) to elect directors and thus to participate in the management through
them ; (ii) to vote on resolution at meetings of the company ; (iii) to enjoy
the profits of the company in the shape of dividends ; (iv) to apply to the
court for relief in the case of oppression ; (v) to apply to the court for
relief in the case of mismanagement ; (vi) to apply to the court for winding up
of the company ; and (vii) to share in the surplus on winding up.
Palmer
in his Company Law, 21st edition 1982, page 853, has observed that:
"The
general clause in the articles vesting the management of the company in the
directors is of great practical importance ; it means that the directors have
full powers of management, and are only subject to control by the shareholders
in the manner laid down by statute and articles. It further means that the
shareholders cannot, by ordinary resolution of the general meeting, exercise a
power given to the directors by the articles or overrule the directors when
exercising such a power.
The
shareholders are, of course, at liberty by special resolution altering the
articles to vest in the general meeting a power given to the directors, and
then to exercise such power. Further, the shareholders have always the
statutory power—which gives them ultimate control over the management—of
removing a director at any time by ordinary resolution requiring special,
notice (section 184), and, if the conditions of section 75 of the 1980 Act are
satisfied, to petition for the alternative remedy".
Furthermore,
section 291 of the Act provides that except where an express provision is made
that the powers of a company in respect of any particular matter are to be
exercised by the company in general meeting, in all other cases, the board of
directors are entitled to exercise all powers. Thus, the shareholders can
express their view at the special meeting convened for passing the special
resolution and if the majority of the shareholders do not approve the proposed
appointment of a sole selling agent, the shareholders can reject the proposal
made by the board of directors but once the general body approves the
appointment and passes the special resolution, even if a minority shareholder
does not approve of the majority view, the grievance cannot be redressed in
proceedings under section 294AA of the Act. If the Legislature had intended
that every shareholder must have opportunity to express his view before the
Central Government in proceedings under section 294AA of the Act, it would have
provided for it by making notice to the shareholders obligatory as it is done
in the Monopolies and Restrictive Trade Practices Act or for that matter in the
present Act by incorporating a condition to that effect in the section itself
or including section 294AA in the list of sections mentioned in section 640B or
otherwise.
The
petitioners cannot gain support from the judgment of the Gujarat High Court in
Narendra Gordhan Bhain Shodhan's case, because the right of a shareholder to
object to the scheme for reduction of share capital cannot be compared to the
right of a shareholder to object to an application for approval under section
294AA of the Act because in the former case the minority shareholder is
directly affected. The power of the Central Government or the Company Law Board
under section 294AA is also not similar to the power under section 326 of the
Act inasmuch as section 326 of the Act requires positive satisfaction on the
points specified by the section itself whereas section 294AA does not specify
any such criteria and the statute only requires an approval of the general body
by way of a special resolution.
Thus,
while deciding an application under section 294AA of the Act the Central
Government/Company Law Board does not adjudicate on any dispute between the company
and shareholder, nor does it determine any right of shareholders qua the
company and/or the sole selling agent and, therefore, cannot be said to be
exercising any judicial function. Once the consent of the shareholders is given
by way of a special resolution, though in order to effectively and properly
consider an application, the Central Government/Company Law Board may seek
information from various sources, namely, various authorities connected with
the company or even the creditors and shareholders, it does not confer any
right on these parties.
The
Supreme Court in Cosmosteels P. Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas
312, 321 has held :
"We
may also point out that a right to notice by reason of any rule of natural
justice, which a party has to establish, must depend for its existence upon
proof of an interest which is bound to be injured by not hearing the party
claiming to be entitled to a notice and to be heard before an order is passed
If the duty to give notice and to hear a party is not mandatory, the actual
order passed on a matter must be shown to have injuriously affected the
interest of the party which was given no notice of the matter".
Since
the decision of the Central Government in these proceedings does not directly
affect the rights of the petitioners and no real prejudice is caused to them,
they cannot complain of violation of natural justice. Thus, the order cannot be
set aside merely because reasons are not given. In such a case, the court will
strike down a decision of an administrative authority only if the same is mala
fide or perverse.
The
Supreme Court in S.P. Gupta v. President of India, AIR 1982 SC 149, popularly
known as the Judges' case has, if I may say so with respect very succinctly
observed (at page 190) :
"We
would regard the first proposition as correctly setting out the nature and
purpose of the judicial function, as it is essential to the maintenance of the
rule of law that every organ of the State must act within the limits of its
power and carry out the duty imposed upon it by the Constitution or the law. If
the State or any public authority acts beyond the scope of its power and
thereby causes a specific legal injury to a person or to a determinate class or
group of persons, it would be a case of private injury actionable in the manner
discussed in the preceding paragraphs. So also if the duty is owed by the State
or any public authority to a person or to a determinate class or group of
persons, it would give rise to a corresponding right in such person or determinate
class or group of persons and they would be entitled to maintain an action for
judicial redress. But if no specific legal injury is caused to a person or to a
determinate class or group of persons by the act or omission of the State or
any public authority and the injury is caused only to public interest, the
question arises as to who can maintain an action for vindicating the rule of
law and setting aside the unlawful action or enforcing the performance of the
public duty. If no one can maintain an action for redress of such public wrong
or public injury, it would be disastrous for the rule of law, for it would be
open to the State or a public authority to act with impunity beyond the scope
of its power or in breach of a public duty owed by it. The courts cannot
countenance such a situation where the observance of the law is left to the
sweet will of the authority bound by it, without any redress if the law is
contravened. The view has, therefore, been taken by the courts in many
decisions that whenever there is a public wrong or public injury caused by an
act or omission of the State or a public authority which is contrary to the
Constitution or the law, any member of the public acting bona fide and having
sufficient interest can maintain an action for redressal of such public wrong
or public injury. The strict rule of standing which insists that only a person
who has suffered a specific legal injury can maintain an action for judicial
redress is relaxed and a broad rule is evolved which gives standing to any
member of the public who is not a mere busy body or a meddlesome interloper but
who has sufficient interest in the proceeding. There can be no doubt that the
risk of legal action against the State or a public authority by any citizen
will induce the State or such public authority to act with greater
responsibility and care thereby improving the administration of justice".
In
my view, though a shareholder of a company cannot complain of a direct injury,
he cannot be called a mere busy body or a meddlesome interloper having no
interest in the proceedings at all provided he is acting bona fide, and he can
certainly challenge the decision in court by way of a petition under article
226 of the Constitution of India on the limited grounds mentioned above and if
justice of the case requires, the court will issue a writ.
Therefore, even though
the order does not disclose reasons, in spite of the objections raised by the
petitioners, in order to find out if the decision is vitiated on any of the
above grounds, I permitted the Company Law Board to place on record the minutes
of the meeting held by the Company Law Board and the relevant documents.
It
was argued by Mr. Diwan that Sayaji Mills Ltd. has been having a sole selling
agency arrangement for its proudcts (starch, glucose, dextrose, etc.) since its
inception in 1941 and a family company C. Doctor and Co. which was in starch
business since 1914 was appointed as the sole selling agent of respondent No. 3
company since then. It was submitted that in accordance with the Act as amended
by the Companies (Amendment) Act, 1974, the approval of the Central Government
was required for appointment of sole selling agents. Accordingly, respondent
No. 3 company applied for and obtained approval of the Central Government to
the appointment of C. Doctor and Co. as its sole selling agents right from 1974
for the period 1972-77, 1977-82 and 1982-87. The last of such approval granted
with effect from October, 1982, was valid up to September, 1987. However,
before that period expired in or about January, 1982 (sic), a family
arrangement was arrived at by way of a memorandum of understanding between two
brothers of the family of one Shri V.L. Mehta who was the then
chairman-cum-managing director of respondent No. 3 company. Of the two
brothers, one Shri B.V. Mehta and his branch got the management of respondent
No. 3 company and other assets, whereas the branch of the other brother Shri
S.V. Mehta got other companies of the family including C. Doctor and Co. C.
Doctor and Co. had a starch division and an engineering division. Since the
management of C. Doctor and Co. vested with Shri S.V. Mehta and his branch, it
was decided to separate the starch division of C. Doctor and Co. and by a
tripartite agreement, it was provided that the entire staff of the starch
division of C. Doctor and Co. would be taken over by the proposed new company,
viz., L.G. and Doctor Associates P. Ltd. However, while the application was
still under consideration, on account of family differences, Shri S.V. Mehta
and Shri V.L. Mehta developed a hostile attitude towards Shri B.V. Mehta, Shri
S.V. Mehta and his group have set up the three petitioners to raise obstacles
in the smooth functioning of the company. In fact, petitioner No. 1 was the
administrative manager before the family arrangement and resigned immediately
after Shri B.V. Mehta and Shri V.L. Mehta resigned from the company. It was
further submitted that the total paid-up capital of the company is Rs.
1,13,58,700 with Rs. 60,00,000 equity share capital. The petitioners are three
individual shareholders, out of 4,800 equity shareholders, holding amongst
themselves in the aggregate 376 shares of the face value of Rs. 37,600
amounting to approximately 0.6% of the total paid-up equity share capital, which
shows that they do not represent the shareholders of the company to any
material extent and have no status at all in the subject-matter of the
petition. Only two individual shareholders objected to the resolution, namely ;
Shri P.K. Vyas and Shri V.S. Joshi. None of the three petitioners objected to
the resolution approving the appointment inasmuch as petitioner No. 1 sent a
proxy in favour of the resolution, petitioner No. 2 remained absent and
petitioner No. 3 was present and voted in favour. Petitioner No. 3 in fact
volunteered and gave a speech complimenting the performance of the management.
It was submitted that these three persons were put up by the rival group which
is acting behind the scene and thus the conduct of the petitioners is not bona fide.
Though
the fact that the petitioners did not object to the resolution and their sudden
objection to the approval may raise some doubts about their bona fides, I do
not consider it proper to throw out this petition on that ground alone. Having
heard lengthy arguments, in my view, it is appropriate to look at the documents
which were produced by learned counsel appearing for the Company Law Board to
ascertain whether the impugned decision is, on the facts of the case,
justified.
It
was contended by Mr. Sibal that the special resolution of the shareholders
exhausted itself when the Company Law Board refused approval on May 31, 1984,
and, therefore, when the company was advised to file a fresh application, it
was necessary for the company to obtain fresh consent from the general body. It
was argued that it was only fair and reasonable that the shareholders should
have been informed of the changed circumstances and also of the order of the
Company Law Board dated May 31, 1984, rejecting the previous application of the
company.
I
do not think this argument has any force. By a special resolution dated
September 29, 1983, the shareholders of the company had accorded their consent
to the appointment of L.G. and Doctor Associates Pvt. Ltd., a body corporate
and sole selling agent of the company for a period of five years from October
16, 1983, to October 15, 1988, Any change in the shareholding pattern of L.G. and Doctor Associates Pvt. Ltd. or in
the constitution of its board of directors would not, in my view, affect the
resolution granting consent to the appointment of sole selling agents. In any
event, the change was not such as would affect the shareholders of the
applicant company, because the terms of appointment remained unchanged.
It was next contended by
Mr. Sibal that under the Act, special resolution requires an explanatory
statement disclosing all material facts to the shareholders. Therefore, section
173(2) of the Act should be read into section 294AA as well and the Company Law
Board must satisfy itself before granting approval that material particulars
have been disclosed to the shareholders while seeking their consent at the
general body. It was submitted that the family arrangement which was the basis
for passing of the said resolution was not referred to in the explanatory
statement and the notice was, therefore, a tricky notice and the Company Law
Board should have insisted upon a fresh resolution to be obtained after issuing
a proper notice in that regard.
I find no merit in this
contention as well. It is true that under section 173 of the Act, material
particulars necessary for enabling the shareholders to take a decision on the
subject-matter of the proposed resolutions are required to be mentioned.
However, the Company Law Board when it decides a question of approval has only
to prima facie satisfy itself whether the notice was according to law and
confirm whether the consent has been accorded by the shareholders, but it is
not necessary for the Company Law Board at that stage to decide whether the notice
is a tricky notice. If a shareholder has to challenge the notice and the
validity of the special resolution, he can do so by separate proceedings as
provided under the Act. The Company Law Board while deciding the application
for approval under section 294AA cannot embark upon a detailed investigation
and decide on the question of a tricky notice.
Mr. Sibal contended that
the impugned order of the Company Law Board deserves to be set aside as it is,
ex facie, contrary to the guidelines and based on extraneous considerations. He
submitted that the main purpose of enactment of section 294AA of the Act is to
ensure that there is no siphoning of funds and though no guidelines are given
in the section itself, the Central Government has issued guidelines by way of
circulars in order to ensure that this object is achieved and unnecessary
expenditure is avoided. It was submitted that once the Central Government has
issued guidelines, it is bound by the same and if it does not do so, some
cogent reasons must be given for departing from these guidelines for otherwise
the action shall be deemed to be arbitrary. It was submitted that the Company
Law Board while rejecting the first application for approval had given reasons
why it felt that the agreement between the sole selling agent and the company did not appear to be
an arm's length transaction. One of the reasons why the Company Law Board came
to that conclusion was because the entire share capital of the sole selling
agency was held by Shri B.V. Mehta, his wife, son, daughter and their HUF and
Shri B.V. Mehta was also its chairman. By way of change, though Shri B.V. Mehta
had ceased to be the chairman, his married daughter still held considerable
shares and thus the objection still held valid even after reconstitution of the
sole selling agency company. Learned counsel advanced considerable arguments
relying on Circular No. 61.6 of the Company Law Board that a married daughter
inasmuch a member of the family. It was submitted that the other reason why the
Company Law Board felt that it was not an arm's length transaction, was that
the sole selling agency company had invested its entire share capital in the
applicant company and thus had no financial resources for carrying on its
business of the nature contemplated. Learned counsel submitted that the share
capital of the sole selling agency company had been increased very nominally
and this objection thus still survives. He further submitted that the other
reason why the Company Law Board felt that it was not an arm's length
transaction was that the sole selling agency company did not have substantial
infrastructure facility of its own inasmuch as it did not have proper staff,
furniture, telephone, office premises, etc., of its own and it was using the
company's facilities for its business. Learned counsel submitted that this
objection still survives because the sole selling agency company had not made
any new arrangement as yet and was still continuing with the same arrangement.
The argument of respondent No. 3 company that the entire staff of C. Doctor and
Co. was taken over by L.G. and Doctor Associates Pvt. Ltd. was considered by
the Company Law Board and rejected when it took the previous decision and there
were no fresh circumstances brought to the notice of the Company Law Board
which would persuade it to change its own original decision.
Now,
it is true that there are no satisfactory guidelines but once the Central
Government/Company Law Board issues its own guidelines, it must substantially
adhere to these guidelines when a decision on an application for approval is
taken. But the very fact that the Legislature has not provided specific
guidelines in section 294AA which would limit the exercise of powers of the
Central Government to grant or refuse approval shows that a wide discretion is
given to the Central Government in exercise of its powers in this regard. I
find that after the first application was rejected by the Company Law Board,
the constitution of L.G. and Doctor Associates Pvt. Ltd. was considerably changed.
For instance, Shri B.V. Mehta who was formerly the chairman of the sole selling
agency company, and his family members divested themselves of their holdings in
the sole selling agency company and also ceased to be its chairman and
directors. The fact that one of the married daughters is a shareholder in the
sole selling agency company, does not in any way, in my view, make the decision
contrary to the guidelines. Circular No. 61.6 provides that where the
involvement of the proposed appointee either through himself or his family
members in the selling agency is quite substantial, the Board will not approve
the said appointment. If, however, the interest of the appointee and or the
family members in the selling agency is nominal, the Board approves the
appointment but with certain conditions to safeguard the interest of the
company. There is also another circular issued by the Government of India
bearing No. 61.4 at page 176 in the book on Clarifications and Circulars on
Company Law, the relevant portion of which reads thus:
"It
has also been decided that the companies should not, except with the approval
of the Central Government, be allowed to appoint as sole selling agents, any
company or firm in which the sons or wives of the managing directors, etc., had
any interest. This principle was extended to the participation of the unmarried
daughters of managing directors, etc., in the sole selling agencies".
This
circular indicates that a married daughter is not considered a member of the family.
The other change brought about is that the sole soiling agency company also
divested itself of its shareholding in the applicant company and also increased
its paid-up capital from Rs. 4 lakhs to Rs. 12 lakhs. The sole selling agency
company also increased its staff and took some further office premises, etc.
All these changes in the sole selling agency company were brought to the notice
of the Company Law Board in the second application by the company. The company
also emphasized that the entire starch division of C. Doctor and Company, which
was its previous sole selling agent, was taken over by L.G. and Doctor
Associates and the entire staff of C. Doctor and Co. had gone to L.G. and
Doctor Associates Pvt. Ltd. because of the tripartite agreement.
With
the help of Mr. Aruneshwar Gupta, learned counsel for the Company Law Board,
the minutes of the meeting and other documents were perused. From the brief for
consideration circulated to the members of the Company Law Board by the
Secretary to the Company Law Board and the minutes of the meeting held by the
Company Law Board on January 15, 1985, I find that though the order does not
contain any reason granting the approval, the question was discussed threadbare
by the Company Law Board and after that the decision was taken. It also appears
from these documents that the Company Law Board had considered the oral
arguments advanced by Mr. P.K. Vyas, the written representation of petitioner
No. 1 herein which incidentally contains all the objections taken in the writ
petition, the facts stated in the application for approval and the submissions
of the company and the sole selling agent and only thereafter the Company Law
Board took the impugned decision.
Now,
considering that the company has had the benefit of the services of a sole
selling agent right from its inception and that the entire staff of starch
division of C. Doctor and Company, i.e, its previous sole selling agent was
taken over by L.G. and Doctor Associates P. Ltd. and substantial changes were brought
about by L.G. and Doctor Associates to meet the objections raised by the
Company Law Board, if the Company Law Board thought it fit to grant the
approval, I do not think that it could be said to be an arbitrary or perverse
decision. Furthermore, by that time, the Company Law Board had received the
clarification and report of the Registrar of Companies, Gujarat, which
strengthened the case of the applicant company.
Now,
it is well-settled that the court, while exercising jurisdiction under article
226 of the Constitution of India, would be slow to interfere with an executive
decision relating to economic matters and must allow certain freedom to the
executive. Therefore, I do not think I need go into the question whether
reimbursement for previous periods ought to have been permitted by the Company
Law Board or not, because it involves decision on disputed questions of fact
and though the Company Law Board has granted the reimbursement on grounds of
equity, it has done so after fully considering its financial impact on the
applicant company as well as the sole selling agent. Thus, assuming there are
some technical and minor defects in the order, in my opinion, the order cannot
be set aside on that ground.
In
the result, the petition is dismissed with costs.