Section 34
Incorporation/Registration
of Company
[1947]
17 COMP. CAS. 21 (BOM.)
HIGH COURT OF
v.
BHAGWATI,
J.
NOVEMBER
8, 1945
M.V. Desai, and V.K. Chhatrapati,
for the Plaintiffs.
R.S.
Billimoria, Sir Jamshedji Kanga, M.P. Amin, and K.M. Vakil, for the defendants.
Bhagwati,
J.—The plaintiffs
have filed this suit, being members of the Arya Samaj, Bombay, on behalf of
themselves and all other members of the said society, which is a society
registered under the Societies Registration Act, XXI of 1860, against the first
defendant who is the president of the said society, as representing the society
of the Arya Samaj, Bombay, and against defendants Nos. 2, 3 and 4 who are the
members of the managing committee of the society on behalf of themselves and
all the other members of the managing committee of the society, for a
declaration that the resolutions dated October 8, 1944, passed at an
extraordinary general meeting of the society are ultra vires and in fraud of
the minority, for a declaration that the resolution dated January 21, 1945, passed
at the general meeting of the said society is also null and void and for
further and other reliefs. The resolutions dated October 8, 1944, enacted
certain changes in the constitution of the said society and the plaintiffs
allege that the said resolutions are void inter alia as being ultra vires the
said society and constituting a fraud on the rights of the minority who voted
against the said resolutions, and that the minority of the members of the said
society was overborne by the vote of the majority who were acting in their own
interests illegally, fraudulently and contrary to the interests and objects of
the said society and the rights of the minority of the members of the society
present at the meeting and voting against the resolutions. The resolution of
January 21, 1945, sanctioned the agreement for sale of the Shenwewadi property
belonging to the said society and the agreement for purchase of another
property situate at Bangadwadi. The plaintiffs alleged inter alia that the
resolution was passed by the majority in fraud of the rights of the minority
and against the interests of the society. The plaintiffs further alleged that
the managing committee of the said society were about to complete the sale of
the property at Shenwewadi and purchase of the property at Bangadwadi and
sought to restrain the defendants from completing the sale of Shenwewadi
property and purchase of Bangadwadi property and from acting on the
resolutions, dated October 8, 1944, and January 21, 1945, and carrying the same
into effect, particularly from carrying out the sale of the Shenwewadi property
and purchase of the Bangadwadi property.
At
the hearing of the suit before me Mr. R.S. Billimoria for the first defendant
raised inter alia the following issues:—
(1) Whether the
plaintiffs are entitled to maintain the suit without having obtained the
sanction and consent of the society for the institution thereof.
(2) Whether the
society in this suit is both the plaintiff and the defendant and whether the
suit as framed is maintainable.
(4-a) Whether the
allegations contained in paragraphs 4(b), 4(c) and 16 of the plaint amount to
any averments of fraud.
(6) Whether
apart from the plea of the resolutions being ultra vires, the plaint deals with
matters which relate to the internal management of the society.
(7) If so, whether the Court will entertain
the suit in respect of such matters.
Mr.
M.P. Amin on behalf of defendants Nos. 2, 3 and 4 joined in the issues raised
by Mr. R.S. Billimoria and raised further issues on behalf of defendants Nos.
2, 3 and 4 which were:—
(1) Whether
the plaint discloses any cause of action against these defendants; and
(2) Whether
these defendants are necessary parties to the suit.
Mr.
R.S. Billimoria invited me first to decide issue No. (4-a), viz., whether the
allegations contained in paragraphs 4(b), 4(c) and 16 of the plaint amount to
any averments of fraud. He contended that it was an acknowledged rule of
pleadings that the plaintiffs must set forth the particulars of the fraud which
they allege and that it was not enough to use such general words as "
fraud " or "fraudulently " as has been done by the plaintiff in
the plaint. He relied upon the observations of Lord Selborne in
"With
regard to fraud, if there be any principle which is perfectly well settled, it
is that general allegations, however strong may be the words in which they are
stated, are insufficient even to amount to an averment of fraud of which any
Court ought to take notice."
These
observations of Lord Selborne have been quoted with approval by their Lordships
of the Privy Council in Gunga Narain Gupta v. Tiluckram Chowdhry and in Bal
Gangadhar Tilak v. Shrinivas Pandit He also
referred me to the later decision of the Privy Council reported in Bharat
Dharma Syndicate v. Harish Chandra, where it
was held that litigants who prefer charges of fraud or other improper conduct
against persons should be compelled to place on record precise and specific
details of those charges even if no objection is taken on behalf of the parties
who are interested in disproving the accusations. Their Lordships went so far
as to observe that in the case before them the petitioner ought not to have
been allowed to proceed with his petition and to prove fraud unless and until
he had upon such terms as the Court thought fit to impose amended his petition
by including therein full particulars of the allegations which he intended to
prove, and that such cases would be much simplified if this practice was
strictly observed and insisted upon by the Court even if, as in the case before
them, no objection was taken on behalf of the parties who were interested in
disproving the accusations. Relying upon these authorities, Mr. R.S. Billimoria
urged that the allegations contained in the plaint with regard to the fraud
alleged to have been perpetrated by the majority of the members of the society
upon the minority were not enough and could not be entertained by the Court as they
stood.
Mr.
M.V. Desai for the plaintiffs did not controvert these propositions of law
which were advanced by Mr. R.S. Billimoria but submitted to the Court that no
fraud as such was relied upon by the plaintiffs, the only contention of the
plaintiffs being that their rights had been wrongfully or unlawfully affected
and that the resolutions had been improperly procured. During the course of the
argument I understood Mr. M. V. Desai to mean that his clients did not rely
upon fraud as such but merely relied upon the wrongful and/or illegal manner in
which the resolutions had beed passed by the majority of the members of the
society and on that basis I then ruled that issue No. (4-a) did not survive.
After
the case had been opened by Mr. M.V. Desai for some time Mr. R. S. Billimoria
applied to the Court that issues Nos. (1), (2), (6) and (7) raised by him
should be tried first. Mr. M.P. Amin joined in this application and further
applied that his issues Nos. (1) and (2) also should be tried similarly. Mr. M.V.
Desai stated that he had no objection to that course being adopted by the Court
and I ordered accordingly that issues Nos. (1), (2), (6) and (7) raised by Mr.
R.S. Billimoria and issues Nos. (1) and (2) raised by Mr. M.P. Amin should be
tried in the first instance.
The
issues Nos. (1) and (2) raised by Mr. R.S. Billimoria challenged the
maintainability of the suit as framed. As I have already observed the Arya
Samaj, Bombay, is a society registered under the Societies Registration Act, XXI
of 1860, under the name of the Arya Samaj, Bombay, the memorandum and articles
of association of the society were filed with the Registrar of the Joint Stock
Companies and the society has been in existence since then and has been
functioning as such since the date of its registration. The plaintiffs are
admittedly in a minority, the majority of the members of the society being of a
persuasion contrary to that of the plaintiffs. The plaintiffs, however, filed
this suit in a representative capacity on behalf of themselves and all other
members of the society, which would mean that all the members of the society
and therefore the society itself is in the position of the plaintiffs. The
first defendant is the president of the society and has been sued as representing
the society, which means that the society is the defendant in this suit. Mr. R.
S. Billimoria contended that the plaintiffs being an admitted minority of the
members of the society could not by any stretch of imagination purport to
represent all the members of the society and could not even by availing
themselves of the procedure laid down in Order I, Rule 8, of the Civil
Procedure Code, claim to file this suit as representing all the members of the
society, the majority of the members of the society being admittedly against
their persuasion. The society had not sanctioned the filing of this suit. No
meeting of the society had been called for considering the advisability or
otherwise of the institution of the suit. Mr. R.S. Billimoria stated and it was
not disputed that if a meeting of the society were called for the purpose of
considering whether the suit which had been instituted by the plaintiffs should
be continued or not, the result of such a meeting would be a foregone
conclusion and the overwhelming majority of the members of the society would
pass a resolution disapproving of the further prosecution of the suit. The
objection of Mr. R.S. Billimoria went still further in that he contended that
the consent and the sanction of the society not having been obtained by the
plaintiffs prior to the institution of this suit which they have filed in a
representative capacity on behalf of themselves and all other members of the
said society, it was not competent to the plaintiffs to file the suit as they
had done. A further objection was raised by Mr. R.S. Billimoria that on the
frame of the suit as it stood the society, were the plaintiffs as well as the
defendants and therefore the suit as framed was not maintainable because it
offended against the elementary rule of procedure that the same individual even
in different capacities could not both be the plaintiff and the defendant.
In
dealing with these issues raised by Mr. R. S. Billimoria it is necessary to
ascertain what is the legal position of a society which is registered under the
Societies Registration Act, XXI of 1860, The society is an association of
individuals which is neither a corporation nor a partnership nor an individual
which apart from statute are the only entities known to law as capable of suing
or being sued. The society is an association of individuals which comes into
existence with certain aims and objects. If it is not registered as a society
under the Societies Registration Act, it would have the character of a club or
other association which cannot sue or be sued except in the name of all members
of the association or in the name of the secretary or other members of the
governing body on their own behalf and on behalf of other members of the
association under the provisions of Order 1, Rule 8, of the Civil Procedure
Code. It would not be competent to a secretary or other members of the
governing body of the club or association to sue or be sued alone in respect of
matters in which the association is interested even though authority in that
behalf has been conferred on them by all members of the association. A
partnership-firm is also an association of individuals who have come together
for carrying on business in partnership. Even in the case of a partnership it
would not be competent to file a suit on behalf of or against a partnership as
such but for the enactment of Order XXX of the Civil Procedure Code, which
enables a suit to be filed by or against a partnership in the firm name. That
is a statutory enactment which enables the firm name being used for the purpose
of filing a suit by or against a partnership. The society of the character we
have before us is, however, quite distinct from a partnership. It has nothing
in common with a partnership. A corporation or a limited company which is
incorporated under the Indian Companies Act has a corporate existence apart
from the members constituting the same. A corporation has been defined as a
collection of individuals united into one body under a special denomination
having perpetual succession under an artificial form and vested by the policy
of law with the capacity of acting in several respects as an individual,
particularly of taking and granting properties, of contracting obligations and
of suing and being sued, of enjoying privileges and immunities in common and of
exercising a variety of political rights, more or less extensive, according to
the design of its institution or the powers conferred upon it either at the
time of its creation or at any subsequent period of its existence. [Kyd on
Corporations, [1793], Vol. I, page 13]. (See Halsbury's Laws of England,
Hailsham Edition, Vol. VIII, page 1, para. 1; Adler's Law Relating to
Corporations, page 2; and Grant's Law of Corporation, page 4). The ideas
inherent in the definition of a corporation are (1) that its identity is
continuous, (2) that it is intangible, i.e., it is only in abstracto and rests
only in intendment and consideration of law (Lord Coke), and (3) it is a thing
distinct from its members. Grant in his Law of Corporation predicates a
continuous identity, a name and a common seal as indispensable requisites to
the creation of a corporation proper and states that besides the aggregate
bodies whose legal character and attributes have been above discussed, there
are various other aggregate bodies, partaking in some respects, and for some
purposes, of the corporate character, but which nevertheless are not complete
corporations for want of some of the essentials of corporations, and which
therefore have been called quasi corporations. He gives as an illustration of
the latter category "Churchwardens" who though empowered to hold
goods, etc., in succession, for the church, etc., have not power to hold lands
in succession, have not a common seal, and want other characteristics of
complete incorporation. As regards the companies which are incorporated under
the Indian Companies Act, Section 23 of the Indian Companies Act enacts that
from the date of incorporation mentioned in the certificate of incorporation
the subscribers of the memorandum, together with such other persons as may from
time to time become members of the company, shall be a body corporate by the
name contained in the memorandum, capable forthwith of exercising all the
functions of an incorporated company, and having perpetual succession and a
common seal, but with such liability on the part of the members to contribute
to the assets of the company in the event of its being wound up as is mentioned
in the Act. The corporations and the companies incorporated under the Indian
Companies Act have thus conferred on them a legal entity which is capable of
suing or being sued.
If,
as stated above, associations of individuals are not capable of suing or being
sued except by statutory provisions in that behalf as in the case of
partnership firms, corporations or companies incorporated under the Indian
Companies Act, could it be said that a society registered under the Societies
Registration Act, XXI of 1860, becomes a legal entity such as can sue or be
sued in the name in which it is registered? The Societies Registration Act, XXI
of 1860, is an Act for the registration of literary, scientific and charitable
societies, and the object of the Act as stated in the preamble is to make
provision for improving the legal condition of societies established for the
promotion of literature, science, or the fine arts, or for the diffusion of
useful knowledge, or for charitable purposes. Under the provisions of the Act
seven or more persons associated for any literary, scientific, or charitable
purpose, or for any such purpose as is described in Section 20 of the Act may
form themselves into a society under the Act by subscribing their names to a
memorandum of association and filing the same with the Registrar of Joint Stock
Companies. The memorandum of association is to contain the name of the society,
the objects of the society and the names, addresses, and occupations of the
governors, council, directors, committee or other governing body to whom, by
the rules of the society, the management of its affairs is entrusted. A
certified copy of the rules and regulations of the society has to be filed with
the memorandum of association. The Registrar issues a certificate under his
hand that the society is registered under the Act, upon such memorandum and
certified copy being filed with him. The property belonging to the society may
be vested in trustees, and if not so vested is deemed to be vested, for the
time being, in the governing body of such society, and in all proceedings,
civil and criminal, can be described as the property of the governing body of
such society by their proper title. Provision is made for suits by and against
societies in that the society may sue or be sued in the name of the president,
chairman, or principal secretary, or trustees, as shall be determined by the
rules and regulations of the society, and, in default of such determination, in
the name of such person as shall be appointed by the governing body for the
occasion. If, however, on application to the governing body no officer or
person is nominated to be the defendant, it is competent for any person having
a claim or demand against the society to sue the president or chairman or
principal secretary or the trustees thereof. No suit or proceeding, however, is
to abate or discontinue by reason of the person by or against whom such suit or
proceedings shall have been brought or continued, dying or ceasing to fill the
character in the name whereof he shall have sued or been sued, but the same
suit or proceedings shall be continued in the name of or against the successor
of such person. A judgment recovered against the person or officer named on
behalf of the society is not to be put in force against the property movable or
immovable or against the body of such person or officer, but against the
property of the society. The society is given the power to recover any penalty
accruing under the bye-laws by filing a necessary suit against the person
liable to pay the same. The members are liable to be sued as strangers and the
property of the society is liable to process for payment of the costs of
unsuccessful litigation against such member. Members guilty of offences are
punishable as strangers. Provision is made for the adjustment of their affairs,
but no member of the society is entitled to receive any profit upon the
dissolution of a society ; whatever surplus that remains after satisfaction of
all its debts and liabilities is to go to some other society as may be
determined by the votes of three-fifths of the members present personally or by
proxy at the time of the dissolution, or, in default thereof, by the Court
having jurisdiction in that behalf.
Do
these provisions of the Societies Registration Act, XXI of 1860, constitute the
society as registered with the Registrar of Joint Stock Companies a legal
entity capable of suing or being sued? Has the society as registered with the
Registrar of Joint Stock Companies a legal existence apart from the members
constituting the same ? It is significant to observe that the members of the
society are a fluctuating body. A member of the society is a person who having
been admitted therein according to the rules and regulations thereof has paid
the subscription or signed the roll of the members thereof and has not resigned
according to the rules and regulations. The governing body of the society is
the governors, council, directors, committees, trustees or other body to whom
by the rules and regulations of the society the management of its affairs is
entrusted. The members as well as the governing body are not always the same
and that is the reason why it has been necessary to provide that no suit or
proceeding in any civil Court shall abate or discontinue by reason of the
person by or against whom such suit or proceedings may have been brought or
continued dying or ceasing to fill the character in the name whereof he shall
have sued or been sued, but the same suit or proceedings shall be continued in
the name of or against the successor of such person. Even though the members of
the society or the governing body fluctuate from time to time, the identity of
the society is sought to be made continuous by reason of these provisions. The
identity of the original members and their successors is one. The liability or
obligation once binding on the society binds the successors even though they
may not be expressly named, and in this the society savours of the character of
a corporation. The resignation or the death of a member does not make any
difference to the legal position of the society. The increase or decrease of
the members of the society similarly does not make any difference to the
position. A partnership under similar circumstances would come to an end, but
not the society. The society continues to exist and to function as such until
the dissolution thereof under the provisions of the Societies Registration Act.
The properties of the society continue vested in the trustees or in the
governing body irrespective of the fact that the members of the society for the
time being are not the same as they were before nor will be the same
thereafter. Could it under these circumstances be said that the society by
reason of its registration with the Registrar of Joint Stock Companies becomes
a legal entity apart from the members constituting the same ? I am of opinion
that by reason of the provisions of the Societies Registration Act, once the
society is registered with the Registrar of Joint Stock Companies by the filing
of the memorandum and certified copy of the rules and regulations thereof with
the Registrar and the Registrar has certified under his hand that the society
is registered under the Act, the society enjoys the status of a legal entity
apart from the members constituting the same and is capable of suing or being
sued. It may, however, be urged that there are provisions in the Societies
Registration Act which would go to show that suits by or against the society
have got to be filed in a particular manner, viz., every society registered
under the Act may sue or be sued in the name of the president, chairman, or
principal secretary, or trustees, as shall be determined by the rules and
regulations of the society, and, in default of such determination in the name
of such person as shall be appointed by the governing body for the occasion ;
provided that it shall be competent for any person having a claim or demand
against the society to sue the president or chairman, or principal secretary or
the trustees thereof, if on application to the governing body some other
officer or person be not nominated to be the defendant. These provisions and
the provisions for the non-abatement of suits and enforcement of judgments
against the society would go to show that the society even though registered
with the Registrar of Joint Stock Companies would not be able to sue or be sued
in the name of the society but could sue or be sued only in the name of the
president, chairman, or principal secretary or the trustees thereof or some
other person or officer nominated to be the defendant by the society. These
provisions, however, in my opinion, are not mandatory. They show a mode in
which suits could be filed by or against the society. A similar situation arose
in England under the provisions of the Trade Union Acts of 1871 and 1876. A
trade union registered under the said Acts was sued in the case of Taff Vale
Railway v. Amalgamated Society of Railway Servants. A summons
was taken out on behalf of the trade union to strike out their names as defendants
on the ground that they were neither a corporation nor individual and could not
be sued in a quasi corporate or any other capacity. The summons came on for
hearing before Farwell, J. The learned Judge stated that it was undoubtedly
true that a trade union was neither a corporation nor an individual nor a
partnership between a number of individuals but that was by no means conclusive
of the case. He proceeded to observe (page 429) :—
"Now,
although a corporation and an individual or individuals may be the only entity
known to the common law who can sue or be sued, it is competent to the
Legislature to give to an association of individuals which is neither a
corporation nor a partnership nor an individual a capacity for owning property
and acting by agents, and such capacity in the absence of express enactment to
the contrary involves the necessary correlative of liability to the extent of
such property for the acts and defaults of such agents. It is beside the mark
to say of such an association that it is unknown to the common law. The
Legislature has legalised it, and it must be dealt with by the Courts according
to the intention of the Legislature."
He
accordingly dismissed the summons. An appeal was filed against this decision of
Farwell, J., and the decision of the Appeal Court is report ed in Tajj Vale
Railway v. Amalgamated Society of Railway Servants. The Appeal
Court held that a trade union, registered under the Trade Union Acts, 1871 and
1876, could not be sued under its registered name and reversed the decision of
Farwell, J.A.L. Smith, M.R., observed (pages 173, 175, 176):—
"There
can, in my judgment, be no doubt that at common law the defendants could not be
sued in the name in which they are sued in this action, any more than a
tradesman could sue a defendant in the name of a West-end club for goods
supplied by him to that club, for the simple reason that the name of a club is
not the name of a corporation nor of an individual nor of a partnership, which,
apart from statute, are the only entities known to the law as being capable of
being sued. In order, there fore, that this action can be maintained against
the defendants in the name of 'The Amalgamated Society of Railway Servants,'
there must be some statute enabling this to be done either by creating the
society a corporation or enacting that it may be sued in its registered name;
and this, as the learned Judge states—and in this I also agree—depends upon the
true con struction of the Trade Union Acts of 1871 and 1876……….
When
once one gets an entity not known to the law, and therefore incapable of being
sued, in our judgment, to enable such an entity to be sued, an enactment must
be found either express or implied enabling this to be done, and it is
incorrect to say that such an entity can be sued unless there be found an
express enactment to the contrary. Where in the Trade Union Acts is to be found
any enactment, express or implied, that a trade union is to be sued in its
registered name ? Express there is none, and it is clear that a trade union is
not made a corporation, as the Acts above referred to shew is constantly the
case with other societies, [e.g., Companies Act, 1862, Section 6, Building
Society Act, 1874, Section 9, Industrial and Provident Societies Act, 1893,
Section 21.] That the Legislature has omitted to enact this in the Trade Union
Acts of 1871 and 1876 is clear;………….Moreover, by Section 9 of the Act of 1871
it is expressly enacted that the trustees of a trade union registered under the
Act, or any other officer of the union who may be authorized to do so by the
rules, may bring or defend any action in any Court of law touching the property
of the trade union—a most remarkable section if, as is argued for the
plaintiffs and held by the learned Judge, the purview of the Act is that a
trade union can be sued in its registered name. If this were so, what is the
good of this section expressly enabling the trustees or other officer of the
union to sue or be sued in respect of property ? We can find nothing in the
Acts wherefrom the inference is to be drawn that the Legislature has enacted
that a trade union can be sued in it registered name; but by reason of the
language of the Acts and what is omitted therefrom, if necessary, we should
find the exact contrary."
An
appeal was filed to the House of Lords from this decision of the Appeal Court
and the decision of the House of Lords is reported in Taff Vale Railway v.
Amalgamated Society of Railway Servants. The House
of Lords reversed the decision of the Appeal Court and restored the decision of
Farwell, J., and held that a trade union, registered under the Trade Union
Acts, 1871 and 1876, can be sued in its registered name. I need not refer at
length to the speeches of the noble Law Lords there. It is necessary only to
refer to the speeches of Lord Brampton and Lord Lindley in this behalf. Lord
Brampton observed (page 442):—
"I
think that a legal entity was created under the Trade Union Act, 1871, by the
registration of the society in its present name in the manner prescribed, and
that the legal entity so created, though not perhaps in the strict sense a
corporation, is nevertheless a newly created corporate body created by statute,
distinct from the unincorporated trade union, consisting of many thousands of
separate individuals, which no longer exists under any other name. The very
omission from the statute of any provision authorizing and directing that it
shall sue and be sued in any other name than that given to it by its
registration appears to me to lead to no other reasonable conclusion than that
in so creating it, it was intended by the Legislature that by that name and by
no other it should be known, and that for all purposes that name should be used
and applied to it in all legal proceedings unless there was any other provision
which militated against such a construction, as, for instance, in the case of
trustees, by Section 9 of the same Act, who hold real and personal property of
the society."
Lord
Lindley observed (pages 444, 445):—
"The
Act does not in express terms say what use is to be made of the name under
which the trade union is registered and by which it is known. But a trade union
which is registered under the Act must have a name...It may acquire property,
but, not being incorporated, recourse is had to the old well-known machinery of
trustees for acquiring and holding such property, and for suing and being sued
in respect of it (Sections 7, 8, 9). The property so held is, however, the
property of the union: the union is the beneficial owner ... The Act appears to
me to indicate with sufficient clearness that the registered name is one which
may be used to denote the union as an unincorporated society in legal
proceedings as well as for business and other purposes. The use of the name in
legal proceedings imposes no duties and alters no rights: it is only a more
convenient mode of proceeding than that which would have to be adopted if the
name could not be used. I do not say that the use of the name is compulsory,
but it is at least permissive……….….to avoid misconception, I will add that if a
judgment or order in that form is for the payment of money it can, in my opinion,
only be enforced against the property of the trade union, and that to reach
such property it may be found necessary to sue the trustees."
Even
though in the speech of Lord Brampton there are observations which would go to
show that the provision, which we have enacted in Section 6 of the Societies
Registration Act as regards suits by and against societies, is capable of being
construed as the only mode in which suits by or against the societies could be
brought, the observations of Lord Lindley which I have quoted above go to show
that the registered name is one which may be used to denote the union as an
unincorporated society in legal proceedings as well as for business and other
purposes and that even though the use of the name is not compulsory it is at
least permissive. I prefer to be guided by the observations of Lord Lindley
which I have referred to above and hold that in spite of the provisions
contained in Sections 6, 7 and 8 of the Societies Registration Act as regards
suits by and against societies, non-abatement of suits and enforcement of
judgment against the societies, which I have already referred to above, it is
competent to the society to sue or be sued in the name of the society, to be
sued in its registered name, the society on its registration under the
Societies Registration Act having come into existence as a legal entity apart
from the members constituting the same. If it were necessary to do so, I would
adopt the terminology which has been adopted in this connection by
Cozens-Hardy, M.R., in Osborne v. Amalgamated Society of Railway Servants, where he
describes a registered trade union as a "species of quasi
corporation." [See also note (q) in Halsbury's Laws of England, Hailsham
Edition, Vol. VIII, page 2, "Registered Trade Union is not a Corporation
but a legal entity governed by special rules," and also Halsbury's Laws of
England, Hailsham Edition, Vol. XXXII, page 486, para. 776, "A registered trade
union is not a corporation nor an individual nor a partnership ; but it becomes
by registration a legal entity distinct from an unregistered trade union. Its
registered name is to be used and applied in all legal proceedings, unless
there is any provision inconsistent with such use."]
I
am of opinion that the provisions contained in Sections 6, 7 and 8 of the
Societies Registration Act are not inconsistent with the user of the registered
name of the society in connection with legal proceedings. As Lord Lindley
observed in Taff Vale Railway Company's case, "I do
not say that the use of the name is compulsory but it is at least
permissive."
If
this is the true legal position of a society registered under the Societies
Registration Act, the objection of Mr. R. S. Billimoria that the plaintiffs and
the defendants are one and the same and that the suit as framed is not
maintainable by reason of the society being the plaintiffs as well as the
defendants disappears. The plaintiffs are suing on behalf of themselves and all
the members of the society. The first defendant is the president of the society
and represents the society. As I have already observed the society on its
registration with the Registrar of Joint Stock Companies becomes a legal entity
apart from its members; it would be therefore idle to contend that the society
are the plaintiffs as well as the first defendant in this action. In my
opinion, therefore, this objection of Mr. R.S. Billimoria fails.
The
next question to consider is how far the plaintiffs are entitled to maintain
this suit without having obtained the sanction and consent of the society for
the institution thereof. In this connection it must be noted that the
plaintiffs are an admitted minority. The affairs of the society are conducted
by the majority which for the purposes of this argument may even be assumed to
be an overwhelming majority. The resolutions which are sought to be challenged
have been passed by that majority in the general meetings of the society
convened for the purpose of passing the same. The complaint of the plaintiffs,
however, is that in the matter of the passing of the said resolutions the
majority has been guilty of oppressing or overbearing the minority and that the
acts of the majority complained of are ultra vires the society, are a fraud on
the minority, or that in any event, there is an absolute necessity to waive the
rule as to the supremacy of the majority in order that there may not be a
denial of justice. It is contended on behalf of the plaintiffs that the
principles of the company law which are enunciated in the well-known decisions
of Foss v. Harbottle and Mozley
v. Alston
and the well recognized exceptions thereto should be applied to this case and
it should be held that the plaintiffs are entitled to institute this suit in
the manner they have done and without obtaining the sanction and consent of the
society before instituting the same. I accept this contention of the
plaintiffs. The society is neither a corporation nor a limited company
incorporated under the Indian Companies Act. It is a registered society of
individuals which has acquired a legal status by reason of its registration
with the Registrar of the Joint Stock Companies under the provisions of the
Societies Registration Act. Every member of a corporation or an incorporated
company joints the same on the basis that prima facie the majority of its
members is entitled to exercise its powers and control its operations
generally. The same would be the position in the case of unincorporated
associations of individuals whether the same be registered under the Societies
Registration Act or not. The rule of the majority is the normal basis of these
associations. The members of these associations do join these associations
whether incorporated or unincorporated, whether registered or unregistered, knowing
full well that the affairs of these associations would be conducted normally by
the vote of the majority of the members thereof. In the absence of any specific
rules and regulations governing the conduct of these affairs, this would be the
normal presumption, and no member who joins any association would be heard to
contend to the contrary. If unanimity of opinion were needed for the passing of
any proposition, it would have to be expressly provided for. In the absence of
any such provision the normal state of affairs would be that the opinion of the
majority would be binding on the whole association. In the present case,
however, the matter does not rest merely with this presumption which I have
enunciated above. It has been expressly enacted in the rules and regulations of
this society, certified copy of which has been filed with the Registrar of
Joint Stock Companies, that "all matters in the meetings and
sub-committees of the Samaj will be decided according to the majority of votes
of the members present at the meeting." This being the position, I have no
doubt that the principles applicable to cases of corporations and companies
incorporated under the Indian Companies Act would govern the relations between
the members of this society inter se and the principles enunciated in the
well-known cases of Foss v. Harbottle and Mozley
v. Alston
and the exceptions thereto would be applicable to the facts of this case. I am
fortified in this conclusion of mine by the observations of Kania, J., in
Krishnan v. Sundaram, where the
learned Judge held that:—
"The
position of a society registered under the Societies Registration Act (XXI of
1860) is like that of a club or a joint stock company……In my opinion the
position of the members of this society is similar to that of shareholders of
the company."
In
that case the learned Judge applied the principles of the company law to the
case of a society registered under the Societies Registration Act, the type of
which I have before me. I am therefore of opinion that the principles governing
the relations of members of joint stock companies, i.e., companies incorporated
under the Indian Companies Act, are the principles which are applicable in the
case of a society registered under the Societies Registration Act.
Applying
those principles to the present case, it appears to me that the issues Nos.
(1), (6) and (7) raised by Mr. R.S. Billimoria can be dealt with together.
Whether the acts which are complained of are matters of internal management of
the society or constitute acts which fall within the well recognized exceptions
to the rules enunciated in the cases of Foss v. Harbottle and Mozley
v. Alston
would be the determinative factor in deciding not only issues Nos. (6) and (7)
but also issue No. (1) raised by Mr. R.S. Billimoria. According to my reading
of the authorities if the Court came to the conclusion that the acts complained
of fall within the latter category, the plaintiffs would under those
circumstances be entitled to institute a suit on behalf of themselves and all
other members of the society except the defendants making the society and the
defendants party defendants to this suit and it would not be necessary to
obtain the previous sanction and consent of the society for the institution
thereof, simply because the control of the affairs of the society is in the
hands of the majority whose acts are complained of and it would be futile to
attempt to obtain the sanction and consent of the society for the institution
of the suit, it being an absolute certainty that no such sanction and consent
would ever be available to the plaintiffs.
Two
principles emerge clearly from the authorities and they are (1) that the Court
will not interfere with the internal management of the companies acting within
their powers and in fact has no jurisdiction to do so, and (2) that in order to
redress a wrong done to a company or to recover money or damages alleged to be
due to a company the action should prima facie be brought by the company
itself. The leading cases on this subject are Foss v. Harbottle, Mozley v.
Alston,
and Lord v. Governor and Company of Copper Mines. In Foss v.
Harbottle
two members of an incorporated company filed a bill against the directors and
others praying that the defendants might be compelled to make good the loss
sustained by the company by reason of the fraudulent acts of such directors.
The defendants demurred. The Court held that upon the facts stated the
continued existence of the Board of Directors de facto must be intended, that
the possibility of convening a general meeting of proprietors capable of
controlling the acts of the existing Board was not excluded by the allegations
of the bill, that in such circumstances there was nothing to prevent the
company from obtaining redress in its corporate character in respect of the
matters complained of, that therefore the plaintiffs could not sue in a form of
pleading which assumed the practical dissolution of the corporation and that
the demurrers must be allowed. The Court was further of opinion that the acts
of the directors complained of were capable of confirmation by the majority of
the members of the company and declined to interfere. In the course of his
judgment Sir James Wigram, V.C, observed (pages 491, 494):—
"The
first objection taken in the argument for the defendants was that the
individual members of the corporation cannot in any case sue in the form in
which this bill is framed. During the argument I intimated an opinion, to
which, upon further consideration, I fully adhere, that the rule was much too
broadly stated on behalf of the defendants. I think there are cases in which a
suit might properly be so framed. Corporations like this, of a private nature,
are in truth little more than private partnerships ; and in cases which may
easily be suggested, it would be too much to hold, that a society of private
persons associated together in undertakings, which, though certainly beneficial
to the public, are nevertheless matters of private property, are to be deprived
of their civil rights inter se, because in order to make their common objects
attainable the Crown or the legislature may have conferred upon them the
benefit of a corporate character. If a case should arise of injury to a
corporation by some of its members, for which no adequate remedy remained,
except that of a suit by individual corporators in their private characters,
and asking in such character the protection of those rights to which in their
corporate character they were entitled, I cannot but think that the principle
so forcibly laid down by Lord Cottenham in Wallworth v. Holt and other
cases, would apply, and the claims of justice would be found superior to any
difficulties arising out of technical rules respecting the mode in which
corporations are required to sue.
But,
on the other hand, it must not be without reasons of a very cogent character
that established rules of law and practice are to be departed from,—rules,
which, though in a sense technical, are founded on general principles of
justice and convenience, and the question is, whether a case is stated in this
bill, entitling the plaintiffs, to sue in their private character.……..but the
majority of the proprietors at a special general meeting assembled,
independently of any general rules of law upon the subject, by the very terms
of the incorporation in the present case, has power to bind the whole body, and
every individual corporator must be taken to have come into the corporation
upon the terms of being liable to be so bound. How then can this Court act in a
suit constituted as this is, if it is to be assumed, for the purposes of the
argument, that the powers of the body of the proprietors are still in
existence, and may be lawfully exercised for a purpose like that I have
suggested? Whilst the Court may be declaring the acts complained of to be void
at the suit of the present plaintiffs, who in fact may be the only proprietors
who disapprove of them, the governing body of proprietors may defeat the decree
by lawfully resolving upon the confirmation of the very acts which are the
subject of the suit. The very fact that the governing body of proprietors
assembled at the special general meeting may so bind even a reluctant minority,
is decisive to shew that the frame of this suit cannot be sustained whilst that
body retains its functions."
In
Mosley v. Alston, two
members of an incorporated railway company filed a bill in their individual
characters against the corporation and twelve other members, who were alleged
to have usurped the office of directors and to be exercising the functions
thereof, as a majority of the governing body, injuriously to the company's
interests, and praying that the twelve might be restricted from acting as
directors, and be ordered to deliver the company's common seal, property and
books to six other persons, who were alleged to be the only duly constituted
directors. Lord Cottenham, L.C, allowed a demurrer to the bill. In the first
place, he pointed out that if there had been no other objection to the bill,
the fact of its having been brought by shareholders, not on behalf of
themselves and others but in their individual characters only, was fatal. Then
he said that the more important objection was that the injury alleged was not
to the plaintiffs personally but to the corporation, without any reason being
assigned by the bill why the corporation did not put itself in motion to seek a
remedy. After observing that Foss v. Harbottle was
identical in principle with the case before him, Lord Cottenham said that the
Vice-Chancellor's observations in that case applied with greater force to the
present case because there (page 800):—
"The
bill expressly alleges that a large majority of the shareholders are of the
same opinion with them (the plaintiffs); and, if that be so, there is obviously
nothing to prevent the company from filing a bill in its corporate character to
remedy the evil complained of."
Finally
he relied on the ground that it was without precedent for the Court to
interfere "solely on the ground of the supposed invalidity of the title of
persons claiming to be corporate officers."
In
Lord v. Governor and Company of Copper Mines, demurrer
of a bill by one of the shareholders of an incorporated mining company on
behalf of himself and all other shareholders except the members of the
governing body who were the defendants, impeaching several transactions of that
body which it appeared had been sanctioned by majorities at general meetings of
the shareholders and amongst which was a project to vest all the property of
the company in trustees for the purpose of liquidating its affairs was allowed
notwithstanding some vague and general charges of fraud and misconduct on the
part of the defendants and an allegation that by the constitution of the
company no one but the governing body could convene a general meeting the
specific acts complained of not being clearly such as in the opinion of the
Court it was incompetent to a majority of shareholders to sanction. Lord
Cottenham, L.C., observed (page 751):—
"I
find all the complaints made by the individual shareholders to consist of acts
within the powers of the corporation, and all sanctioned by general meetings of
the shareholders and no allegation raising any case for the interference of a
Court of Equity with the exercise of such rights.
A
Court of Equity could not assume jurisdiction in such a case, without opening
its doors to all parties interested in corporations or joint stock companies or
private partnerships, who, although a small minority of the body to which they
belong, may wish to interfere in the conduct of the majority. This cannot be
done, and the attempt to introduce such a remedy ought to be checked for the
benefit of the community.
In
Foss v. Harbottle Sir James
Wigram acted on this principle, because the acts were capable of confirmation;
and in Mozley v. Alston I expressed
my strong approbation of Sir James Wigram's decision in that case.
These
authorities lay down the general principles which I have above enunciated.
These principles have been uniformly followed by the Courts in England and in
India.
The
principle that the Court will not interfere with the internal management of the
companies acting within their rights and in fact has no jurisdiction to do so
is based on the supremacy of the majority. As I have already observed in all
corporations and companies incorporated under the Indian Companies Act the
normal position is that the internal affairs of the corporations or the companies
are managed by a vote of the majority ; and members join the corporations or
the companies with full knowledge that the majority of the members are entitled
to exercise the powers and control the operations generally. This power which
has been conferred on the majority has, however, got to be exercised bona fide
and the Court interferes only to prevent unfairness or oppression. But subject
to that each member of the corporation or company may vote with regard to his
individual interests though these interests may be peculiar to himself and not
shared by the company. This is the limitation on the power conferred on the
majority which has been laid down in the case of Goodfellow v. Nelson Line
(Liverpool) Limited which has
been approved by the Judicial Committee of the Privy Council in British America
Nickel Corporation v. M. J.O' Brien. In the
latter case Viscount Haldane observed (pages 371, 373):—
"There
is, however, a restriction of such powers, when conferred on a majority of a
special class in order to enable that majority to bind a minority. They must be
exercised subject to a general principle, which is applicable to all
authorities conferred on majorities of classes enabling them to bind
minorities; namely, that the power given must be exercised for the purpose of
benefiting the class as a whole, and not merely individual members only.
Subject to this, the power may be unrestricted.
………But
their Lordships do not think that there is any real difficulty in combining the
principle that while usually a holder of shares or debentures may vote as his
interest directs, he is subject to the further principle that where his vote is
conferred on him as a member of a class he must conform to the interest of the
class itself when seeking to exercise the power conferred on him in his
capacity of being a member. The second principle is a negative one, one which
puts a restriction on the completeness of freedom under the first, without
excluding such freedom wholly."
In
this connection I may as well refer to the case of Brown v. British Abrasive
Wheel Co.,
where Astbury, J., discussed what constitutes the benefit of the company as a
whole. In that case the company was in great need of further capital. The
majority representing 98% of the shares were willing to provide this capital if
they could buy up the two per cent. minority. Having failed to effect this by
agreement, they proposed to pass an article enabling them to purchase the
minority shares compulsorily on certain terms therein mentioned, but were
willing to adopt any other mode of ascertaining the value that the Court
thought fit. It was held in the circumstances that the proposed article was not
just or equitable or for the benefit of the company as a whole, but was simply for
the benefit of the majority. It was not therefore an article that the majority
could force on the minority under Section 13 of the Companies (Consolidation)
Act, 1908. Astbury, J., observed (pages 295, 296):—
"In
Allen v. Gold Reefs of West Africa, Limited, the
majority of the Court of Appeal sanctioned, as against the only holder of fully
paid shares, a new article imposing a lien on fully paid shares. Lindley, M.R.,
said: 'The power thus conferred on companies to alter the regulations contained
in their articles is limited only by the provisions contained in the statute
and the conditions contained in the company's memorandum of association. Wide,
however, as the language of Section 50 [now Section 13] is, the power conferred
by it must, like all other powers, be exercised subject to those general
principles of law and equity which are applicable to all powers conferred on
majorities and enabling them to bind minorities. It must be exercised, not only
in the manner required by law, but also bona fide for the benefit of the
company as a whole, and it must not be exceeded.'
The
question therefore is whether the enforcement of the proposed alteration on the
minority is within the ordinary principles of justice and whether it is for the
benefit of the company as a whole. It find it very difficult to follow how it
can be just and equitable that a majority, on failing to purchase the shares of
a minority by agreement, can take power to do so compulsorily.
...In
default of further capital the company might have to go into liquidation. The
plaintiff is willing to risk that...It is merely for the benefit of the
majority. If passed, the majority may acquire all the shares and provide
further capital. That would be for the benefit of the company as then
constituted. But the proposed alteration is not for the present benefit of this
company."
This
discussion as to the power of the majority to bind the minority contains within
itself the limitations on the power of the majority. Subject to those
limitations, however, the powers of majority are supreme in matters of internal
management of the company. As was observed by James, L.J., in MacDougall v.
Gardiner:—
"I
think it is of the utmost importance in all these companies that the rule which
is well-known in this Court as the rule in Mozley v. Alston and Lord v.
Copper Mines' Company and Foss v.
Harbottle
should be always adhered to; that is to say, that nothing connected with
internal disputes between the shareholders is to be made the subject of a bill
by some one shareholder on behalf of himself and others, unless there be
something illegal, oppressive, or fraudulent—unless there is something ultra
vires on the part of the company qua company, or on the part of the majority of
the company, so that they are not fit persons to determine it; but that every
litigation must be in the name of the company, if the company really desire
it."
Mellish,
L.J., also observed in the same case (page 24):—
"I
think it is a matter of considerable importance rightly to determine this
question, whether a suit ought to be brought in the name of the company or in
the name of one of the shareholders on behalf of the others. It is riot at all
a technical question, but it may make a very serious difference in the
management of the affairs of the company. The difference is this:— Looking to
the nature of these companies, looking at the way in which their articles are
formed, and that they are not all lawyers who attend these meetings, nothing
can be more likely than that there should be something more or less irregular
done at them—some directors may have been irregularly appointed, some directors
as irregularly turned out, or something or other may have been done which ought
not to have been done according to the proper construction of the articles.
Now, if that gives a right to every member of the company to file a bill to
have the question decided, then if there happens to be one cantankerous member,
or one member who loves litigation, everything of this kind Will be litigated;
whereas, if the bill must be filed in the name of the company, then, unless
there is a majority who really wish for litigation, the litigation will not go
on. Therefore, holding that such suits must be brought in the name of the
company does certainly greatly tend to stop litigation.
In
my opinion, if the thing complained of is a thing which in substance the
majority of the company are entitled to do, or if something has been done
irregularly which the majority of the company are entitled to do regularly, or
if something has been done illegally which the majority of the company are
entitled to do legally, there can be no use in having a litigation about it, the
ultimate end of which is only that a meeting has to be called, and then
ultimately the majority gets its wishes. Is it not better that the rule should
be adhered to that if it is a thing which the majority are the masters of, the
majority in substance shall be entitled to have their will followed? If it is a
matter of that nature, it only comes to this, that the majority are the only
persons who can complain that a thing which they are entitled to do has been
done irregularly; and that, as I understand it, is what has been decided by the
cases of Mozley v. Alston and Foss v.
Harbottle.
In my opinion that is the rule that is to be maintained. Of course if the
majority are abusing their powers, and are depriving the minority of their
rights, that is an entirely different thing, and there the minority are
entitled to come before this Court to maintain their rights; but if what is
complained of is simply that something which the majority are entitled to do
has been done or undone irregularly, then I think it is quite right that nobody
should have a right to set that aside, or to institute a suit in Chancery about
it, except the company itself."
This
supremacy of the majority is therefore subject to the following exceptions
which are laid down in the authorities, viz., (1) where the act complained of
is ultra vires the company; (2) where the act complained of is a fraud on the
minority; and (3) where there is absolute necessity to waive the rule in order
that there may be no denial of justice. (Palmer's Company Precedents, Vol. I,
page 1246). As was observed by Lord Davey in Burland v. Earle:—
"It
is an elementary principle of the law relating to joint stock companies that
the Court will not interfere with the internal management of companies acting
within their powers, and in fact has no jurisdiction to do so. Again, it is
clear law that in order to redress a wrong done to the company or to recover
moneys or damages alleged to be due to the company, the action should prima
facie be brought by the company itself. These cardinal principles are laid down
in the well-known cases of Foss v. Harbottle and Mozley v. Alston and in
numberous later cases which it is unnecessary to cite. But an exception is made
to the second rule, where the persons against whom the relief is sought
themselves hold and control the majority of the shares in the company, and will
not permit an action to be brought in the name of the company. In that case the
Courts allow the shareholders complaining to bring an action in their own
names. This, however, is mere matter of procedure in order to give a remedy for
a wrong which would otherwise escape redress, and it is obvious that in such an
action the plaintiffs cannot have a larger right to relief than the company
itself would have if it were plaintiff, and cannot complain of acts which are
valid if done with the approval of the majority of the shareholders, or are
capable of being confirmed by the majority. The cases in which the minority can
maintain such an action are, therefore, confined to those in which the acts
complained of are of a fraudulent character or beyond the powers of the
company. A familiar example is where the majority are endeavouring directly or
indirectly to appropriate to themselves money, property, or advantages which
belong to the company, or in which the other shareholders are entitled to
participate, as was alleged in the case of Menier v. Hooper's Telegraph Works. It should
be added that no mere informality or irregularity which can be remedied by the
majority will entitle the minority to sue, if the act when done regularly would
be within the powers of the company and the intention of the majority of the
shareholders is clear. This may be illustrated by the judgment of Mellish,
L.J., in MacDougall v. Gardiner.
There
is yet a third principle which is important for the decision of this case. Unless
otherwise provided by the regulations of the company, a shareholder is not
debarred from voting or using his voting power to carry a resolution by the
circumstance of his having a particular interest in the subject-matter of the
vote. This is shewn by the case before this Board of North-West Transportation
Company v. Beatty. In that
case the resolution of a general meeting to purchase a vessel at the vendor's
price was held to be valid, notwithstanding that the vendor himself held the
majority of the shares in the company, and the resolution was carried by his
votes against the minority who complained."
This
position is further emphasised by another decision of their Lordships of the
Privy Council reported in Dominion Cotton Mills Company, Limited v. Amyot. In that
case Lord Macnaghten observed (page 551):—
"The
principles applicable to cases where a dissentient minority of shareholders in
a company seek redress against the action of the majority of their associates
are well-settled.... In order to succeed it is incumbent on the minority either
to shew that the action of the majority is ultra vires or to prove that the
majority have abused their powers and are depriving the minority of their
rights. It would be pedantry to go through the line of decisions by which those
principles have been established. But there is a passage in a recent judgment
of this Board in the case of Burland v. Earle, which has
the high authority of Lord Davey, so appose it to the circumstances of the
present case, that it may be useful to cite it at length," and Lord
Macnaghten cities the passage from the speech of Lord Davey which I have
hereinabove referred to. These are really the principles which govern the
actions which may be brought by a dissentient minority in respect of the acts
of the majority which normally are the governing factors in the internal
management of the companies.
The
second principle that, in order to redress a wrong done to the company or to
recover moneys or damages alleged to be due to the company, the action should
prima facie be brought by the company itself, does not require much
elaboration. It is a salutary rule the reason of which is to be found in the
observations of Sir James Wigram, V.C., in Foss v. Harbottle and the
observations of Mellish, L.J., in MacDougal v. Gardiner. This is,
however, a general rule. As was observed by Sir George Jessel, M.R., in Russell
v. Wakefield Waterworks Company:—
"But
the general rule being that the cestui que trust must sue, and not the
individual corporator who has only an ultimate beneficial interest, the only
point remaining to be considered is, whether there are any exceptions to the
general rule……….when you want to find the rule you must look to Foss v.
Harbottle,
where you will find the general rule is that which I have stated. But that is
not a universal rule ; that is, it is a rule subject to exceptions, and the
exceptions depend very much on the necessity of the case ; that is, the
necessity for the Court doing justice."
After
quoting the remarks of Sir James Wigram, V.C. in Foss v. Harbottle, Sir George
Jessel, M.R., proceeded to observe (page 480):—
"That
I take to be the correct law on the subject.
It
remains to consider what are those exceptional cases in which, for the due
attainment of justice, such a suit should be allowed. We are all familiar with
one large class of cases which are certainly the first exception to the rule.
They are cases in which an individual corporator sues the corporation to
prevent the corporation either commencing or continuing the doing of something
which is beyond the powers of the corporation. Such a bill, indeed, may be
maintained by a single corporator, not suing on be half of himself and of
others, as was settled in the House of Lords in the case of Simpson v.
Westminster Palace Hotel Company………
...But
that is not the only case. Any other case in which the claims of justice
require it is within the exception.
Another
instance occurred in the case of Atwool v. Merryweather in which
the corporation was controlled by the evildoer, and would not allow its name to
be used as plaintiff in the suit. It was said that justice required that the
majority of the corporators should not appropriate to themselves the property
of the minority, and then use their own votes at the general meeting of the
corporation to prevent their being sued by the corporation, and consequently in
a case of that kind the corporators who form part of the minority might file a
bill on their own behalf to get back the property or money so illegally
appropriated. It is not necessary that the corporation should absolutely refuse
by vote at the general meeting, if it can be shewn either that the wrongdoer
had command of the majority of the votes, so that it would be absurd to call
the meeting ; or if it can be shewn that there has been a general meeting
substantially approving of what has been done; or if it can be shewn from the
acts of the corporation as a corporation, distinguished from the mere acts of
the directors of it, that they have approved of what has been done, and have
allowed a long time to elapse without interfering, so that they do not intend
and are not willing to sue. In all those cases the same doctrine applies, and
the individual corporator may maintain the suit. As I have said before, the
rule is a general one, but it does not apply to a case where the interests of
justice require the rule to be dispensed with. I do not intend by the
observations I have made in any way to restrain the generality of the terms
made use of by the learned Judge who decided the case of Foss v. Harbottle."
These
observation of Sir George Jessel, M.R., go to show that the general principle
as to the action having to be brought prima facie by the company itself in
order to redress a wrong done to the company or to recover moneys or damages
alleged to be due to the company, is subject to exceptions, which are well
recognised. The position is thus summarized in Halsbury's Laws of England,
Hailsham Edition, Vol. V, p. 408, para. 675:—
"To
redress a wrong done to the company or to recover money or damages due to it
the action must prima facie be brought by the company itself. Where, however,
the persons against whom relief is sought hold and control the majority of the
shares, and will not permit an action to be brought in the company's name,
shareholders complaining may bring an action in their own names and on behalf
of the others, and they may do so also where the effect of preventing them so
suing would be to enable a company by an ordinary resolution to ratify an
improperly passed special resolution. In such an action the plaintiffs have no
larger right to relief than the company would have if plaintiff; they cannot
complain of acts which are valid if done with the approval of the majority of
shareholders, or are capable of being confirmed by the majority, and can only
maintain their action when the acts complained of are of a fraudulent character
or are ultra vires of the company, mere irregularity or informality which can
be remedied by the majority being insufficient."
The
reason for this exception is very forcibly brought out in the observations of
Sir W.M. James, L.J., in Menier v. Hooper's Telegraph Works:—
"It
is said, however, that this is not the right form of suit, because, according
to the principles laid down in Foss v. Harbottle, and other
similar cases, the Court ought to be very slow indeed in allowing a shareholder
to file a bill, where the company is the proper plaintiff. This particular case
seems to me precisely one of the exceptions referred to by Vice Chancellor Wood
in Atwool v. Merryweather, a case in
which the majority were the defendants, the wrongdoers, who were alleged to
have put the minority's property into their pockets. In this case it is right
and proper for a bill to be filed by one shareholder on behalf of himself and
all the other shareholders."
and
also in the observations of Lord Davey in Burland v. Earle above quoted.
I may also refer to the observations of Lindley, M.R., in Alexander v. Automatic Telephone
Company.
"It
is necessary, however, to consider the form of the action, and the relief which
can be given. The breach of duty to the company consists in depriving it of the
use of the money which the directors ought to have paid up sooner than they
did. I cannot regard the case as one of mere internal management which,
according to Foss v. Harbottle and
numerous other cases, the Court leaves the shareholders to settle amongst
themselves. It was ascertained and admitted at the trial that, when this action
was commenced, the defendants held such a preponderance of shares that they
could not be controlled by the other shareholders. Under these circumstances an
action by some shareholders on behalf of themselves and the others against the
defendants is in accordance with the authorities, and is unobjectionable in
form: see Menier v. Hooper's Telegraph Works. An action
in this form is far preferable to an action in the name of the company, and
then a fight as to the right to use its name. But this last mode of procedure
is the only other open to a minority of shareholders in cases like the
present."
As
a matter of fact where the majority is overbearing the minority it was held in
Mason v. Harris
that it was not necessary that a meeting of shareholders should first be called
before the bill could be filed by one shareholder on behalf of the others
against the company. Jessel, M.R., observed there (page 107):—
"As
a genera] rule the company must sue in respect of a claim of this nature, but
general rules have their exceptions, and one exception to the rule requiring
the company to be the plaintiff is, that where fraud is committed by persons
who can command a majority of votes, the minority can sue. The reason is plain,
as unless such an exception were allowed it would be in the power of a majority
to defraud the minority with impunity."
These
are thus the well-recognised exceptions to the second principle, viz., that in
order to redress a wrong done to the company or to recover moneys or damages
alleged to be due to the company, the action should prima facie be brought by
the company itself.
I
shall now turn to the facts of the present case, having regard to the
principles enunciated above. The resolutions dated October 8, 1944, and January
21, 1945, which are complained of by the plaintiffs have been challenged inter
alia on the ground that the same have been passed in fraud of the rights of the
minority and against the interests of the said society. Even though when
arguing issue No. (4-a) at the commencement Mr. M.V. Desai gave me to
understand that he was not relying upon fraud as such in support of his
contentions as regards the said resolutions, it became abundantly clear whilst
arguments proceeded, that the statement which he made to me on the earlier
occasion was due to some misapprehension. He made it clear that he was relying
upon fraud alleged to have been perpetrated by the majority of the members of
the society upon the minority consisting of the plaintiffs and several others
in the matter of the passing of the said resolutions and expressed his
willingness to furnish particulars of the fraud alleged in paragraphs 4(b), 4(c)
and 16 of the plaint if the Court thought that the particulars of fraud
contained in the plaint were insufficient. I shall, therefore, deal with this
part of the case on the basis that the plaint contains averments of fraud
against the majority of the members of the said society. If the majority of the
members of the society were guilty of any act which was ultra vires the company
or which was in fraud of the minority as has been alleged, it would not
constitute merely an infringement of the rights of the minority but would
within the meaning of the authorities I have discussed above be a wrong
perpetrated by them on the society itself. In the exercise of their power the
majority have got to look to the benefit of the society as a whole and not
merely to the benefit of the individual members thereof who constitute the
majority. The resolutions as passed must be for the benefit of not only the
majority of the members who support the same but also the minority who are a
dissentient minority and who obviously would be entitled to demonstrate before
the Court that the said resolutions are in fraud of their rights. It would
therefore be not merely a wrong perpetrated on the minority but the society as
a whole which is an aggregate of members consisting of the majority as well as
the minority. That being the position, the society would be the only person
entitled to institute this suit. In so far, however, as the majority of the
members of the society are in charge of the affairs of the society, and are
also in a position to outvote the minority in any meeting of the society which
may be called for the purpose, it would be impossible for the society to pass a
resolution sanctioning the institution of this suit or the further continuance
thereof, and it would be futile to expect the plaintiffs who are an admitted
minority to obtain the sanction or consent of the society to institute this
suit even though as I have already observed it is a suit for redressing a wrong
done to the society. Under these circumstances, I am of opinion that the case
as it stands at present is covered within the well-recognised exceptions to the
rule in Foss v. Harbottle and Mozley
v. Alston
and the plaintiffs are entitled to maintain this suit in the form which they
have done, viz., on behalf of themselves and all other members of the society.
I may
observe that for the purposes of this decision of mine I am not discussing any
further the nature of the fraud which is alleged to have been perpetrated by
the majority on the plaintiffs and the other members who constitute the
minority of the members of the society. The fraud alleged is not particularised
with such detail as it should have been done and it is necessary that the
plaintiffs should furnish to the defendants the particulars of the fraud
alleged by them in paras. 4(b), 4(c) and 16 of the plaint. I may none the less
refer to the observations of Marten, J., in
"Where
fraud is alleged, and where consequently it is alleged that the suit is within
one of the recognised exceptions to the principles laid down in Foss v.
Harbottle,
it will, I think, in general be found that the case is allowed to go to trial
to ascertain the facts before it is finally determined whether the action of
the majority can in fact bind the minority. This is because until the facts are
ascertained with some distinctness, it is difficult to say what is the precise
action of the majority, and whether it only amounts on the one hand to those
matters of internal management where the majority of the shareholders can
rightly impose their will upon the minority, or whether on the other hand it is
one of those cases in which the assets of the company are being improperly
distributed by an attempt to pay them into the pockets of the majority of
shareholders of the company or their friends at the expense of the
minority."
The
only thing which remains to be considered as regards the frame of the suit is
whether the plaintiffs would be entitled to bring this suit on behalf of
themselves and all other members of the society when defendants Nos. 2, 3 and
4, even though they are sued in their capacity as members of the managing
committee of the society, are also members of the society. Defendants Nos. 2, 3
and 4 are sued in a representative capacity as members of the managing
committee of the society which consists of 33 members. These 33 members
therefore are within the category of defendants and by reason of the description
of the plaintiffs in the title of the plaint would also be included within the
category of the plaintiffs. It is, therefore, contended that the same persons
cannot be plaintiffs as well as defendants even though they might be impleaded
in the suit in different capacities. I am of opinion that the objection is good
to the extent that it goes. It is a well-recognised elementary rule of
procedure that the same individual even in different capacities cannot be both
a plaintiff and a defendant, and this principle has been followed by our Court
in Rustomji v. Sheth Purshotamdas, Dadabhoy
Framjee v. Cowasji Dorabji, Ratanbai
v. Narayandas
and Chandulal v. Keshavlal. This rule
is, however, subject to exceptions in equity in cases where it would be
possible to ascertain the rights and liabilities of the parties in the event of
all the parties being present before the Court either in the group of
plaintiffs or defendants. Procedure as has been well said is but the
hand-maiden of justice and no rules of procedure as such can be allowed to
thwart the ends of justice. As a matter of fact the Courts in Chancery allowed
various exceptions to this mere rule of procedure. One finds in Mitford (Lord
Redesdale) on The Pleadings in Chancery, 5th edition [1847], at page 414,
instances where suits were allowed to be filed even though the defendants were
also included in the category of the plaintiffs, as for example:—
"Where
a suit is instituted for the payment of a sum of money, in the nature of a
debt, due to the whole body of the shareholders of a company, the suit may be
instituted by one of the shareholders on behalf of himself and all the other
shareholders. And in such a case, although the payment may be claimed from the
directors, who are made defendants for that purpose, it is correct not to
except them out of the number of shareholders on whose behalf the bill is
expressed to be filed ; because they are not sued as shareholders, but as
directors, and, in their character of shareholders, they would be entitled to
participate in the fruits of the suit: Mocatto v. Ingilby. And in
like manner where two or more shareholders in a numerous joint-stock company
sue on behalf of themselves and all other shareholders, and one of the
shareholders has acted as the agent of the company, the plaintiffs may sue on
his behalf in his character as shareholder, although they may make him a
defendant in his character of agent: Taylor v. Salmon."
The
above-mentioned passage goes to show that the Courts in Chancery did not allow
the ends of justice to be thwarted by being trammelled by the rules of
procedure like this in proper cases. The Courts in India are not merely Courts
of Law but are also Courts of Equity. Order XXX, rule 9, of the Civil Procedure
Code has enacted an equitable exception to the elementary rule of procedure
which I have stated above, in that it allows suits between a firm and one or
more of the partners therein and suits between firms having one or more
partners in common to be filed. In proper cases the Courts would, in spite of
that elementary rule of procedure, have the power to deal out justice between
the parties even disregarding the elementary rule of procedure which requires
that the same individual even in different capacities cannot be both a
plaintiff and a defendant. If it were necessary I would, following the passage
from Mitford which I have quoted above, hold that defendants Nos. 2, 3 and 4 in
their representative capacity as members of the managing committee of the
society are made defendants in a capacity different from that of the members of
the society who are within the description of the plaintiffs, and there is no
defect in the frame of the suit by reason of their having been included in the
category of the plaintiffs as members of the society claiming relief against
the defendants in their capacity as the members of the managing committee
thereof. The defect such as this in the frame of the suit by reason of the 33
members of the managing committee of the society being included in the category
of the plaintiffs as members of the society can however be remedied by allowing
to the plaintiffs an amendment by describing the plaintiffs in the title of the
plaint as members of the Arya Samaj, Bombay, on behalf of themselves and all
other members of the Arya Samaj, Bombay, being a society registered under the
Societies Registration Act, XXI of 1860, except the defendants. In that event
whatever objection there is to the frame of the suit based on the same parties
being plaintiffs as well as defendants to the suit would disappear.
There
now remain to be considered the two issues which have been raised by Mr. M.P.
Amin on behalf of defendants Nos. 2, 3 and 4, viz., whether the plaint
discloses any cause of action against them and whether they are necessary
parties to the suit. In this connection it may be observed that in para. 1 of
the plaint they have been described as "some of the members of the
managing committee of the said society," and are stated there to have been
sued on behalf of themselves and all members of the managing committee of the
society. In para. 16 of the plaint it is alleged that the managing committee
are about to complete the sale of the Shenwewadi property and purchase of the
Bangadwadi property, and in para. 17 of the plaint the plaintiffs have
submitted that defendants Nos. 2 to 4 should be restrained from completing the
said sale of Shenwewadi property and purchase of Bangadwadi property and from
acting on the said resolution dated October 8, 1944, and carrying the same into
effect. The prayer (c) of the plaint is based on these allegations against
defendants Nos. 2, 3 and 4. When one turns to the written statement of
defendants Nos. 2 to 4, they merely aver that the plaint discloses no cause of
action against them and that they are unnecessarily made parties to the suit.
There is no denial of the allegations which have been made in para. 16 of the
plaint that the managing committee is about to complete the sale of the
Shenwewadi property and purchase of the Bangadwadi property. In the absence of
a specific denial in that behalf, I would be entitled to assume that the
allegations in that behalf are admitted by defendants Nos. 2, 3 and 4. Mr. M.P.
Amin, however, pointed out para. 2 of the written statement of the defendants
Nos. 2 to 4 where they joined in all and singular the defences raised by the
1st defendant in his written statement as their own. When one turns to the
written statement of the 1st defendant the only traverse which he has made of
the allegations in para. 16 of the plaint is contained in the last sentence of
para. 21 thereof which runs:—
"This
defendant admits that the society is about to complete the sale of Shenwewadi
property and the purchase of the property at Bangadwadi and the same will be
completed in a few days."
This
statement even though it has been adopted in its entirety by defendants Nos. 2,
3 and 4 in their written statement, does not, in my opinion, amount to a
traverse of the allegations contained in para. 16 of the plaint that the
managing committee are about to complete the sale of the Shenwewadi property
and the purchase of the Bangadwadi property. Under these circumstances, I do
not see how defendants Nos. 2, 3 and 4 can contend that the plaint discloses no
cause of action against them. If it cannot be contended that the plaint does
not disclose any cause of action against them, it can certainly not be
contended that they are not necessary parties to the suit. On this preliminary
objection therefore I am not prepared to hold that the plaint discloses no
cause of action against defendants Nos. 2, 3 and 4 or that they are not
necessary parties to the suit.
In
the result I answer the issues which have been argued before me in the first
instance as under:—
Issues
raised by Mr. R.S. Billimoria.
(1) In
the affirmative.
(2) The
plaintiffs to be at liberty to amend the plaint by describing themselves as
members of the Arya Samaj, Bombay, on behalf of them selves and all other
members of the Arya Samaj, Bombay, being a society registered under the
Societies Registration Act, XXI of 1860, except the defendants.
The
suit as framed would then be maintainable.
(6)
In the negative. (7) In the negative.
Issues
raised by Mr. M.P. Amin.
(1)
In the affirmative. (2) In the affirmative.
As
regards issue No. (4-a) it is clear that the defendants are entitled to the
particulars of the fraud which has been pleaded by the plaintiffs, and I cannot
allow the suit to proceed in the absence of such particulars furnished by the
plaintiffs. Mr. M.V. Desai strenuously urged that the various allegations which
had been made by the plaintiffs in the plaint were sufficient to constitute
fraud and that there were sufficient particulars of fraud available in the
plaint itself. A careful perusal of the relevant paragraphs of the plaint,
however, reveals that there are no sufficient particulars of fraud which could
be culled out from the various allegations contained therein and that on the
vary statement of the case made by Mr. M.V. Desai in his opening there were
various facts which were relied upon by him as constituting fraud which did not
find their place in the various paragraphs of the plaint relied upon by him for
the purpose. I have therefore come to the conclusion that the plaintiffs are
bound to furnish to the defendants the particulars of the fraud which they want
to rely upon in support of their contentions set out in the plaint. I
accordingly order that the plaintiffs do make an affidavit giving particulars
of the fraud alleged by them in paras. 4(b), 4(c) and 16 of the plaint and
furnish a copy thereof to the defendants' attorneys within fourteen days. The
defendants will be at liberty to plead to the same and file a supplemental
written statement or written statements as they might be advised within
fourteen days of such affidavit of particulars made by the plaintiffs.
The
cost of the issues disposed of by me above and the cost of the supplemental
written statement or written statements will be reserved.
[1988] 64 COMP. CAS. 151 (SC)
SUPREME COURT OF
v.
Parle Bottling
RANGANATH MISRA AND M. M. DUTT, JJ.
MARCH 22, 1988
Kuldeep Singh, Miss
A. Subhashini, Mrs. Sushma Suri and B. Parthasarathy for the Appellants.
C. L. Sareen, O. K.
Khuller, R. C. Kohli and Mrs. H. Wahi Advocates for the Respondents.
Special leave granted.
This appeal is by special
leave. The appellant, who is the Deputy Chief Controller of Imports and
Exports, filed a complaint in the Court of the Chief Metropolitan Magistrate,
"On perusal of the
averments, it is seen that at the time the learned trial judge issued/processed
against the petitioners accused, the Department and the State had merely filed
a complaint case along with list of witnesses and documents. None of the
statements of witnesses or copies of documents were produced before the trial
judge. The complainant's verification statement is also not recorded. As such,
the order of issuance of process is clearly a result of non-application of mind
by the trial judge. Such order would mean that merely on filing a complaint the
process could be issued. It would be unjust to the accused if process is issued
against him by the Magistrate without first satisfying himself about the nature
of the case and whether there exist sufficient grounds for proceeding with the
case. Since this is not done, then in the instant case, the process issued
against petitioner No. 2 (managing director) is liable to be quashed on this
ground alone. Without short-circuiting the other grounds, it must be pointed
out that perusal of the complaint and in particular page 23 of the complaint
shows that the prosecution intends to charge petitioner No. 2 as the principal
offender along with petitioner No. 1-company. That is not possible for the
simple reason that offence under section 5 of the Imports and Exports (Control)
Act is done principally by the licensee (company in this case) and/or by the a
better to the offence. There are no allegations in the complaint that
petitioner No. 2 either aided or abetted in the contravention of licence
conditions by the petitioner No. 1-company. As such, on this ground also the
process issued against petitioner No. 2 is liable to be and is quashed and set
aside".
The criticism advanced by
the learned judge against the trying Magistrate is wholly untenable and is
perhaps applicable to the learned judge. If reference had been made to section
200, first proviso, clause (a), of the Code of Criminal Procedure, what has been
advanced as the most impressive ground for quashing the proceedings against
respondent No. 2 could not at all have been accepted. The learned judge
obviously has not cared to look into the procedural law applicable to the
factual situation before him. The learned judge also lost sight of the fact
that similar objections had once been raised and this High Court had refused to
entertain the same and the order of the High Court had been upheld here by
dismissing the special leave petition. The portion we have extracted from the
order of the High Court, suggests that the learned judge wanted to draw a
distinction between then and now by saying that the records of investigation
had not then been available. Records of investigation are not evidence in this case
and a complaint could not be quashed by referring to the investigation records
particularly when the petition of the complainant did allege facts which prima
facie show commission of an offence. The learned judge did note the fact that
the licensee was a company but lost sight of the fact that a company by itself
could not act. Obviously, the company has to act through someone. In the
petition of the complainant, there was a clear allegation that the managing
director had committed the offence acting on behalf of the licensee. If the
complainant's petition had been properly scrutinized, the second ground
advanced in the impugned order for quashing the proceedings against the
managing director could not have been utilised in the impugned order. Both ,the
grounds are wholly untenable and, therefore, the order of the High Court has
got to be reversed. We allow the appeal and vacate the order of the High Court.
Once the order of the High
Court is vacated, the order of the learned Magistrate would revive and the
prosecution as directed by the learned Magistrate has now to continue. The
petition of the complainant at page 21 of the paper-book shows that the offence
was committed between 1967 and 1969 which is some 20 years back. While we have
no sympathy for respondent No. 2 and we are clearly of the opinion that he has
no equity in his favour and the delay after the complaint had been filed has
been mostly on account of his mala fide move, we do not think it would be in
the interest of justice to allow a prosecution to start 20 years after the
offence has been committed. If we could convict respondent No. 2 in accordance
with law, we would have been prepared to do so taking the facts of the case and
the conduct of the respondent into consideration, but that would not be
possible within the framework of the law of procedure. We, therefore, do not
propose to allow the learned Magistrate to proceed with the trial of the, case
at this belated stage.
We accordingly direct the
case to be closed against respondent No. 2 without further delay. Ordinarily,
in a criminal case of this type, there would have been no order for costs. But,
keeping in view the background of the case, the manner in which respondent No.
2 has behaved and the fact that he is squarely responsible for delaying the
proceedings by reiterating the same contention twice over, we are of the
definite opinion that respondent No. 2 should be made to suffer exemplary
costs. We accordingly direct that he shall be called upon to pay a sum of Rs.
10,000 by way of costs and the said amount is to be deposited in the trial
court within one month hence, failing which the trial court shall have a
direction to recover the same as fine and pay the amount to the complainant.
Compliance shall be reported to the registry of this court.
High Court of
Delhi
v.
Hindustan General Industries Ltd.
Mohd.
Shamim, J.
Suit No. 129 of
1984
August
21, 1998
Section 3, read with section 5, of the
Companies Act, 1956 and Order XIV of Code of Civil Procedure, 1908 - Company -
Definition of - Plaintiff-Company sought to recover certain sum including
interest, alleged to have been paid to defendants by way of advance against
supply of certain machines on quotations submitted by defendant No. 1 (Company)
- Defendant No. 1 contested suit on various grounds, while defendant Nos. 2 and
3 (Directors) separately resisted plaintiff’s claim - Whether a company is a
corporate body with a separate existence inasmuch as it is an artificial person
with a perpetual succession and, thus, where permission was granted as per
resolution of plaintiff-company to file a suit against company (defendant No.
1), it would be wrong to treat it as permission to sue directors - Held, yes -
Whether where directors of company have entered into agreement for sale of
shares, company not being privy to contract, it would be impermissible to treat
company as being bound under contract - Held, yes
Facts
The plaintiff-Company, through the instant
suit, through its managing director RK, sought to recover certain sum,
including interest, stated to have been deposited with the defendants (company
and its directors) by way of advance for the price of certain machines to be
supplied by them including a deep-drying press. The plaintiff had entered into
a contract with the defendant No. 1, for supply of machines on
‘no-profit-no-loss’ basis and had, therefore, advanced certain sum against the
revised quotation submitted by the defendant No. 1. Defendant No. 1 had entered
into a contract with SEC, for the manufacture of the said deep drying press and
supplied to them in connection therewith material worth Rs. 91,482.96. They
also paid a sum of Rs. 60,000 to the SEC. In this way, a sum of Rs. 1,51,482.96
was paid to SEC. The plaintiff made various payments to defendant No. 1 to the
tune of Rs. 4,05,000.
The contract alluded to above also found a
mention in the agreement dated 24-1-1981, regarding sale of shares in between
the defendants and MR & RR. The said agreement was signed by defendant Nos.
2 and 3 also. Out of the machines which were to be supplied to the plaintiff by
defendant No. 1, one circuit cutting machine was bought by defendant No. 1 from
The defendants contested the suit, inter alia,
on the grounds: (1) that ‘RK’ was neither the managing director of the
plaintiff-company nor was he authorised to institute the present suit; (2) that
the suit was barred by time; (3) that they never received the entire payments
claimed to have been made by the plaintiff nor did they receive any advance
from the plaintiff; (4) that defendant Nos. 2 and 3 became directors only after
they purchased shares from shareholders subsequent to the signing of the
agreement and, therefore, they were not bound by the said agreement; and (5)
that, in fact, the plaintiff was liable to pay to defendant No. 1 a sum of Rs.
58,500, i.e., value of the circuit cutting machine and the deep drying press as
reduced by the amount of advance paid by the plaintiff. Both the defendant Nos.
2 and 3 separately resisted the plaintiff’s claim on the ground that there was
no privity of contract in between the plaintiff and defendant Nos. 2 and 3;
that they did not give any undertaking either for the liability of the amount
or for securing supply of any machinery to the plaintiff; and that the agreement
dated 24-1-1981 between ‘MR’ and ‘RR’ and defendant Nos. 2 and 3 regarding sale
of shares to the latter, did not stipulate any such conditions so as to bind
them to make any payment to the plaintiff.
Held
The resolution of the board of directors of
the plaintiff-company was the pivot round which the entire controversy with
regard to the present issues revolved. A close scrutiny of the said document
revealed that the board of directors while passing the said resolution
authorised ‘RK’ to file a suit against defendant No. 1 only. There was no
mention therein that a suit be also instituted against defendant Nos. 2 and 3.
Admittedly, defendant No. 1 was not a partnership firm. It was a corporate body
with a separate existence inasmuch as it was an artificial person with a
perpetual succession. It was not like a firm whose existence could not be
visualised in the absence of its partners. Thus, it would be a sheer travesty
to contend that the permission which was granted against defendant No. 1 could
also be treated as permission against defendant Nos. 2 and 3 as well. Thus, the
present suit was not a properly instituted suit against defendant Nos. 2 and 3.
Admittedly, the agreement dated 24-1-1981 was
an agreement in between ‘MR’ and ‘RR’ as the vendors on their own behalf and on
behalf of their friends, etc., other than directors and associates and
defendant Nos. 2 and 3 as the vendees, according to which the former sold
majority of their shares in favour of the latter. Thus, the said agreement was
in their individual capacity and if there was any breach of the agreement, the
same would give rise to a cause of action in favour of ‘MR’ and ‘RR’ to bring
forward a suit from defendant Nos. 2 and 3. The plaintiff admittedly was a
legal entity. It was not a party to the impugned contract. Hence, the plaintiff
would not be entitled to claim any amount through the present suit against
defendant Nos. 2 and 3.
Moreover, clause (vi) of the agreement simply
envisaged that in case the vendors were required to pay anything to the
authorities mentioned therein the said liability was to be met by defendant
Nos. 2 and 3. Admittedly, the plaintiff were not being required to pay anything
to the abovesaid authorities. Thus, the same could not be claimed from
defendant Nos. 2 and 3. Moreover, the present suit could by no stretch of
imagination be treated as a suit for breach of the contract. Consequently, no
action was maintainable under law as per the terms of the said clause against
defendant Nos. 2 and 3. There was thus no privity of contract between the
plaintiff and defendant Nos. 2 and 3.
As regards the limitation, admittedly, the
present suit had been filed for recovery of the balance amount which was paid
as advance for the purchase of certain goods. Hence, the proper article which
will govern the period of limitation in the present case would be article 13 of
the Limitation Act. It envisages ‘for the balance of money advanced in payment
of goods to be delivered the period of limitation would start running from the
date on which the goods ought to have been delivered’. The plaintiff placed the
order of the defendant No. 1, vide their letter dated 2-11-1979. The said order
was for the supply of as many as six machines. One of the said machines was a
deep drying press of 300 mt. capacity which was the bone of contention in
between the parties. One of the stipulations of the said order was that the
machines were to be supplied within three months from the date of the order.
Thus, the said machines were to be supplied by 2-2-1980. If the period of
limitation was to be computed from the said date, then the suit should have
been filed on or before 2-2-1983. There was no dispute with regard to the
placement of the said order on the said date. Thus, the period of limitation in
the present case would commence running from 2-2-1980 and it came to an end on
2-2-1983. The present suit was filed on 20-1-1984. Hence, the suit was barred
by time.
The agreement dated 24-1-1981 between the
parties was with regard to the sale and purchase of shares. Defendant Nos. 2
and 3 vide the said agreement agreed to purchase majority of shares held in
defendant No. 1 from its erstwhile Chairman and M.D. and other shareholders,
i.e., ‘MR’ and ‘RR’. Thus, the said agreement had got absolutely nothing to do
with the supply of the machinery. Moreover, even if the period of three years
was computed from the last payment made to defendant No. 1 by the plaintiff
still the present suit was not within time inasmuch as the same was filed on
20-1-1984.
The plaintiff then tried to seek sustenance
from a letter dated 23-1-1981, from ‘RR’ who was then acting as the managing
director of defendant No. 1 acknowledging the dues of Rs. 3,81,500 to the
plaintiff from the defendant. On a deeper scrutiny and read in the light of the
subsequent events, the said letter had been fabricated by the plaintiff in
collusion with ‘RR’ son of ‘MR’ who was the managing director of the defendant
No. 1 during those days. Thus, viewed from any angle, it was hopelessly barred
by limitation.
The plaintiff then contended that according to
the said agreement, the impugned machinery was to be purchased by the
plaintiff on ‘no-profit-no-loss’ basis. Defendant No. 1, being a company was in
no way connected with the said agreement.
In fact, it had got absolutely nothing to do
with the same. Hence, the mention therin that the machinery was to be supplied
on ‘no profit no loss’ basis did not lead one anywhere. It was a recital which
had got no meaning and had got no bearing. The said agreement was by ‘MR’ and
‘RR’ in their individual capacity and thus could not have bound defendant No.
1. The obligations which arose out of the said agreement and which defendant
Nos. 2 and 3 undertook to perform for the benefit of ‘MR’ and ‘RR’ were their
personal obligations. The said obligations could not be so stretched as to
bring within their domain defendant No. 1. If there was any grievance of ‘MR’
and ‘RR’ for the non-performance of any of the covenants they could seek no
doubt a redressal of the said grievance against defendant Nos. 2 and 3. However, they could do so in
their personal capacity. In view of the above, the said agreement was of no
avail to the plaintiff.
Moreover, the plaintiff, vide their letter
dated 2-11-1979, accepted the offer made by defendant No. 1 for the supply of
machines. The terms and conditions enumerated therein could not be changed
subsequently to the detriment of defendant No. 1 through the agreement dated
24-1-1981, which was pure and simple an agreement for the sale and purchase of
shares of defendant No. 1.
Defendant No. 1 company neither passed any
resolution to the effect to supply machinery on ‘no-profit no-loss’ basis nor
could it have passed any resolution to its detriment at the meeting of the
board of directors. Furthermore, defendant Nos. 2 and 3 could not have
participated in any such meeting in which they were interested in view of the
clear cut provisions of section 300.
Admittedly, defendant Nos. 2 and 3 wanted to purchase
the majority of the shares of defendant No. 1. Thus, with the said end in view
they must have entered into an agreement dated 24-1-1981, on certain terms and
conditions with ‘MR’ and ‘RR’. However, the said terms and conditions by no
stretch of imagination would be deemed to be binding on defendant No. 1
particularly when the said terms and conditions were to the detriment of
defendant No. 1. Thus, defendant No. 1 never agreed to supply the machinery on
‘no profit no loss’ basis to the plaintiff.
Thus, the plaintiff had miserably failed to
prove the terms and conditions on which the impugned machine was to be
supplied.
The agreement dated 24-1-1981 was of no avail
to the plaintiff in order to show and prove that the impugned machine was to be
supplied on ‘no profit no loss’ basis. Hence, the plaintiffs were not entitled
to the recovery of the sum claimed from the defendant. It was also not
entitled to any interest. The suit was, accordingly, dismissed.
S.N. Gupta and Ashish Mishra for the Plaintiff. Ishwar Sahai, Atul
Shankar and Jaisi Ram Goyal for the Respondent.
Judgment
1. The plaintiff
through the present suit wants to recover a sum of Rs. 3,54,217.04 including
interest amounting to Rs. 1,24,200 alleged to have been deposited with the
defendants by way of advance price of certain machines, including a 300 tonne
deep drying press.
2. The case of the
plaintiff briefly stated is as under : that the plaintiffs are a limited
liability company, Shri R.K. Bhalla is the managing director of the said company
and is, as such competent to bring forward the present suit and to sign and
verify the plaint. He has also otherwise been authorised to file the present
suit through a resolution dated 14-1-1984.
3. Defendant No. 1
had entered into a contract with the plaintiff for the supply of certain
machines, including a 300 tonne deep drying press on ‘no profit no loss’ basis.
The plaintiff in connection therewith deposited with defendant No. 1 a sum of
Rs. 4,05,000 by way of advance. Defendant No. 1 had oral discussions with the
plaintiff on 26-10-1979, and in pursuance thereof submitted a quotation for
L.P.G. cylinder plant/machinery. The said quotation was further followed by a
letter dated 2-8-1980, as a revised quotation. The same was accepted by the
plaintiff.
4. Defendant No. 1
had entered into a contract with Swadeshi Engg. Co., Mayapuri, New Delhi, for
the manufacture of the said deep drying press and supplied to them in
connection therewith material worth Rs. 91,482.96. They also paid a sum of Rs.
60,000 to the said Swadeshi Engg. Co. In this way, a sum of Rs. 1,51,482.96 was
paid to Swadeshi Engg. Co. The plaintiff made various payments to defendant No.
1 to the tune of Rs. 4,05,000, details whereof are as under :
|
|
|
(Rs.) |
|
2-11-1979 |
|
30,000 |
|
23-11-1979 |
Cheque No. 283902 NBI |
15,000 |
|
28-11-1979 |
Cheque No. 283903 NBI |
20,000 |
|
28-11-1979 |
Cheque No. 3905 |
30,000 |
|
2-1-1980 |
Cheque No. 3908 |
30,000 |
|
6-5-1980 |
Cash |
20,000 |
|
7-5-1980 |
Cheque No. 3910 |
20,000 |
|
8-5-1980 |
Cash |
20,000 |
|
12/19-5-1980 |
Cash 12/5 |
50,000 |
|
19-5-1980 |
Cash 19/5 |
20,000 |
|
23-5-1980 |
Cheque No. 3911 |
10,000 |
|
10-8-1980 |
Cash |
35,000 |
|
10-11-1980 |
Cash for Elec. bill |
17,000 |
|
9-12-1980 |
Cheque No. 3914 |
1,00,000 |
|
|
|
4,17,000 |
|
Less : received cash on
13-11-1980 |
|
12,000 |
|
|
|
4,05,000 |
5. The contract
alluded to above also finds a mention in the agreement dated 24-1-1981, in between
the defendants and Shri M. R. Bhalla and Shri R. R. Bhalla, residents of 51,
Anand Lok, New Delhi. The said agreement was signed by defendant Nos. 2 and 3
also. Out of the machines which were to be supplied to the plaintiff by
defendant No. 1, one circuit cutting machine was bought by defendant No. 1 from
Bombay valued at Rs. 23,500 and the same was delivered to the plaintiff.
Defendant No. 1 in this way paid to the plaintiff a sum of Rs. 1,51,482.92 and
Rs. 23,500 by way of price of the said machine thereby leaving a balance of Rs.
2,30,017.04 outstanding against the defendants. Defendant No. 1 is thus liable
to pay the said amount to the plaintiff along with interest at the rate of 18
per cent per annum from 20-12-1980, till the date of the institution of the
suit, amounting to Rs. 1,24,200. The plaintiffs thus claim a sum of Rs.
3,54,217.04 from the defendants.
6. All the
defendants are jointly and severally liable to pay the said amount to the plaintiff.
Defendant Nos. 2 and 3 had undertaken to secure the supply of the said
machinery for the plaintiff on behalf of defendant No. 1. Thus, they are also
liable for the said amount. The plaintiff had already taken delivery of the
said deep drying press from Swadeshi Engg. Co. after spending a considerable
amount. It was the obligation of defendant No. 1 to secure the same from
Swadeshi Engg. Co. and to supply the same to the plaintiff. The said Swadeshi
Engg. Co. did not give delivery of the said machine to defendant No. 1 as they
failed to make necessary payment by way of price of the same. Since the defendants
have failed to make payment to the plaintiff of the various amounts paid to
them by way of advance in connection with the supply of the said machine, hence
arose the necessity for the institution of the present suit.
7. The defendants
have put in contest, inter alia, on the following grounds: that Shri R.K.
Bhalla is neither the managing director of the plaintiff-company nor is he
authorised to institute the present suit and to sign and verify the plaint. The
suit is barred by time.
8. Defendant No. 1
had written a letter dated 26-10-1979, to the plaintiff giving therein
quotations for supply of different types of machines to the plaintiff. The
plaintiff by their letter dated 2-11-1979, accepted the said offer. The
delivery period for the said machine was three months from the date of
acceptance of the said order.
Defendant No. 1 never received from the
plaintiff the payments mentioned, vide para 3 of the plaint. The books of
account of defendant No. 1 show a sum of Rs. 3,15,000 to have been received by
way of advance from the plaintiff while the cost of the said deep drying press
was Rs. 3,50,000 excluding excise duty and other statutory levies. It is also
wrong and false that the machine was to be supplied by defendant No. 1 to the
plaintiff on ‘no profit no loss’ basis. There is no record of defendant No. 1
with regard to the receipt of the letter dated 21-8-1980. It is wrong and false
that the plaintiff paid a sum of Rs. 4,05,000 to defendant No. 1 by way of
advance. In fact, they paid only a sum of Rs. 3,15,000. Shri M.R. Bhalla and
Shri R.R. Bhalla and various other shareholders of defendant No. 1 sold their
shares to defendant Nos. 2 and 3 and other different persons. Defendant Nos. 2
and 3 became directors of defendant No. 1 after the purchase of the said
shares and subsequent to the signing of the agreement dated 24-1-1981.
Defendant No. 1 was not a party to the said agreement. Consequently, defendant
No. 1 are not bound by the said agreement. It is wrong and false that a sum of
Rs. 2,30,017.04 is due from defendant No. 1 to the plaintiff. However, it is
true that the plaintiff supplied a circuit cutting machine valued at Rs. 23,500
and a deep drying press of the value of Rs. 3,50,000. Thus, the total value of
the machinery supplied to the plaintiff was more than the amount paid by the
plaintiff to defendant No. 1. Defendant No. 1 received from the plaintiff a sum
of Rs. 3,15,000. Hence, the plaintiff are liable to pay to defendant No. 1 a
sum of Rs. 58,500. In this way nothing is due to the plaintiff from defendant
No. 1. Hence, there is no question of payment of interest by defendant No. 1
to the plaintiff. The suit is thus liable to be dismissed.
9. Defendant Nos.
2 and 3 have resisted the claim of the plaintiff through their separate
written statements. According to them, there is no privity of contract in
between the plaintiff and defendant Nos. 2 and 3. Defendant Nos. 2 and 3 did
not give any undertaking to the plaintiff that they would be liable for the
said amount. It is also wrong and false that the defendants had undertaken to
secure the supply of any machinery to the plaintiff. By the agreement dated
24-1-1981, the vendors in the said agreement agreed to secure retirement or
resignation of the then team of the directors on the board of defendant No. 1.
The agreement dated 24-1-1981, is in between Mulkh Raj Bhalla and Raj Rattan
Bhalla on the one hand, and defendant Nos. 2 and 3 on the other. They agreed to
sell their shares and those of their friends and relatives in the said company
to defendant Nos. 2 and 3. The said agreement was by Mulkh Raj Bhalla and Raj
Rattan Bhalla in their individual capacity. Defendant Nos. 2 and 3 are thus in
no way liable to pay anything to the plaintiff. In any case, the agreement
dated 24-1-1981, does not stipulate any such conditions which binds defendant
Nos. 2 and 3 to make any payment to the plaintiff. The suit is false and
frivolous. It is liable to be dismissed.
10. The following
issues were framed by the learned predecessor of this Court, vide order dated
14-5-1985 :
1. Whether the suit is properly instituted ?
2. Whether the suit is barred by limitation ?
3. Whether
there is any privity of contract between the plaintiff and defendant Nos. 2 and
3 ?
4 Whether
the plaintiff entered into a contract with defendant No. 1 for supply of
machinery being 300 tonne deep drying press and other machinery on ‘no profit
no loss’ basis, and whether the plaintiff deposited with defendant No. 1 a sum
of Rs. 4,05,000 as advance towards the same ?
5. What
were the terms of the agreement for supply of the aforesaid machinery to the
plaintiff by defendant No. 1 ?
6. What
is the effect of agreement dated 24-1-1981, between Shri M. R. Bhalla and Shri
R. R. Bhalla on the one part and defendant Nos. 2 and 3 on the other part for
transfer of shares of defendant No. 1, vis-a-vis, the agreement for sale of
machinery in question ?
7. Whether
defendant No. 1 had placed orders with Swadeshi Engg. Co., Maya Puri for
manufacture of 300 tonne deep drying press to be supplied to the plaintiff and
whether defendant No. 1 paid a sum of Rs. 60,000 and supplied certain machinery
parts valued at Rs. 91,482.95 to Swadeshi Engg. Co. and if so, to what effect ?
8. Whether
the plaintiff were entitled to take delivery of the aforesaid machinery direct
from Swadeshi Engg. Co. and whether the plaintiff made any further payment to
Swadeshi Engg. Co. and if so, to what effect ?
9. Whether
issue Nos. 7 and 8 can be decided in the absence of Swadeshi Engg. Co. and for
that matter is not Swadeshi Engg. Co. a necessary party to the suit ?
10.Whether the plaintiff received
one circuit cutting machine of the value of Rs. 23,500 from defendant No. 1
under the aforesaid contract and if so, to what effect ?
11.Whether the plaintiff is
entitled to a sum of Rs. 2,30,017.04 (Rs. 4,05,000 minus Rs. 1,51,482.96 and
minus Rs. 23,500) under the aforesaid contract with defendant No. 1 ?
12.Whether the plaintiff is
entitled to any interest and if so, at what rate and for what period ?
13.Relief.
Issue Nos. 7, 8, 9 and 10.—The above issues
were deleted, vide order dated 4-8-1998, as per the above statements of the
learned counsel for the parties made on the said date.
Issue Nos. 1 and 3.—Both these issues are
being taken up together as the same can be conveniently disposed of at one and
the same time.
11. The plaintiff
in order to show and prove that the present suit is a properly instituted suit have
examined P.W. 6, Shri RR Bhalla. He has deposed to the fact that a resolution
was passed through a meeting of the board of directors held on 14-1-1984, copy
whereof is exhibit P.W. 6/3, wherein Shri R. K. Bhalla, managing director, was
authorised to file a suit against defendant No. 1 for recovery of the
remaining amount which was paid to defendant No. 1 by way of advance for the
purchase of the machinery. To the same effect is the statement of P.W. 7 Shri
RK Bhalla. The learned counsel on the strength of the said document and the
above statements has vehemently contended that the present suit is a properly
instituted suit and P.W. 7 Shri RK Bhalla is fully competent to sign and verify
the plaint and to bring forward the present suit.
The learned counsel for the defendant, Mr.
Ishwar Sahai, senior advocate, has urged to the contrary.
12. It is manifest from the above that the learned counsel for the
plaintiff Mr. Gupta while so arguing has drawn sustenance from the impugned
resolution of the board of directors, exhibit P.W.6/3. Thus, exhibit P.W. 6/3
is the pivot round which the entire controversy with regard to the present
issues revolve. A close scrutiny of the said document reveals that the board of
directors while passing the said resolution authorised Shri RK Bhalla to file a
suit against defendant No. 1 only, i.e., Hindustan General Industries Ltd.,
Nangloi. There is no mention therein that a suit be also instituted against
defendant Nos. 2 and 3. Thus, the learned counsel while construing the said
resolution has tried to read therein much more than what is contained therein.
I thus feel he cannot be permitted to do so in the eye of law.
13. The learned
counsel for the plaintiff has contended that once a permission was granted to
institute a suit against defendant No. 1 it implies thereby that the said
permission can be treated and would be a permission against defendant Nos. 2
and 3 who are the directors of defendant No. 1. The contention of the learned
counsel is without any force. Admittedly, defendant No. 1 is not a partnership
firm. It is a corporate body with a separate existence inasmuch as it is an
artificial person with a perpetual succession. It is not like a firm whose
existence cannot be visualised in the absence of its partners. Thus, it would
be a sheer travesty to contend that the permission which was granted against
defendant No. 1 can also be treated as permission against defendant Nos. 2 and
3 as well. Thus, it can be safely concluded from the above discussion that the
present suit is not a properly instituted suit against defendant Nos. 2 and 3.
14. It has been urged
for and on behalf of the plaintiff that the order for supply of goods was
placed on defendant No. 1 and advance payment was also made in connection
therewith by the plaintiff to defendant No. 1. Defendant Nos. 2 and 3 stood
guarantee for the proper execution of the said contract, being the directors of
defendant No. 1. Hence, in case of the failure of defendant No. 1 to return the
said advance payment the same can be recovered from defendant Nos. 2 and 3. The
learned counsel for the plaintiff Mr. Gupta has placed much reliance to
substantiate his contention on clause (vi) of the agreement dated 24-1-1981
(exhibit P.W.6/1.)
15. Since we are
concerned with the construction of the said clause, it would be just and proper
to carefully examine the said clause before proceeding any further in the
matter which is in the following words :
“The vendees have undertaken and bound
themselves to ensure that the vendors are not made liable for any past, present
or future liability, financial towards banks, Government bodies, Railway Board
or anyone else having claim against the company. They will indemnify the
vendors if they for any reason whatsoever are called upon or made to pay.”
16. The learned
counsel inspired by the said clause contained in the aforementioned agreement
has vehemently contended that the said clause is sufficient enough to fasten
the liability on the head of defendant Nos. 2 and 3 in case of failure of
defendant No. 1 to make payment. The learned counsel for defendants, Mr. Ishwar
Sahai and Mr. Jaisi Ram Goyal, have on the other hand, argued that the learned
counsel for the plaintiff has construed amiss clause (vi) alluded to above.
According to them, there is absolutely nothing in the said clause to assist and
help the plaintiff to recover the alleged advance payment made by them to
defendant No. 1.
17. Let us now see as
to on whose side the truth is ? Admittedly, the impugned agreement exhibit P.W.
6/1 is an agreement in between Shri M. R. Bhalla, Chairman of Hindustan
General Industries Ltd., and Shri R.R. Bhalla, Managing Director of Hindustan
General Industries Ltd., as the vendors on their own behalf and on behalf of
their friends, relatives other directors and associates, who are registered
shareholders of Hindustan General Industries Ltd., and defendant Nos. 2 and 3.
The said Shri M. R. Bhalla and Shri R. R. Bhalla and other shareholders sold
majority of their shares through the impugned agreement in favour of defendant
Nos. 2 and 3. Thus, the said agreement in between Shri M.R. Bhalla and Shri
R.R. Bhalla is in their individual capacity to sell shares in defendant No. 1
company to defendant Nos. 2 and 3. Thus, if there is any breach of the said
agreement the same would give rise to a cause of action in favour of Shri M. R.
Bhalla and Shri R.R. Bhalla to bring forward a suit from defendant Nos. 2 and
3. The plaintiff admittedly is a legal entity. It was not a party to the
impugned contract. Hence, the plaintiff would not be entitled to claim any
amount through the present suit against defendant Nos. 2 and 3.
18. There is another
aspect of the matter. A close scrutiny of clause (vi) of the agreement referred
to above would reveal that it simply envisages that in case the vendors were
required to pay anything to the authorities mentioned therein the said
liability was to be met by defendant Nos. 2 and 3. Admittedly, the plaintiffs
are not being required to pay anything to the abovesaid authorities. Thus, the
same cannot be claimed from defendant
Nos. 2 and 3. Moreover, the present suit can by no stretch of
imagination be treated as a suit for breach of the contract. Consequently, no
action is maintainable under law as per the terms of the said clause against
defendant Nos. 2 and 3. It can be safely concluded therefrom that there is no
privity of contract between the plaintiff and defendant Nos. 2 and 3.
19. Issue No. 2—The
learned counsel for defendant No. 1, Mr. Ishwar Sahai, senior advocate, has
urged with all the vehemence at his command that the present suit is hopelessly
barred by time. According to the learned counsel, the present suit has been
filed for recovery of the remaining advance payment which was alleged to have
been made by the plaintiff to defendant No. 1 in connection with certain
machineries which were to be supplied by defendant No. 1 to the plaintiff which
they failed to do. According to him, the present case is to be governed by
article 13 of the Limitation Act. Article 13 provides that when a suit is filed
for the balance of the money advance in payment of goods to be delivered, then
the period of limitation would start running from the date when the goods ought
to have been delivered. The learned counsel for the plaintiff, Mr. Gupta, on
the other hand, has urged to the contrary. According to him, the suit is well
within time inasmuch as the same was filed on 20-1-1984, i.e., within three
years from the date of the execution of the agreement dated 24-1-1981 (vide
exhibit P.W. 6/1) as the period of limitation (which is three years) would
start running from the date of the agreement. The learned counsel in support of
his argument has led me through article 113 of the Limitation Act which deals
with a contingency when there is no period of limitation provided elsewhere in
the Schedule under the Limitation Act.
20. I am sorry, I am
unable to agree with the above contention of the learned counsel for the
plaintiff. It is manifest from article 113 that the said article would come
into operation only in those discerning few cases where there is no limitation
provided in the Schedule under the Limitation Act. In such an eventuality the
three years period would be computed for the institution of the suit from the
date when the right to sue accrues. Admittedly, the present suit has been filed
for recovery of the balance amount which was paid as advance for the purchase
of certain goods. Hence, the proper article which will govern the period of
limitation in the present case would be article 13. I am tempted here to
reproduce the provisions of the said article in support of my above view. It
envisages “for the balance of money advanced in payment of goods to be
delivered the period of limitation would start running from the date on which
the goods ought to have been delivered”. The plaintiff placed the order on the
defendant No. 1, vide their letter dated 2-11-1979 (exhibit D-1). The said
order was for the supply of as many as six machines mentioned at serial numbers
1 to 6 in the body of the said letter. One of the said machines was a deep
drying press of 300 mt. capacity, referred to at serial No. 1 of the letter,
which is the bone of contention in between the parties. One of the stipulations
of the said order was that the machines were to be supplied within three months
from the date of the order. Thus, the said machines were to be supplied by
2-2-1980. If the period of limitation is to be computed from the said date then
the suit should have been filed on or before 2-2-1983. There is no dispute with
regard to the placement of the said order on the said date. This fact has been
admitted by P.W.6 Shri R.R. Bhalla in his examination-in-chief. He has got this
to say on this point. “The quotation submitted by defendant No. 1 was accepted
by the plaintiff, vide agreement dated November 2, 1979, which is exhibit.
D-1”. Thus, the factum of the acceptance of the order on the terms and
conditions enumerated in the letter dated 2-11-1979 (exhibit D-1), is very
much admitted by the plaintiff. Hence, they cannot wriggle out of their words.
They are very much bound by them. Thus, the period of limitation in the present
case would commence running from 2-2-1980, and it came to an end on 2-2-1983.
The present suit was filed on 20-1-1984. Hence, the suit is barred by time.
21. The learned
counsel for the plaintiff in his anxiety to bring the present suit within time
raised different pleas during the course of his arguments. However, they are of
no avail to him. Para 9 of the plaint deals with the question of limitation.
The plaintiffs are very much bound by the averments made therein. It has been
stated therein that since the defendant acknowledged their liability to supply
the machinery, vide agreement dated 24-1-1981. Consequently, the period of
limitation would start running from the said date and if three years are so
counted from the said date then the suit is well within time inasmuch as the
same was filed on 20-1-1984. The contention of the learned counsel does not
hold any water. The said agreement in between the parties is with regard to the
sale and purchase of the shares. Defendant Nos. 2 and 3, vide the said
agreement agreed to purchase majority of shares held in defendant No. 1
company from its erstwhile chairman and managing director and other shareholders,
i.e., Shri M.R. Bhalla and Shri R.R. Bhalla. Thus, the said agreement has got
absolutely nothing to do with the supply of the machinery.
22. The learned
counsel for the plaintiff has then contended that defendant No. 1 made payments
to the plaintiff on different dates. The same is tantamount to acknowledgement
of liability. The period of limitation would commence from the different dates
on which said payments were made. He has in this connection referred to the
entries in the books of account of the defendant in connection with the account
of the plaintiff. The said entries are exhibit D-3 to exhibit D-12. The said
entries are not tantamount to the acknowledgement of liability. The last entry
in connection therewith is dated 11-12-1980, on which date payment of Rs. 1
lakh was made to defendant No. 1. The said payments have been adverted to in
para 3 of the plaint. Assuming arguendo, even if the period of limitation of
three years is computed from the last payment still the present suit is not within
time inasmuch as the same was filed on 20-1-1984.
23. The learned
counsel for the plaintiff has then during the course of his arguments also
tried to seek sustenance from a letter dated 23-1-1981, written by Shri Raj
Rattan Bhalla who was then acting as the managing director of defendant No. 1
company to the plaintiff (vide exhibit P.W.6/2), wherein there is an
acknowledgement that a sum of Rs. 3,81,500 is due to the plaintiff from the
defendant. The learned counsel for the plaintiff has argued on the basis of the
said letter that it is a clear case of acknowledgement of liability. Hence, the
period of limitation should be computed from the last date. The contention of
the learned counsel at first blush may appear to be of some substance but on a
deeper scrutiny and read in the light of the subsequent events is without any
merit. Admittedly, the said letter was written on 23-1-1981, by Shri Raj Rattan
Bhalla then director of the defendant No. 1 to the plaintiff wherein he stated
that a sum of Rs. 3,81,500 was due to the plaintiff from the defendant.
However, on the next day in the agreement dated 24-1-1981 (vide exhibit
P.W.6/1), to which Shri Raj Rattan Bhalla is a party there is a reference to
the advance payment made by Raj Cylinders (plaintiff) to defendant No. 1 and it
is shown to be in the neighbourhood of about Rs. 3 or 4 lakh, vide clause
(vii) of exhibit P.W.6/1. In view of the above, the question which comes to the
tip of the tongue is as to why an exact figure of the advance payment did not
find a mention in the agreement dated 24-1-1981, which was of a subsequent date
when it was known to Shri Raj Rattan Bhalla on 23-1-1984, that an exact amount
of Rs. 3,81,500 had been paid by the plaintiff to the defendant. This goes to
show that the said letter had been fabricated by the plaintiff in collusion
with Raj Rattan Bhalla, son of Shri M. R. Bhalla who was the managing director
of the defendant No. 1 company during those days. In view of the above
discussion, I am of the view that viewed from any angle even then the suit
filed by the plaintiff is not within time. It is hopelessly barred by
limitation. Issue No. 2 is decided accordingly.
24. Issue Nos. 4, 5
and 6.—All the above three issues are inter-connected, hence, they are being
taken up together for the purpose of disposal as the same points are to be gone
into while disposing of them.
The learned counsel for the plaintiff in order
to show and prove that the contract with regard to the supply of deep drying
press was entered into on ‘no profit no loss’ basis has led me through the
agreement dated 24-1-1981 (vide exhibit P.W.6/1). It is true that there is a
mention in the said agreement with regard to the sale and purchase of machinery
on ‘no profit no loss’ basis. The learned counsel on the basis of the said
recital in the said agreement wants this Court to conclude therefrom that the
impugned machinery was to be purchased by the plaintiff on ‘no profit no loss’
basis.
25. The learned
counsel for the defendant, Mr. Ishwar Sahai, senior advocate, has refuted the
said contention. He has contended that the said agreement dated 24-1-1981
(exhibit P.W.6/1), was for the purchase and sale of the shares. Defendant Nos.
2 and 3, the directors of defendant No. 1 now, wanted to purchase the majority
of the shares of defendant No. 1 from Shri M. R. Bhalla, then chairman of the
defendant No. 1 and Shri R.R. Bhalla, managing director of defendant No. 1,
vide the impugned agreement. Defendant No. 1 which is a company was in no way
connected with the said agreement. In fact, it has got absolutely nothing to do
with the same. Hence, the mention therein that the machinery was to be supplied
on ‘no profit no loss’ basis does not lead us anywhere. It is a recital which
has got no meaning and has got no bearing. The said agreement was by Shri M. R.
Bhalla and Shri R.R. Bhalla in their individual capacity and, thus, could not
have bound defendant No. 1. The obligations which arose out of the said
agreement and which defendant Nos. 2 and 3 undertook to perform for the benefit
of Shri M.R. Bhalla and Shri R.R. Bhalla were their personal obligations. The
said obligations cannot be so stretched as to bring within their domain
defendant No. 1. If there is any grievance of Shri M.R. Bhalla and Shri R.R.
Bhalla for the non-performance of any of the covenants they can seek no doubt a
redressal of the said grievance against defendant Nos. 2 and 3. However, they
can do so in their personal capacity. Furthermore, a forum was also settled
for the redressal of the grievances, if any, through arbitration and an
arbitrator was to be appointed by mutual consent who was to be a person not
lesser in rank than a retired judge of a High Court. Thus, the said parties are
bound by the said term in the agreement. In view of the above, the said
agreement dated 24-1-1981, vide exhibit P.W.6/1 is of no avail to the
plaintiff.
26. There is another
side of the picture. It has already been observed above while disposing of
issue No. 2 that the plaintiff, vide their letter dated 2-11-1979 (exhibit
D-1), accepted the offer made by defendant No. 1 for the supply of machines.
The terms and conditions enumerated in the said letter cannot be changed
subsequently to the detriment of defendant No. 1 through the agreement dated
24-1-1981 (exhibit P.W.6/1) which is pure and simple an agreement for the sale
and purchase of shares of defendant No. 1 company. Defendant No. 1 company
neither passed any resolution to the effect to supply machinery on ‘no profit
no loss’ basis nor could it have passed any resolution to its detriment at the
meeting of the board of directors. Furthermore, defendant Nos. 2 and 3 could
not have participated in any such meeting in which they were interested in view
of the clear cut provisions of section 300 of the Companies Act, 1956. The
previsions of section 300 can be referred to with profit. It runs as under :
“Interested director not to participate or
vote in Board’s proceedings—(1) No director of a company shall, as a director,
take any part in the discussion of, or vote on, any contract or arrangement
entered into, or to be entered into, by or on behalf of the company, if he is
in any way, whether directly or indirectly, concerned or interested in the
contract or arrangement; nor shall his presence count for the purpose of forming
a quorum at the time of any such discussion or vote; and if he does vote, his
vote shall be void.”
27. Admittedly,
defendant Nos. 2 and 3 wanted to purchase the majority of the shares of defendant
No. 1. Thus with the said end in view they must have entered into an agreement
dated 24-1-1981, vide exhibit P.W.6/1 on certain terms and conditions with Shri
M.R Bhalla and Shri R.R. Bhalla. However, the said terms and conditions by no
stretch of imagination would be deemed to be binding on defendant No. 1
particularly when the said terms and conditions are to the detriment of
defendant No. 1. It can thus be held that defendant No. 1 never agreed to
supply the machineries on no profit no loss basis to the plaintiff.
It thus brings us to the question as to
whether a sum of Rs. 4,05,000 was paid by the plaintiff to defendant No. 1 by
way of advance for the purchase of the machinery as alleged in para 3 of the
plaint. Out of the 14 payments which find a mention in para 3 of the plaint,
defendant No. 1 have challenged only the four payments, i.e., the payments of
Rs. 30,000 dated 2-11-1979, Rs. 20,000 dated 7-5-1980, Rs. 35,000 dated
10-8-1980, and Rs. 17,000 dated 10-11-1980. Besides the above the plaintiff
have also alleged the receipt of Rs. 12,000 from defendant No. 1 though the
same has been denied by the defendant.
28. The plaintiff in
order to show and prove that in fact they made the said payments have placed on
record receipts exhibit P.W.4/1, dated 10-11-1980, in regard to payment of Rs.
17,000 exhibit P.W.4/2, dated 10-8-1980, for Rs. 35,000, exhibit P.W. 4/3,
dated 7-5-1980, for Rs. 20,000 and photocopy of the receipt dated 2-11-1979, in
the sum of Rs. 30,000. The learned counsel further contends that the said
receipts are on the letter-head of defendant No. 1. The said receipts bear the
initials of P.W.4 Shri P.K. Bhalla, a personnel officer of defendant No. 1
P.W.4 Shri P.K. Bhalla has further deposed to the fact that he did receive the payment
for and on behalf of defendant No. 1 and issued the said receipts in token
thereof. The learned counsel has then urged that the said payments are also
duly reflected in the account books of the plaintiff-company which have been
placed on the file of this Court. The learned counsel in this connection has
led me through the cash book which was being maintained at the relevant time by
the plaintiff-company, the extract whereof is exhibit P.W.2/1. Hence, the
learned counsel wants this Court to draw a conclusion therefrom that the said
payments were duly made to defendant No. 1 and as such they are liable to
refund the said amount to the plaintiff.
29. The learned
counsel for the defendant Mr. Ishwar Sahai on the other hand has argued that
the said receipts are forged and fictitious. The entries made in the cash book
(vide exhibit P.W.2/1) are not worth placing reliance thereupon. Entries
relating to the said payment are also forged and fictitious inasmuch as no such
payment has been shown to have been made to defendant No. 1 during that period
as is crystal clear from the accounts of defendant No. 1 which have been placed
on the record (vide exhibit D-3 to exhibit D-19).
30. I have heard the
learned counsel for the parties on the above point and have very carefully
examined their rival contentions and have given my anxious thoughts thereto.
31. It is in the
statement of P.W.4 Shri P.K. Bhalla that defendant No. 1 maintained proper
receipt books. The said receipt books contain serial numbers. The impugned receipts,
admittedly, are not from the said receipt books. It creates serious doubts with
regard to the authenticity of the said receipts. The said receipts were typed
at the residence of Shri M.R. Bhalla, father of Shri R.R. Bhalla (as per the
statement of P.W.4, Shri P.K. Bhalla).
32. Shri P.K. Bhalla
(P.W.4) is a highly interested witness inasmuch as he is a close relation of
Shri M.R. Bhalla and Shri R.R. Bhalla. He has admitted this fact with
commendable fairness on his part during the course of his cross-examination. He
has got this to say on this point that his father and Shri M.R. Bhalla, father
of Shri R.R. Bhalla, are cousins. Though this fact has been denied by P.W. 6
Shri R.R. Bhalla in his statement on oath.
33. Shri P.K. Bhalla
(P.W.4) has admitted during the course of cross-examination that being the
secretary of defendant No. 1 company he was not supposed to receive the cash.
However, he could have received the same in case of urgency. Later on, on being
asked as to what was the urgency, he has contented himself by pretending
ignorance. This fact further becomes relevant in view of the fact that on being
asked he was unable to tell that he never issued any such receipts like the
impugned ones for any amount to anybody else.
34. P.W. 4 Shri P.K.
Bhalla has deposed to the fact that the impugned amounts were handed over to
him by Shri M.R. Bhalla in the year 1980 and he was asked to issue receipts in
token thereof in the name of the plaintiff-company. The said statement is
contradictory to and inconsistent with the statement of Shri R.R. Bhalla
(P.W.-6) who has averred on oath that Shri P.K. Bhalla, secretary of defendant
No. 1, used to come to his residence to collect the amount from him and he made
all the payments to Shri P.K. Bhalla in the presence of his father and secured
the receipts in token thereof from him, on the other hand, Shri P.K. Bhalla
(P.W.-4) does not talk of the presence of Shri R.R. Bhalla when the payments
were made to him by Shri M.R. Bhalla.
35. P.W 4 Shri P.K.
Bhalla has asserted in his statement on oath that the amounts received by him,
vide receipts exhibit P.W.4/1 to exhibit P.W.4/3 might have been handed over by
him to the persons working in the accounts department. In this connection, he
has mentioned the names of three persons as Mr. L.B. Sharma, Mr. Balbir Singh
Chaudhary and Mr. A. S. Verma. Shri A.S. Verma has appeared before this Court
as D.W-1. According to him, whenever he received any payment he had invariably
made an entry to that effect in the account books. Admittedly, no entry is
there in the account books of defendant No. 1 with regard to the payment of
the said disputed amounts.
36. Exhibit P.W. 4/3
is a receipt dated 7-5-1980, with regard to payment of Rs. 20,000. A close scrutiny
of the same reveals that the said amount was received, vide cheque No. 283910,
dated 7-5-1980, drawn on the New Bank of India, Tolstoy Marg, New Delhi, on
account of payment in connection with the order dated 2-11-1979. Photocopy of
the said cheque is exhibit P.W. 1/3. A careful scrutiny of the same reveals
that the said cheque was drawn in favour of self by Shri R.R. Bhalla as
admitted by Shri R.R. Bhalla (P.W. 6). The amount was received by him as his
signature appears on the back of the said cheque. It thus does not appeal to
reason as to how and in what manner Shri P.K. Bhalla issued the receipt exhibit
P.W. 4/3 for the payment of the said amount through a cheque (vide para 3 of
the plaint and again reiterated, vide paras 2 and 3 of the replication). Even
if it is assumed that after the encashment of the said cheque the payment was
made by Shri R.R. Bhalla to Shri P.K. Bhalla in that eventuality the said
receipt should have been a receipt for cash and not for cheque as shown in para
3 of the plaint and paras 2 and 3 of the replication.
37. Another payment,
i.e., for Rs. 35,000 is alleged to have been made in cash, vide receipt exhibit
P.W. 4/2, dated 10-8-1980. There is an entry to that effect in the cash book of
the plaintiff-company, vide exhibit P.W.2/1. P.W.-2, Shri B.N. Chadha, has got
this to say on this point during the course of his cross-examination “Shri Raj
Rattan used to tell me about the transactions within a day or two of its
occurring. Thereafter, I used to make entry in the account. No payment has been
made in my presence”. He was working as part-time accountant. Shri Raj Rattan
Bhalla was the chairman of defendant No. 1 company. Shri Raj Rattan Bhalla
became a director of the plaintiff-company on 6-2-1981 (vide his statement in
his cross-examination). Admittedly, all the alleged impugned payments were
made prior to his becoming the chairman/director of the plaintiff-company.
Hence, how he could have made the payment on behalf of the plaintiff. This goes
a long way to show that the account books of the plaintiff-company have been
forged and fabricated.
38. The third receipt
is with regard to the payment of Rs. 17,000 (vide exhibit P.W. 4/1) in cash as
is manifest, vide para 3 of the plaint.
However, this fact is contrary to the evidence on record. The said payment is
alleged to have been made through a cheque, vide exhibit P.W. 1/1. The said
cheque is alleged to have been issued by Shri Raj Kishan Bhalla, director of
the plaintiff-company payable to self or the bearer. It was encashed by Shri
R.R. Bhalla. It is in the statement of Shri R.R. Bhalla that a cheque for Rs.
17,000, dated 10-11-1980, was received by him on behalf of defendant No. 1 and
got it encashed. The amount was handed over by him to Shri P.K. Bhalla who
issued a receipt. It has been further admitted that the cheque for Rs. 17,000
was a bearer cheque and was issued by his brother on behalf of the
plaintiff-company. Surprisingly enough, this fact is not borne out from the
record. The fact that the alleged payment was made through a cheque also does
not find a mention in the receipt exhibit P.W.-4/1, dated 10-11-1980. This
fact, moreover, is contradictory to the statement of Shri P.K. Bhalla, P.W. 4.
He has averred through his statement on oath that Shri M.R. Bhalla was the
chairman/managing director of defendant No. 1 that whenever the company needed
finances they approached him. The company requested him for money in the year
1980. He gave the requisite money and directed the receipt to be issued in the
name of the plaintiff. He, accordingly, did the same. It is further very much
surprising as to why the said cheque was not issued in the name of defendant
No. 1 though the payment is alleged to have been made to defendant No.
1-company. The plaintiff admittedly is a limited liability company. Thus, in
the normal course of business it is expected that a company would make payment
to another company only through cheque and not in cash. This is not likely to
happen particularly when a company deals with another company in connection
with business transactions and when both the companies are having their
accounts in banks in Delhi.
39. It is an admitted
case of both the parties, as per exhibit P.W. 6/1 (i.e., the agreement with
regard to the sale of shares) that accounts were complete up to April, 1980.
The accounts thereafter were to be completed under the new management which
came to the hands of defendant Nos. 2 and 3. A perusal of the entries in the
account books of the defendant reveals that there are entries for the payments
made by the plaintiff in cash as well as by cheque after April 1980. However,
the entries with regard to the disputed payments are missing therefrom. Thus,
it does not appeal to reason as to why no entries were made with regard to the
payments in question in the account books of defendant No. 1.
40. This brings me to
the fourth payment of Rs. 30,000 (vide mark A). The said document was not got
exhibited. Thus, it cannot be read in evidence. However, while dealing with it
I would like to observe that the said payment has not been recorded in the account
books of defendant No. 1. For the
reasons stated above no reliance can be placed on the said receipt. Had the
said payment been made it would have definitely found a mention in the account
of the plaintiff particularly when other payments have been duly reflected.
41. It has next been
urged by the learned counsel for the plaintiff (vide para 3 of the plaint)
that a sum of Rs. 12,000 was returned by defendant No. 1 to the plaintiff in
cash on 13-11-1980. The said payment of Rs. 12,000 has got no bearing on the
facts of the present case. I thus need not dwell on this point except to the
extent that there is no entry with regard to the return of the said amount in
the books of account of defendant No. 1. Furthermore, there is absolutely no
evidence on record to show as to in what connection the said amount was
returned to the plaintiff in cash on 13-11-1980, when a sum of Rs. 1 lakh was
paid to the plaintiff by the defendant on 9-12-1980 (as is manifest from para
3 of the plaint). Thus, this court is not prepared to believe the plaintiff on
this point also. It can thus safely be concluded that only a sum of Rs.
3,15,000 was received by defendant No. 1 from the plaintiff and not the sum of
Rs. 4,05,000 as referred to in para 3 of the plaint.
42. The case of the
plaintiff as set out, vide para 2 of the plaint is that defendant No. 1 company
after oral discussions held on 26-10-1979, submitted a quotation for LPG
cylinders, plant and machinery. The said quotation was followed by a letter
dated 2-8-1980, as a revised quotation which was accepted by the plaintiff. On
the other hand, the case of the defendant is that defendant No. 1 submitted a
quotation, vide letter dated 26-10-1979,
and the plaintiff accepted the same, vide
letter dated 2-11-1979 (exhibit D-1). It has been denied by defendant
No. 1 that they gave a revised quotation dated 2-8-1980, which could have been
accepted by the plaintiff. It has also been denied by the defendant to have
agreed to supply the 300 tonne deep drying press on ‘no profit no loss’ basis.
This Court while dealing with other issues has agreed with defendant No. 1 on
this point. Surprisingly enough the plaintiffs have placed on record the said
revised quotation dated 2-8-1980, from the defendant to the plaintiff wherein
the price of the impugned deep drying press has been shown as Rs. 4,25,000.
However, for reasons best known to them the said revised quotation was not got
proved. Hence, the same cannot be looked into and is not even worth the paper
on which it has been typed. Though there is a denial with regard to the receipt
and acceptance of the letter exhibit D-1, dated 2-11-1979, in the plaint.
However, the said fact that the order exhibit D-1 was placed by the plaintiff
on defendant No. 1 has been accepted by P.W. 6 Shri Raj Rattan Bhalla. Thus,
there is a variation in between the pleadings and the proof. The allegations
and the averments in the plaint are quite contradictory to the evidence of P.W.
6 Shri Raj Rattan Bhalla. Thus, the plaintiffs have miserably failed to prove
the terms and conditions on which the impugned machine was to be supplied.
Exhibit D-1 shows that the plaintiff made a payment of Rs. 3,15,000 only in
connection with the supply of machine. Hence, the plaintiffs are bound by the
same.
43. Exhibit P.W. 6/1,
i.e., the agreement dated 24-1-1981, is of no avail to the plaintiff in order
or show and prove that the impugned machine was to be supplied on no profit no
loss basis. As already observed above the said agreement is with regard to the
sale and purchase of shares in between Shri M.R. Bhalla and Shri R.R. Bhalla
and other shareholders on one side, and defendant Nos. 2 and 3 on the other.
That is not a contract in between the plaintiff and defendant No. 1. Hence, the
same is of no avail to the plaintiff as stated above. All the three issues are
decided accordingly.
44. Issue Nos. 11, 12
and 13.—In view of the above, the plaintiffs are not entitled to the recovery
of the sum of Rs. 3,54,217.04 from the defendant. The plaintiff are also not
entitled to any interest. Thus, they are not entitled to any relief
whatsoever. The suit of the plaintiff is, accordingly, dismissed with costs
quantified at Rs. 12,000.
High Court of
v.
Lunarmech
Vikramajit Sen, J.
I.A. Nos. 8511 of 1998, 2238, 8315, 10258 of 1999
35 of
2000 and Suit No. 910 of 1995
Section 3 of the Companies Act, 1956 -
Company - Definition of - Whether a company is a distinct legal entity from its
shareholders - Held, yes - Whether corporate legal entity mutates or
transforms itself or undergoes a transfer with each change in shareholders -
Held, no - Whether if total shareholding of a company is purchased by one
person or a group of persons acting in concert, legal consequence would be that
company ceases to exist or undergoes a cataclysmic metamorphosis leading to its
complete disappearance - Held, no - Whether where suit is filed against a
company and there is change in its ownership and, consequently, its name, that
would result in dismissal of suit - Held, no
Facts
In a pending suit, the plaintiff filed
applications for the change of name of plaintiff No. 1 from ‘M’ to ‘UF’ and of
plaintiff No. 2 from ‘MA’ to ‘UFS’, supported by an affidavit, notarised and
authenticated by the Indian Embassy in the U.S. The U.S. Government had also
furnished a certificate in support of the change of names. The defendant
opposed the applications on the ground that the same had been filed only after
they had moved an application for dismissal of suit as the plaintiff-company
had ceased and had been acquired by ‘UF’ which was to be the owner and
manufacturer of the machine and also subsequent to the filing of another
application for the dismissal of the suit as even ‘UF’ had been taken over by
‘V’.
Held
A company is a distinct legal entity and
should not be confused with its shareholders. This distinction appeared to had
been lost sight of by the defendant. Shares of companies are usually freely
transferable. The corporate legal entity does not mutate or transform itself or
undergo a transfer with each change in its shareholders. Even if the total
shareholding of a company is purchased by one person, or a group of persons
acting in concert, the legal consequence is not that the company ceases to
exist or undergoes a cataclysmic metamorphosis leading to its complete
disappearance. There is a further distinction between change in shareholding
and amalgamation. In the present case the latter had not occurred. The
plaintiff at no stage extinguished its existence by a mere change in its name,
nor did this follow even if a change occurred in ownership.
The application was accordingly allowed and
the amended memorandum of parties was taken on record. Change in ownership of a
company was no ground for dismissal of the suit.
Sudhir Chandra Agarwal, Praveen Anand and Ms. Bini Kalra for the Plaintiff. S.K.
Mehra and Ms. Mamta Mehra for the Defendant.
Judgment
1. I.A. Nos. 2238
of 1999, 8511 of 1998 and 8315 of 1999 -
These applications have been filed by the plaintiff for change of the name of
plaintiff No. 1 from the present Memtec. Ltd. to USF Filteration Ltd. and of
plaintiff No. 2 from the present Manteec America Corpn. to USF Filteration
& Separation Group Inc. The application is supported by an affidavit of Mr.
Kevin F.O. Neill which has been duly notarised and authenticated by the Indian
Embassy in Washington D.C.A. certificate from the Australian Securities
Commission and Secretary of State, State of
2. The relief has
been strenuously opposed by Shri S.K. Mehra, the learned counsel for the
defendant. He has contended that the application has been filed only after the
defendants had moved I.A. No. 8511 of 1998 for dismissal of the suit “as the
plaintiff-company had ceased and having been acquired by USF Filteration to
be the owner and manufacturer of the machine; and also subsequent to the filing
of I.A. No. 8315 of 1999 for the dismissal of the suit as even USF Filteration
had been taken over by Vivendi, a French group”. Reliance was placed on the
treatise of Dutta and also of Gower on Company Law. It is Mr. Mehra’s contention
that an amalgamation of companies had taken place and hence the suit was liable
to be dismissed.
3. It must be
borne in mind that a company is a distinct legal entity and should not be
confused with its shareholders. This distinction appears to have been lost
sight of by the defendant. Shares of companies are usually freely transferable.
The corporate legal entity does not mutate or transform itself or undergo a
transfer with each change in its shareholders. Even if the total shareholding
of a company is purchased by one person or a group of persons acting in
concert, the legal consequence is not that the company ceases to exist or
undergoes a cataclysmic metamorphosis leading to its complete disappearance.
There is a further distinction between change in shareholding and amalgamation.
In the present case the latter has not occurred. The plaintiff at no stage
extinguished its existence by a mere change in its name, nor does this follow
even if a change occurs in ownership. Neither of the treatises relied on by the
learned counsel for the defendant are authorities for the proposition pressed
by him. Even where amalgamation takes place, due care is taken to transfer the
assets and debts of one company to the other so as to, inter alia, protect
pending litigation. The objection is, therefore, without merit.
4. In this
analysis I.A. No. 2238 of 1999 is allowed. The amended memorandum of parties is
taken on record. I.A. Nos. 8511 of 1998 and 8315 of 1999 are dismissed. Change
in ownership of a company is no ground for dismissal of the suit.
5. I.A. No. 10258 of
1999—I.A. No. 10258 of 1999, under Order XI, rule 12 of the Code of Civil
Procedure, 1908, has been filed by the defendant on 5-10-1999, inter alia, for
the following relief :
“It is, therefore, prayed that this Court may
be pleased to direct the plaintiffs to give discovery on oath of all the
relevant documents which are in their possession and power in respect of
acquisition of Brunswick Corporation by the plaintiffs; and thereafter
acquisition of present plaintiffs by the US Filteration Ltd. and USF Filteration
& Separation Group Inc. and again thereafter acquisition of the said
companies by Vivendi. The plaintiff be also direct to file the said documents
in the Court.”
The application is predicated, as the above
extracted relief would itself indicate, on the acquisition of the present plaintiff
by Brunswick Corpn. and thereafter by the alleged acquisition of the plaintiff
by USF Filteration Ltd. and USF Filteration & Separation Group Inc. and
again by the alleged subsequent acquisition of these companies by Vivendi. In
reply, the plaintiff has disclosed that in the first instance the copyright
which vested in Brunswick Corpn. was purchased by the plaintiff; thereafter
only a change in name had occurred and hence an application for amending the
memo of parties was filed; thereafter Vivendi had acquired the shares of US
Filteration Ltd. and USF Filteration & Separation Group Inc. These
companies continued to exist. Documents evidencing these transactions have been
filed by the plaintiff, but it is speciously argued that these documents are
not sufficient compliance. The contention of the learned counsel for the
defendant that because of these transactions an amalgamation of the plaintiff
has occurred and hence the suits are not maintainable, is untenable being an
incorrect assumption and understanding of the law relating to the formation and
existence of companies. For this
The defence of defendant No. 1, in addition to
the challenge to the territorial jurisdiction of the Court is that the
plaintiff has no right in the CPP System and that the defendant has not copied
the plaintiff’s machines but has adopted and modified the process known the
world over. There is a specific denial of the plaintiff’s averment that the
defendant has, by reverse engineering, manufactured the machines. It is not
the stand of the defendant that it has purchased or succeeded to the copyright
held by Brunswick Corpn. or obtained a right of user by licence or otherwise
from any of the legal corporations mentioned above. Therefore, the discovery of
documents pertaining to these companies is of no relevance to the defence of
the applicant-defendant No. 1, or to the issues that may arise in the case.
This application is dismissed.
6. I.A. No. 12271
of 1999.—This application has also been filed by the defendant again under
Order XI, rule 12 of the Code of Civil Procedure, on 4-12-1999. Its foundation
is that the plaintiff should give discovery of the blueprints and drawings on
the basis of which Brunswick Corpn. was manufacturing the machines, along with
registration number, model numbers and distinctive marks. Thereafter, documents
executed between the United States Filteration Corpn. and Vivendi have been
called for. In its reply the plaintiff has stated that full disclosure has been
given in response to I.A. No. 10258 of 1999. I am of the view that the
plaintiff has made appropriate discovery, even before any order directing it to
do so had been passed by the Court, i.e., the drawings created by Ms. Susan
Buller and blueprints in these proceedings as well as in the appellate court.
Since the averments in the plaint are to the effect that the plaintiff has
obtained the copyright in the machines from
7. I.A. No. 35 of
2000.—This application can be appropriately considered after the issues have
been struck by the Court and, therefore, a decision is deferred.
8. S. No. 910 of
1995.—On 22-7-1998, the Division Bench of this Court had directed that the
matter be listed before the Joint Registrar on 17-8-1998, for admission/denial
of documents. It was thereafter directed to be listed on 24-8-1998, for framing
of issues and that the trial would commence sometime in the first week of
October, 1998, and would go on day-to-day basis. Because of the frequent filing
of applications these orders have not been implemented till date.
9. Accordingly, the suit be now listed for framing of issues on 31-7-2000.
[1970] 40
COMP. CAS. 809 (CD)
F. Goldsmith (Sicklesmere) Ltd.
v.
STAMP, J.
JULY 3, 4, 7, 1969
Stamp-J.—This is an action by the
plaintiff company for specific performance of a contract for the sale to the
defendant of a piece of land, cottage and buildings known as
"Shelley," Stanstead,
I, should perhaps
mention that May 7, 1968, was the date fixed for completion of the contract
which I have to consider. Part of the land purchased from Mrs. Honeywood that
is "Shelly" was, or became, surplus to the requirements of the
plaintiff company, and the Brewsters decided to sell it, and so,
"Shelly" was put up for sale. On or about February 12, 1968, the
defendant came to the garage premises as a prospective purchaser. He first saw
Mr. Brewster junior, and later in the day Mr. Brewster himself. Mr. Brewster,
at the request of the defendant, who I think wanted to check the parcels of the
property being sold, took the defendant that same after noon to see Mr. Winch,
and before the end of the day the defendant had orally agreed with Mr. Brewster
to buy the property and the price had been agreed. Mr. Brewster junior had at
the outset, that is, before Mr Brewster himself arrived on the scene, told the
defendant that the property being sold belonged to a company: Goldsmith
Coaches, I think he said.
It is unnecessary to
decide if there was on that day a concluded oral agreement, -because the
plaintiff company's counsel did not rely on any such oral agreement. There
probably was not an oral agreement, because it appear? to have been
contemplated that a formal written agreement would be entered into. Thereafter
matters took a normal course down to the point at which the written agreement
came into existence. It is also necessary to remark that the correspondence
between the solicitors for the plaintiff company and for the defendant, and the
preliminary inquiries were headed "Brewster to Baxter." The contract
was prepared in Mr. Winch's office, and perhaps not surprisingly in view of how
the title stood, Goldsmith Coaches (Sicklesmere) Ltd. was named in it. The
National Conditions of Sale were used, and the agreement, which was dated April
9, 1968, took the form of a memorandums of agreement that Goldsmith Coaches
(Sicklesmere) Ltd., whose registered office was situate at Sicklesmere in the
county of Suffolk, was the vendor, and that Eric Hugh Baxter, was the purchaser
of the property described in the accompanying particulars of sale at the price
of £4,300 subject to the accompanying conditions of sale. "Shelley"
was of course described in the particulars. The contract had one or two other
features to which I must draw attention. In the first place, as I have said,
the property was described as "Shelley"; secondly, it was stated that
the tender was the beneficial owner of it; thirdly, that the memorandum was
signed by Mr. Brewster "for and on behalf of Goldsmith Coaches
(Sicklesmere) Ltd."
Thereafter matters
again took a usual course until the defendant's solicitors, searching to see if
there was any charge registered against the vendor in the companies register at
Bush House, were unable to trace any company registered in the name of
Goldsmith Coaches (Sicklesmere) Ltd. They so informed the plaintiff company's
solicitor in a letter of April 23, 1968. The plaintiff company's solicitors on
April 26, 1968, replied fully to the defend ant's solicitors' letter, and in
justice to them I think I should read the letter of April 26, in full.
It runs as follows:
"Thank you
for-your letter of the 23ra4nstant, the contents of which we note. We have
taken this up with our client, who was under the impression that his company
was called Goldsmith Coaches (Sicklesmere) Ltd., and he certainly instructed us
that this was its name when we acted for him on the purchase of the property.
On reference to his accountants who were responsible for the formation of the
company, we are informed that the name of the company is in fact F. Goldsmith
(Sicklesmere) Ltd.
"As the
conveyance executed by the vendor to the company is to a non-existent company
we take the view that it was ineffective to pass a legal estate but that the then
vendor having received the money from F. Goldsmith (Sicklesmere) Ltd., holds
the property upon trust for that company; and it appears to us that a
supplemental conveyance by the original vendor should be executed. We suggest
that this can conveniently be endorsed on the ineffective conveyance and
enclose herewith a draft of the proposed conveyance for your approval.
"If you agree with our view of the situation and
approve the proposed confirmatory conveyance we can arrange to have this
executed by the original, vendor without causing undue delay."
As I have indicated,
the confirmative conveyance was in fact executed by the original vendor on May
7, 1968. Taking the view, however, that there was no vendor and therefore no
contract, the defendant's solicitors gave advice to the defendant which
resulted in his refusing to complete.
The defendant has
Continued to take up this position, and his short defence to this action is: no
vendor, no contract.
A somewhat elaborate
argument has been addressed to me on behalf of the plaintiff company, and I
have been invited to a number of authorities where there has been a mistake as
to the identity of one of the contracting parties, and where a distinction has
been drawn between a case where that identity was material, inducing the other
party to enter into the contract, and a case where it was not. It has been
urged that since in this case it mattered not to the defendant with whom he was
contracting, the plaintiff company should succeed, notwithstanding that there
was no person known to the law as Goldsmith Coaches (Sicklesmere) Ltd. There is
much confusion here: there must be two parties to a contract for the sale of
land, vendor and a purchaser, and if there was in truth no such person as is
stated to be the vendor in the memorandum of April 9, 1968, the conclusion that
there was no contract appears to me inescapable. In my judgment the question:
contract or no contract? depends on the answer to the question whether applying
permitted principles of construction, the vendor named and described in the
memorandum can be found to be identical to plaintiff company
Looking at the
memorandum alone, and without regard to the surrounding circumstances. It seen
find that the person—the persona fida—said to be the vendor has the following
characteristics: (1) it is named Goldsmith Coaches (Sicklesmere) Ltd.; (2) its
registered office is said to be at Sicklesmere; (3) it has an agent called a
who claims to act for it is the beneficial owner of " Shelley.
Applying the rule
that a contract is to be construed by reference to the surrounding
circumstances, or in the light of the known facts. It timing is (1) there is no
limited company which in law has the name Goldsmitr Coaches (Sicklesmere) Ltd.,
but the plaintiff company is often known as "Goldsmith Coaches" and
carries on business as a bus and coach contractor and does so at Sicklesmere;
(2) the plaintiff company's registered Office is at Sicklesmere, in the very
place at which it carries on the bus and coach business; (3) the plaintiff
company has an agent called and (4) it is the beneficial owner of
"Shelley" also there is no other company having those
characteristics. Applying this process, if it be permissible, the conclusion
beyond peradventure is that Goldsmith Coaches (Sicklesmere) Ltd; is no more nor
less than an inaccurate description of the plaintiff company, F. Goldsmith
(Sicklesmere) Ltd.
On behalf of the
defendant, Mrs. Puxon was constrained to concede, and she could not do
otherwise, that the process which I have adopted to conclude that the plaintiff
company is the vendor on behalf of whom Mr. Brewster contracted, is a proper
process for identifying a vendor who is an individual and who had been
inaccurately described in a contract. But it is urged that the process not permissible
in ascertaining the identity of a company incorporated under the Companies
Acts. Unlike a natural person, who can be recognised and identified by physical
characteristics, a limited company, it is submitted, can only be recognised and
identified by its registered name, and unless you find the correct registered
name of a company in a document purporting to be a contract, or at least a
name, so nearly correct that you can see merely by looking at it that the
correct name of a particular company is intended, there is no contract.
It appears that in
ancient times, acts of corporations were often avoided on this ground—namely,
that a corporation, unlike a natural person has no identity but its name, and
that if it does not act by its name, the act is not its act (see Grant's Law of
Corporations (1850), at p. 145):
"But…”, says the author of that work, "
equity very early, at latest in the reign of James I, began to relieve against
this doctrine of the courts of common law, Lord Ellesmere, C, laying down, in
effect, that an error in the name of a corporation demising by lease was of no
importance, so long as it could be seen that the same corporation was meant,
and there was no other corporation to which the name in the lease could be
reasonably taken to refer, and he added, that’s his was the old law, and that
judges might have done well at the first to have expounded it so."
In the absence of
authority constraining me to do so—and none has been cited—I would find it
impossible to hold that a company incorporated-under the Companies Acts has no
identity but reference to its correct name, or that, unless an agent acts on
its behalf by that name, or a name so nearly resembling it that it is obviously
an error for that name, he acts for nobody. A limited company has, in my
judgment, characteristics other than its. name by reference to which it can be
identified: for example, a particular business, a particular place or places
where it carries on business, particular shareholders and particular directors.
If there are two limited companies having the same characteristics, then it is
hardly to be supposed that each of them was incorporated on the same day, and
owns the same property. Moreover, to accept the submission advanced on behalf
of the defendant, would be to introduce a source of great confusion and
uncertainty in respect of business transactions. Would it not follow that a
memorandum signed by an auctioneer on behalf of the vendor or the owner would
fail to bind the owner or vendor who was in fact a limited company?
Mrs. Puxon sought to
escape from that position by submitting that special considerations applied to
sales by auction. I am not persuaded that there is any relevant distinction
between a memorandum signed at an auction and a memorandum signed to record an
oral private contract, except perhaps that at an auction neither party at the
moment when the oral contract is completed, when the hammer falls, may be aware
of the identity of the other party. But assuming the distinction, I would be
reluctant to hold that, if property is withdrawn from the auction and, as often
happens, the auctioneer receives and accepts an offer when the auction is
concluded, that this act of acceptance is a nullity unless he names with
precision the limited company on whose behalf he has agreed to sell the
property.
Happily there has
come to light an authority which assists me to come to the conclusion to which
I have come in its absence. Commins v. Scott
was concerned with an agreement for the sale of real estate which did not
disclose the names of the vendors, but it appears therefrom that the vendors
were a company in possession of the property offered for sale and that they had
carried on operations thereon. Thus that was a case where a company (and it was
a limited company) was not named at all. Sir George Jessel, M.R., pointed out
that the question in the case was: was there a contract? And he added, at page
16:
"Now, in order that there may be a contract, at
least two things are necessary namely, contracting parties, and subject-matter
of a contract. No. doubt other things are necessary, such as proper words of
contract; but at all events, those two things there must be."
The only question
which there had to be decided was whether the written memorandum of agreement
contained a sufficient description of the parties to the contract. He continued
his judgment by pointing out:
"Now
the court ought to be careful not to manufacture descriptions, or to be astute
to discover descriptions which a jury could not identify; for, as I understand
it, at law that would be a question for the jury."
Upon the facts of that case, the Master of the Rolls
pointed out that the memorandum there in question showed that the vendors, as
here, employed a particular agent; it showed that they were in possession of
the property to be sold, and were carrying on operations there and, finding
that the vendor company in that, case was a company having those
characteristics, the Master of the Rolls concluded that there was a good
contract. He said at page 17:
"In
my opinion, the only fair inference from these conditions is, that the vendors
are a company in possession of the property, who have been carrying on
operations there; it is admitted that the plaintiffs are such a company; and I
am of opinion, therefore that there is a good contract."
Commins v. Scott
was not a case of misdescription of a company, and it is not a direct authority
in the present case, but I derive assistance from it to show that it is not
essential to the validity of a contract made on behalf of a limited company
that the company should be described with precision.
The name of the company on behalf of which
signed the memorandum was a matter of indifference to the defendant, provided
only that the vendor could be identified with certainty. There was no lack of
the necessary consensus. It does not lie in the defendant's mouth to say that
he paid cash under a contract with a non-existent person. The plaintiff company
is entitled-in my opinion to have the contract specifically performed, but the
claim for ratification is in my judgment misconceived. Either the plaintiff
company was a party to the contract, or there was no contract, and I cannot
rectify a non-existent contract.
The plaintiff company set up an alternative case of
estoppel, resting on the fact that the defendant, with the permission, as I
find, of Mr. Brewster went into possession of the property. In view of my
decision that it was a party to the agreement, I express no opinion whether Mr.
Sunnucks was successful in getting into the saddle of that unruly horse.
I will declare that the plaintiff company, although
erroneously named Goldsmith Coaches (Sicklesmere) Ltd., was a party to the
agreement in the pleading mentioned, and that the said agreement ought to be
specifically performed, and will make the usual order for specific performance.
Order according.
[2004] 52 SCL 762 (Guj.)
High
Court of
v.
MV ‘San Fransceco Dipalola’
D.A.
Mehta, J.
Admirality
Suit No. 3 of 2004
and Misc.
Civil Application No. 14 of 2004
March 9,
2004
Section 34 of the Companies Act, 1956 read
with sections 651 to 653 of the British Companies Act, 1985 - Company - Effect
of registration of - Whether on date of filing suit a company whose name has been
struck off from Register of companies and as a consequence dissolved, can
initiate any legal proceedings so as to be valid in law - Held, no
Facts
In a suit filed
by the plaintiff, a
In the
meanwhile, the defendants filed a miscellaneous application (OJMCA) seeking to
set aside the order of arrest and award of damages for wrongful arrest and
detention of vessel. According to the defendants, the entire plaint was based
on false statement, suppression of material facts and reckless allegations with
complete knowledge that such statements and allegations were false, and also
that the plaintiff company had been dissolved after having been struck off from
Register of the Companies House under the provisions of sections 651 and 652 of
the British Companies Act, 1985.
Held
The merits of
the dispute between the parties had not been gone into as both the sides
presented their case only in relation to the preliminary issue: viz., whether
the plaintiff could have presented the suit in the circumstances of the case.
In the circumstances, the question before the Court was not as to what was the
effect of an order of restoration but as to whether on the date of filing the
suit, a company, whose name had been struck off from the register of the
companies and as a consequence, it was dissolved, could initiate any legal
proceedings so as to be valid in law. [
One of the
characteristics of a company is that it is an incorporated body of persons. It
is not mere aggregate of its members : it is not like a partnership firm or a
family. The company is constituted into a distinct and independent person in
law and is endowed with special rights and privileges; it is in law a person
distinct from its members. The advantage of incorporation is that a company
never dies. It has perpetual succession and remains in existence, however,
often its members change, until its dissolution. This prevents the dissolution
of the company by the death, bankruptcy, or lunacy of any of its members -
unlike a partnership firm. This characteristic offers to a company and its
shareholders various special advantages and privileges; more particularly, the
company is permitted to acquire and hold property in its corporate name, and
enables the company to use a common seal, to contract with its shareholders and
others. [
A company is a
separate legal entity notwithstanding the fact that there is only one governing
director who also holds a majority of the shares of the company. The separate
legal entity enabled the director, representing the company, to enter into a
contract of employment with himself in his individual capacity. [
Companies
incorporated under the Act are capable of suing and being sued in their
corporate names. A company’s right to sue arises when some loss is caused to
the company, i.e., to the property or the personality of the company, as
distinct from a loss occasioned to the directors of the company. The rights of
the company and the rights of its shareholders are not co-extensive.
Incorporation brings into existence a legal person which develops into its own
separate existence as a business or enterprise. A company, as a person separate
from its members, may even sue one of its own members for libel. The
publication of any statement which disparages the business of the company,
defames the company at the same time. Hence, the company is entitled to sue in
damages for libel or slander as the case may be. [
A shareholder
has a limited restricted right only after an order of winding up is made,
liabilities of the company discharged and then if any surplus of assets is
left. In the instant case it was not possible even for the plaintiff to make a
statement that the shareholder was entitled to the vessel as being net surplus
of assets after discharging all liabilities of the company. In fact, during the
course of hearing a stand was adopted that one Mrs. ‘R’, was the sole shareholder
and director of the plaintiff company and, hence, was an interested person.
Once the position was admitted that the company was struck off from the
register and dissolved as a consequence there was no question of any particular
shareholder, even the sole shareholder, making a claim to the property of the
company without showing that all liabilities of the company stood discharge. [
Limited company
is a separate legal entity distinct from its shareholder. Merely because there
is only one shareholder, the entities which are otherwise distinct, one is a
natural person and the other is an artificial juristic person, it cannot be
contended that the said entities merge and one can act for and on behalf of
other. The principle of agency has to be understood and appreciated in light of
the provisions of the Act, memorandum and articles of association of the
company. [
Section 291
deals with general powers of the Board; but this does not include power to
institute suits/legal proceedings. [
Unless the
power to institute a suit is specifically conferred on a particular director,
he would have no authority to institute a suit on behalf of the company.
Individual directors are vested with only such powers as are available to them
either under the memorandum or articles of the company, or otherwise by the
board of directors. A managing director also does not have any power to manage
the affairs of the company over and above those available to the Board; the
managing director can exercise only such powers as have been delegated to him.
A company cannot orally authorise another person to sign a plaint on its
behalf. A company can act only as provided under its articles of association. [
On the date of
presentation of the suit, the company was admittedly struck off the register
and dissolved. There could be, therefore, no question of ratification of an
action which a non-existent entity could not have initiated in the first
instance. [
Admittedly, the
plaint was signed and verified by a person who was neither secretary, nor
director, nor principal officer of the plaintiff. Hence, he was not a person
who was able to depose to the facts of the case. [
Moreover, there
were three statements of the same lady stating at one place that restoration
application was already made on 5-3-2004, another where it was accepted that as
the suit was filed in extreme urgency the plaintiff could not make an
application for restoration and third one where it stated that the application
was being moved on 8-3-2004. These by themselves did not determine the lis
between the parties, and appeared to be small blemishes when viewed in
isolation, but were factors which when cumulatively considered reflected upon
the conduct of the plaintiff/shareholder. [
It was thus,
clear that : (i) there was absence of full and frank disclosure; (ii) there was
a misstatement of a material fact or suppression of material fact; and, there
was withholding of a vital fact by the plaintiff. This amounted to commission
of fraud on the Court. Misrepresentation itself amounts to fraud. A
representation is fraudulent not only when the person making it knows it to be
false, but also when, he ought to have known, or must be taken to have known,
that it was false. The plaintiff was a limited company - a juristic entity -
acting through a living person. That person claimed to be sole
shareholder-director, who admitted that she instructed the Company Secretary in
July 2003 to apply for having the name of the company struck off from the
register; and that she received letter and notice from the Registrar in July
and September 2003 : and yet expected the Court to believe that there was no
suppression. There was no offer/attempt to amend the plaint even after receipt
of OJMCA. The offer, during course of hearing, was only to substitute the
plaint to remove defects. Therefore, that was a clear case of deception. Fraud
and deception are synonymous. [
A non-existent
entity cannot ratify any action which it could not have initiated : there is no
director, no secretary, no principal officer. The company having been dissolved
there is no entity/person who can authorise anyone. A shareholder of erstwhile
company cannot claim any right, title or interest in any particular asset/property
of the company. Then there is no question of executing any power of attorney as
authorised signatory. [
The legal
position is well settled that on dissolution, properties of a company vest in
the Government. By virtue of section 654 of the 1985 Act even if the property
of the company is not sold (as per the plaintiff), the property has vested in
the crown. Then there is no question of any person, including a shareholder,
staking a claim to the property; and, thus, filing a plaint by self or through
a power of attorney holder. [
On a conjoint
reading of provisions of sub-sections (1) and (2) of section 653 of the 1985
Act it is apparent that a company or any member or creditor can apply to a
Court if the company or member or creditor feels aggrieved by the name of the
company having been struck off from the register. The Court is required to be
satisfied that at the point of time when the name of the company was struck off
from the register, the company was carrying on business or was in operation, or
otherwise, that it is just that the company be restored to the register.
Therefore, the person applying for restoration has to be a person who is
aggrieved. The concept of ‘aggrieved’ here means that the order of striking off
has resulted in a situation which is detrimental to the applicant, viz.,
company or any member or creditor. Therefore, unless the applicant is
‘aggrieved’ there is no question of making an application seeking restoration.
Upon an application being made the Court is required to ascertain whether the
company was carrying on business or was in operation at the time of the
striking off the name from the register. In effect, it means that the
reasonable belief entertained by the Registrar of Companies under section
652(1) of the 1985 Act is found to be incorrect. For the Court to record such a
finding there must be some material available on record. The other alternative
contention which permits the Court to exercise discretion requires that ‘it is
just’ that the company be restored to the register. This requirement has to be
backed by facts and circumstances prevailing in a given situation so as to
enable the Court to exercise discretion in favour of the applicant, namely that
the action of the Registrar striking off the name of the company of the
register would result in creating a situation which is unfair and unjust to the
applicant. [Para 46]
In the instant
case, admittedly, the plaintiff could not seek restoration on the ground that
it was carrying on business or was in operation at the time when its name was
struck off, as the plaintiff had applied that its name be struck off from the
register as the company was not carrying on business or was not in operation.
In light of the fact that an application had been moved, it was not necessary
to deal with the alternative situation whether it would be permissible for the
Court to exercise discretion on the basis of the consequence of striking off
being unjust to the applicant. Suffice it to state that there had to be cogent
and sufficient material in that regard. [Para 47]
Section 654 of
the 1985 Act stipulates that property and rights of a dissolved company are
deemed to be bona vacantia and, accordingly, belong to the Crown. Once this was
the position, the plaintiff could not seek any relief on the basis of being
owner of the property without either impleading Crown or putting it to notice.
[Para 48]
In the
aforesaid factual matrix even if the plaintiff had moved an application seeking
restoration of the company to the register it was not necessary to await
outcome of such application. Considering the fact that an order of arrest was
operating against the defendant it was not possible to do so, especially in
light of the fact that the plaintiff was not inclined to permit vacation of the
ex parte interim order of arrest. [Para 49]
In the
aforesaid fact situation it was not possible to state that these were
procedural defects which did not go to the root of the matter and should not be
permitted to defeat a just cause. The plaintiff had failed to make out a case.
[Para 53]
In the result,
the OJMCA was allowed and as a consequence the suit was dismissed. The order of
the arrest of the vessel was vacated/set aside. [Para 54]
Cases referred to
Lee v. Lee’s Air
Farming Ltd. [1961] 31 Comp. Cas. 233 (PC) (para 16), Nandgopal v. NEPC Agro
Foods Ltd. [1995] 83 Comp. Cas. 213 (Mad.) (para 17), Metropolitan Saloon
Omnibus Co. Ltd. v. Hawkins [1859] 28 L.J.CL. 830 (para 17), Agarwalla H.P. v.
Union of India [1963] BLJR 127 (para 18), O.K. Trust v. Rees 23 TC 217 (para
19), Stanely v. Gramophone & Typewriter 5 Tax Cases 358 (CA) (para 19),
I.R. v. John 8 TC 20 (CA) (para 19), Kodak v. Clark 4 TC 549 (para 19), Mrs.
Bacha F. Guzdar v. CIT AIR 1955 SC 74 (para 20), United Bank of India v. Naresh
Kumar AIR 1997 SC 3 (para 26), ‘VASSO’ (Formerly ‘ANDRIA’) [1984] 1 LLR 235
(CA) (para 33), Seemax Construction (P.) Ltd. v. State Bank of India AIR 1992
Delhi 197 (para 34), S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 (para
35), Ram Chandra Singh v. Savitri Devi [2003] 8 SCC 319 (para 36) and Pierce
Leslie & Co. Ltd. v. Miss. Violet Ouchterlong Wakshare AIR 1969 SC 843
(para 38).
M.J. Thakor
and A.S. Vakil for the Plaintiff. Pratap and R.J. Oza for
the Defendant.
Judgment
1. This suit has been
presented by the plaintiff seeking arrest of defendant No. 1-Vessel, i.e., M.V.
‘San Fransceco Di Paola’ in the following circumstances :
2. The case of the
plaintiff is that the plaintiff, a Limited Company, incorporated under the laws
of United Kingdom and having its address as stated in the cause title, is the
owner of defendant No. 1-Vessel. It is stated that the said vessel was
purchased by the plaintiff from one Audrey ventures company on 27-6-2000. That
thereafter the plaintiff entered into a Memorandum of Agreement dated 1-7-2003
with defendant No. 2 for sale of vessel for a consideration of US $ 4,00,000
and defendant No. 2 paid 10% of the said consideration. The expected time of
delivery of the vessel was 7-7-2003. However, according to the plaintiff, as
defendant No. 2 had not paid the entire balance consideration, no delivery was
given by the plaintiff. It is further averred that defendant No. 1 - vessel was
laid up at the port/Harbour of Oostende Port, Belgium since 27-6-2000 and
hence, there was no crew on board. The case of the plaintiff is that defendant
No. 2 clandestinely removed the vessel from the closed basin and sailed the
vessel out of the Oostende Port without paying the balance consideration of US
$ 3,60,000. That for this purpose, it is averred, the defendant No. 2 utilized
a forged bill of sale dated 30-6-2003 and obtained a certificate of
registration dated 6-11-2003 issued by the Belize Ship Registry.
3. In the circumstances,
the plaintiff seeks declaration to the effect that the plaintiff is the sole
owner of the vessel and title vests with the plaintiff, that defendant No. 2 or
any person claiming through the said 2nd defendant does not have any right,
title or interest in the vessel and the vessel is required to be restored in
lawful possession of the plaintiff. Over and above such a declaration, the
plaintiff has also sought a mandatory injunction against defendant No. 2 or any
other person claiming through the 2nd defendant and being in possession of the
vessel, directing them to hand over the possession of the vessel to the
plaintiff.
4. The suit came to be
filed on 1-3-2004. The learned Advocate for the plaintiff mentioned the matter
at 11.00 a.m. on the said day and sought circulation of the matter on the
ground of urgency. Upon such permission having been granted the matter was
taken up for hearing at 2.15 p.m.
5.
Mr. M.J. Thakor, learned senior counsel appearing for Mr. A.S. Vakil, learned
Advocate for the plaintiff submitted that in the aforesaid backdrop of facts
and circumstances the plaintiff had filed the suit claiming possession of
ownership of the vessel and as the same was a maritime lien and claim the suit
under the Admiralty Act was maintainable. It was submitted that the vessel was
in port and Harbour of Alang, i.e., Alang anchorage, and hence within the
territorial jurisdiction of this Court. An apprehension was expressed that
defendant No. 2 was likely to enter into a sale or had already entered into a
sale of the vessel with a Ship breaker and hence, an order seeking arrest of
the vessel to protect the interest of the plaintiff was sought for till the
defendants appear and furnish necessary security. Accordingly, on 1-3-2004 an
ex parte order of arrest came to be made by this Court.
6.
The defendants have filed OJMCA No. 14 of 2004 and the same came to be
presented on 4-3-2004. Considering the urgency of the matter both the Misc.
Civil Application and the suit were taken up for hearing on 5-3-2004.
Thereafter, the matters have been heard continuously on 8th & 9th March,
2004. The defendants in the application presented by them have prayed that the
order of arrest dated 1-3-2004 (wrongly mentioned as 2-3-2004) be set aside
and/or vacated. A further prayer seeking damages @ US $ 4,000 per day for
wrongful arrest and detention of the vessel has also been made and
consequential prayer seeking direction to the plaintiff to furnish a bank
guarantee has also been made. The case of the defendants is that the entire
plaint is based on false statements, suppression of material facts and reckless
allegations with complete knowledge that such statements and allegations are
false and hence, it is the say of the defendants that the ex parte order of
arrest of the vessel dated 1-3-2004 be vacated and defendants be compensated by
awarding adequate damages for wrongful arrest. The basis for the stand adopted
by the defendants is the factum of the plaintiff company having been dissolved
on 16-12-2003 after having been struck off from the Register of Companies House
of the United Kingdom.
7.
Before adverting to the contentions raised on behalf of the respective parties
it is necessary to briefly recapitulate facts which are admitted and
undisputed. The plaintiff, a limited company, has come into existence on
29-6-2000 bearing company No. 04023540. The plaintiff purchased the vessel on
27-6-2000 from one Audrey Ventures Company Limited, U.S.A. The vessel was
originally plying under the name of ‘Princess Christine’ which has subsequently
been changed to the present name, i.e., MV ‘San Fransceco Di Paola’. The
plaintiff has no other property and no other business. Since the day the vessel
was purchased by the plaintiff it has been lying in the closed basin of
Oostende Port, Belgium. The vessel required extensive repairs. The last account
of the plaintiff company has been made upto 30-6-2002 (dormant) and similarly
last return was made upto 29-6-2002. The next return due was 27-7-2003. The
Company Secretary of the plaintiff is one Eikos International Ltd. and has been
appointed on 29-6-2000. The registered address of the plaintiff is the same as
address of the Company Secretary. The plaintiff has only one Director, who is
sole shareholder and has been appointed in the capacity of Director on
29-11-2002.
8.
On 18-7-2003 application for having name of the company struck off from the
register of the Companies House was made by or on behalf of the plaintiff,
under instructions of the plaintiff. The first Gazette notice for voluntary
strike off as statutorily required came to be published on 26-8-2003. Similarly
the final Gazette notice for voluntary strike off as statutorily required came
to be published on 16-12-2003, and upon such publication in the Gazette, as a
statutory consequence, plaintiff company came to be dissolved.
9.
The suit has been filed, as already noticed, by the Limited Company. The plaint
has been signed by the constituted attorney, viz., one Mr. Shridhar Burke. The
dispute between the parties is as to whether the plaintiff had executed the
final sale in favour of defendant No. 2 as per Bill of Sale dated 30-6-2003.
The case of the plaintiff is that the said Bill of Sale (Exh. ‘E’) is a forged
document and hence, there is no completed contract of sale entitling defendant
No. 2 to possess the vessel in absence of any right, title or interest in the
said property. There is a further dispute between the parties that the
consideration for the sale which was fixed as per Memorandum of Agreement at US
$ 4 lacs (US $ 4,00,000.00) has not fully passed from defendant No. 2 to the
plaintiff. The defendants have disputed both the averments. It is stated that
the vessel was already under existing charge and had various outstanding dues
against its name. That defendant No. 2 paid off those dues either in entirety
or at a settled figure and hence, as per the understanding between the parties
the plaintiff had executed the Bill of Sale dated 30-6-2003, which was in fact
executed on 12-7-2003.
10.
Mr. M.J. Thakor, appearing on behalf of the plaintiff submitted that it was an
admitted position that the plaintiff company was dissolved on the date of
presentation of the suit, but the sole shareholder who is also the only
Director of the plaintiff company, was not aware of the fact of the name of the
company having been struck off; that the said shareholder-Director became aware
of this fact only when OJMCA was served on the plaintiff, and hence, the
plaintiff has taken appropriate steps to have the company restored to the
Register by moving appropriate application on 8-3-2004. Mr. Thakor also
accepted the fact that the vessel being the only asset of the plaintiff company
and having entered into an agreement to sell on 1-7-2003, the shareholder
Director had pursuant to the said agreement directed the Company Secretary to move
an application for having the name struck off from the Register. That
accordingly on 18-7-2003 the Company Secretary had moved such an application.
It is reiterated with emphasis that sole shareholder Director was not aware of
any subsequent developments viz. post 18-7-2003 and hence, the application
seeking restoration. It was submitted that the law was well settled that upon
an order of restoration being made the company would stand restored to the
Register and the consequence of such restoration would be that the company and
all other persons would be placed in the same position as if the company’s name
had not been struck off from the Register. Reliance was placed on provisions of
sections 651, 652 and 653 of the Companies Act, 1985 (1985 Act) as well as
various decisions to contend that once an order of restoration was made it
shall be deemed as if the company was never struck off from the Register of
Companies House. It was further submitted that as could be seen from various
decisions pressed into service, the said decisions were rendered in different
factual scenario, viz., one, where the company whose name had been struck off
from the Register had applied for restoration before initiating any
proceedings; second, a situation where the company whose name had been struck
off from the register had moved an application for restoration where
proceedings had been initiated but no effective hearing had taken place, and,
last a situation where the parties, including third parties, had acted in
pursuance of such dissolution and an application for restoration came to be
moved after number of years, albeit within the statutory period of limitation
of 20 years. Thus, according to Mr. Thakor in any set of circumstances the
position in law was that once an application for restoration had been made and
restoration ordered the company was deemed to be in existence as if its name
had never been struck off from the register. The contention, hence, was that
the plaintiff in the present case had already moved an application for
restoration and once an order to restore the plaintiff to the register was made
all actions, including the present suit initiated by the plaintiff would be
legal and valid, being the consequence of the legal position or a legal fiction
that the company was never dissolved. It was further submitted that the
dissolution of the company was as a result of the name of the company being
struck off from the register and the dissolution did not succeed as an order of
winding up.
11.
Mr. Pratap, learned Advocate appearing on behalf of the defendants contended
that as could be seen from provisions of sections 651, 652 and 653 of the 1985
Act, the power of restoration was discretionary in nature and the entire basis
on which the case of the plaintiff has proceeded is not warranted in light of
the language employed in the provisions. It was further submitted that the case
built on restoration is not a case which is coming out from the suit and an
entirely different case from the one stated in the plaint was being argued
before the Court. It was further submitted that, as stated in the OJMCA, the
plaintiff had no locus standi to present the suit, the plaintiff being a non
existent entity in law and hence, there was not only a fraud perpetrated on the
Court but the entire plaint was based on suppression of material facts. It was
urged that the Court was required to apply the test as to whether an ex parte
order of arrest of the vessel would have been made by the Court if the factum
of dissolution of the Company had been disclosed in the plaint. The test was,
according to the counsel that there should be full and frank disclosure of all
material facts.
11.1It was further submitted that the plaint
was even otherwise bad in law and the suit should not be entertained as the
same had been presented by a person who has not only failed to identify himself
but has prima facie not even shown the authority on the basis of which the suit
has been presented. Inviting attention to the power of attorney accompanying
the plaint, viz., Exh.13, it was submitted that the said power of attorney did
not mention the address of Mr. Shridhar Burke who was signatory to the plaint
nor is the power shown to have been executed and authenticated before a Notary.
Thus, in light of the provisions of section 85 of the Evidence Act the said
document was not a valid document on the basis of which any person named
therein could have initiated any proceeding. It was further submitted that the
power of attorney was in the name of four different individuals but did not
specify as to whether the said individuals were permitted to act independently
or jointly or severally or in the alternative to each other and hence, a
presumption should be drawn that they were required to act jointly. That the
suit having been presented by only one individual was not in accordance with
the authority granted under such power of attorney. In support of the
submissions made various decisions were pressed into service.
12.
Mr. Thakor in response to the objection regarding power of attorney not having
been executed and authenticated by a notary public submitted that it was
because of the urgency of the situation that an ordinary copy received by Fax
had been annexed with the plaint. That he was in possession of copy of the power
of attorney which was duly notarised. That the suit had been presented on
1-3-2004 while power had been executed on 29-2-2004 (a holiday) at Calais,
France and hence could be notarised only on 1-3-2004 by which time the suit had
already been filed. It was further submitted that section 85 of the Evidence
Act only raised a presumption but that by itself does not impinge upon the
validity of such a power of attorney. It was further submitted that in any
event the plaintiff was filing a fresh affidavit sworn today by Luany Rodriguez
Salas, a shareholder of plaintiff, ratifying all the actions taken hereinbefore
on the basis of the power of attorney executed on 29-2-2004. That the plaintiff
was ready and willing to submit a fresh plaint duly signed by the said
shareholder, viz., Luany Rodriguez Salas so as to ensure that the procedural
defects stand cured. It was submitted that the case of the plaintiff was
governed only by virtue of provisions of sections 652 & 653 of the 1985 Act
as could be seen from the details available at page No. 17 of OJMCA. That the
three decisions cited on behalf of the defendants were dealing with cases of
winding up and hence could not be applied to the facts of the present case.
13. It
requires to be noted that the merits of the dispute between the parties have
not been gone into as both the sides have presented their case only in relation
to be preliminary issue : viz., whether the plaintiff could have presented the
suit in the circumstances of the case. In the circumstances, the question
before the Court is not as to what is the effect of an order of restoration but
as to whether on the date of filing the suit a company whose name has been
struck off from the register of the companies and as a consequence dissolved,
can initiate any legal proceedings so as to be valid in law.
14.
Section 33 of the Companies Act, 1956 (the Act) provides for Registration of
Memorandum and Articles. The effect of such registration is as laid down in
section 34 of the Act, i.e., the Registrar shall certify under his hand that
the company is incorporated. From the date of incorporation, the subscribers of
the memorandum and other persons, namely the members, shall be a body corporate
by the name contained in the memorandum, capable of exercising all the
functions of an incorporated company, and having perpetual succession and a
common seal.
15.
One of the characteristics of a company thus is that it is an incorporated body
of persons. It is not mere aggregate of its members : it is not like a
partnership firm or a family. The company is constituted into a distinct and
independent person in law and is endowed with special rights and privileges; it
is in law a person distinct from its members. The advantage of incorporation is
that a company never dies. It has perpetual succession and remains in existence
however often its members change, until its dissolution. This prevents the
dissolution of the company by the death, bankruptcy, or lunacy of any of its
members - unlike a partnership firm. This characteristic offers to a company
and its shareholders various special advantages and privileges; more
particularly, the company is permitted to acquire and hold property in its
corporate name, and enables the company to use a common seal, to contract with
its shareholders and others.
16. A
company is a separate legal entity notwithstanding the fact that there was only
one governing director who also held a majority of the shares of the company.
The separate legal entity enabled the director, representing the company, to
enter into a contract of employment with himself in his individual capacity. -
Lee v. Lee’s Air Farming Ltd. [1961] 31 Comp. Cas. 233 (PC).
17.
Companies incorporated under the Act are capable of suing and being sued in
their corporate names. A company’s right to sue arises when some loss is caused
to the company, i.e., to the property or the personality of the company, as
distinct from a loss occasioned to the directors of the company. The rights of
the company and the rights of its shareholders are not co-extensive. Where a
company was the recipient of a cheque which was dishonoured, it was held that
the company was competent to make a complaint under section 138 of the
Negotiable Instruments Act. The money represented by the cheque was the company’s
money and not that of its functionaries and therefore the company alone could
file a complaint - Nandgopal v. NEPC Agro Foods Ltd. [1995] 83 Comp. Cas. 213
(Mad.). Incorporation brings into existence a legal person which develops into
its own separate existence as a business or enterprise. A company, as a person
separate from its members, may even sue one of its own members for libel. The
publication of any statement which disparages the business of the company,
defames the company at the same time. Hence, the company is entitled to sue in
damages for libel or slander as the case may be. - Metropolitan Saloon Omnibus
Co. Ltd. v. Hawkins [1859] 28 L.J.CL. 830.
18. In
the case of Agarwalla H.P. v. Union of India [1963] BLJR 127, it has been held
that a limited company has a separate legal personality and its directors
cannot be made liable for legal liability incurred by the company.
19. A
one-man company is a distinct assessable and legal entity as much as any other
company - O.K. Trust v. Rees 23 TC 217; Stanely v. Gramophone & Typewriter
5 Tax Cases 358 (CA); I.R. v. John 8 TC 20 (CA).
An individual may control a company; but it does not necessarily follow,
because the individual controls the company, that the business carried on by the
company controlled is necessarily a business carried on by the Controller. -
Kodak v. Clark 4 TC 549.
20. In
the case of Mrs. Bacha F. Guzdar v. CIT AIR 1955 SC 74, the Apex Court was
called upon to decide the rights of shareholder qua the rights of a company. It
has been laid down :
“. . . That a shareholder acquires a right to
participate in the profits of the company may be readily conceded but it is not
possible to accept the contention that the shareholder acquires any interest in
the assets of the company. . . .
A shareholder has got no interest in the
property of the company though he has undoubtedly a right to participate in the
profits if and when the company decides to divide them. The interest of a
shareholder ‘vis-a-vis’ the company was explained in the ‘Solapur Mills case’ -
‘Charanjit Lal v. Union of India’, AIR 1951 SC 41 at pp. 54, 55(B). That
judgment negatives the position taken up on behalf of the appellant that a
shareholder has got a right in the property of the company. It is true that the
shareholders of the company have the sole determining voice in administering
the affairs of the company and are entitled, as provided by the articles of
association, to declare that dividends should be distributed out of the profits
of the company to the shareholders but the interest of the shareholder either
individually or collectively does not amount to more than a right to
participate in the profits of the company.
The company is a juristic person and is
distinct from the shareholders. It is the company which owns the property and
not the shareholders. . . .” (p. 77)
It is necessary to note that the aforesaid law has been enunciated by the
Apex Court in the context of the contention raised before it to the effect that
when an investor buys share of a limited company the investor buys in the first
place a share of the assets of the company proportionate to the number of
shares he has purchased. It is this contention which has been negatived by the
aforesaid statement of law.
21.
Applying the aforesaid principles to the present case it is apparent that today
the limited company is no longer in existence, at least was not in existence on
the date the suit was presented. The suit has been brought in relation to the
property owned by and belonging to the limited company. Even if it could be
stated that the shareholder had any interest by virtue of the shareholding, as
stated by the Apex Court, it is only a right to participate in the profits. In
the aforesaid decision in the case of Mrs. Bacha F. Guzdar (supra) it is
further laid down that a shareholder has, over and above a right to participate
in the profits of the company, a further right to participate in “assets of the
company which would be leftover after winding up” but not in the assets as a whole.
22.
Therefore, a shareholder has a limited, restricted right only after an order of
winding up is made, liabilities of the company discharged and then if any
surplus of assets is left. In the present case it is not possible even for the
plaintiff to make a statement that the shareholder is entitled to the vessel as
being net surplus of assets after discharging all liabilities of the company.
In fact, during the course of hearing a stand is adopted that one Mrs. Luany
Rodriguez Salas, is the sole shareholder and director of the plaintiff company
and hence is an interested person. Once the position is admitted that the
company is struck off from the register and dissolved as a consequence there is
no question of any particular shareholder, even the sole shareholder, making a
claim to the property of the company without showing that all liabilities of
the company stand discharged.
23.
One more aspect of the matter is that the limited company is a separate legal
entity distinct from its shareholder. Merely because there is only one
shareholder, the entities which are otherwise distinct, one is a natural person
and the other is an artificial juristic person, it cannot be contended that the
said entities merge and one can act for and on behalf of other. The principle
of agency has to be understood and appreciated in light of the provisions of
the Act, Memorandum and Articles of Association of the company.
24.
Section 291 of the Act deals with general powers of the Board; but this does
not include power to institute suits/legal proceedings. The provisions of
section 291 of the Act while entitling a Board of Directors of a company to
exercise all such powers provide, by way of exception that the Board shall not
exercise any power which is required to be exercised by the company in general
meeting, as required by the provisions of the Act or any other law for the time
being in force as well as Memorandum or Articles of the company. Similarly the
second Proviso carves out a further exception, that the Board while exercising
powers shall be subject to the provisions contained in the Act or any other law
for the time being in force as well as memorandum and articles of the company,
and further that such exercise shall not be inconsistent with provisions of the
Act or requirement of the Memorandum or Articles of the company.
25.
Therefore, unless the power to institute a suit is specifically conferred on a
particular director, he would have no authority to institute a suit on behalf of
the company. Needless to state that such a power can be conferred by Board of
Directors only by passing the resolution in that regard. Individual directors
are vested with only such powers as are available to them either under the
memorandum or articles of the company, or otherwise by the Board of Directors.
A Managing Director also does not have any power to manage the affairs of the
company over and above those available to the Board; the Managing Director can
exercise only such powers as have been delegated to him. A company cannot
orally authorise another person to sign a plaint on its behalf. A company can
act only as provided under its Articles of Association. The provisions of Order
VI rule 14 of the Code of Civil Procedure, 1908 read with Order XXIX rule 1
stipulate that pleadings of a corporation shall be signed by an authorised
Director, Secretary or other Principal Officer.
26. In
the case of United Bank of India v. Naresh Kumar AIR 1997 SC 3 while deciding
the question whether the plaint was duly signed and verified by a competent
officer, the Apex Court laid down as under :
“9. In cases like the present where suits are
instituted or defended on behalf of a public corporation, public interest
should not be permitted to be defeated on a mere technicality. Procedural
defects which do not go to the root of the matter should not be permitted to
defeat a just cause. There is sufficient power in the Courts, under the Code of
Civil Procedure, to ensure that injustice is not done to any party who has a just
case. As far as possible a substantive right should not be allowed to be
defeated on account of a procedural irregularity which is curable.
10. It cannot be disputed that a company like
the appellant can sue and be sued in its own name. Under order 6 rule 14 of the
Code of Civil Procedure a pleading is required to be signed by the party and
its pleader, if any. As a company is a juristic entity it is obvious that some
person has to sign the pleadings on behalf of the company. Order 29 rule 1 of
the Code of Civil Procedure, therefore, provides that in a suit by or against a
corporation the Secretary or any Director or other Principal Officer of the
Corporation who is able to depose to the facts of the case might sign and
verify on behalf of the company. Reading order 6, rule 14 together with order
29, rule 1 of the Code of Civil Procedure it would appear that even in the
absence of any formal letter or authority or power of attorney having been
executed a person referred to in rule 1 of order 29 can, by virtue of the
office which he holds, sign and verify the pleadings on behalf of the
corporation. In addition thereto and de hors order 29, rule 1 of the Code of
Civil Procedure, as a company is a juristic entity, it can duly authorise any
person to sign the plaint or the written statement on its behalf and this would
be regarded as sufficient compliance with the provisions of order 6, rule 14 of
the Code of Civil Procedure. A person may be expressly authorised to sign the
pleadings on behalf of the company, for example, by the board of directors
passing a resolution to that effect or by a power of attorney being executed in
favour of any individual. In absence thereof and in cases where pleadings have
been signed by one of its officers a Corporation can ratify the said action of
its officer in signing the pleadings. Such ratification can be express or
implied. The Court can on the basis of the evidence on record, and after taking
all the circumstances of the case, specially with regard to the conduct of the trial,
come to the conclusion that the corporation had ratified the act of signing of
the pleading by its officer.” (p. 5)
27. The plaintiff would like
to adopt the approach laid down in paragraph 9 as reproduced hereinbefore.
However, the observation regarding sufficient power being available to the
Court to ensure that injustice is not done to any party who has a just case has
to be read not only in the context of the facts of the case which were there
before the Apex Court, but also while applying the principle facts of the
present case have to be borne in mind. The distinction between a public
corporation representing public interest and limited company has to be taken
into consideration for the purpose of deciding whether it is only a procedural
defect or it affects the rights of a party.
28. The question is not as
to whether such a remedy is permissible, or whether defect is required to be
permitted to be cured by ratification of the action, as is sought to be done by
filing an affidavit dated 9-3-2004 by one Luany Rodriguez Salas, a shareholder
of the plaintiff, but whether this can really amount to a procedural
irregularity only. At the cost of repetition it requires to be reiterated that
on the date of presentation of the suit the company was admittedly struck off
from the Register and dissolved. There can be therefore, no question of
ratification of an action which a non existent entity could not have initiated
in the first instance.
29. As laid down by the
Supreme Court in the case of United Bank of India (supra) in the case of a
corporation primarily a pleading is required to be signed by the Secretary, or
any director or other Principal Officer who is able to depose to the facts of
the case. That such person may sign and verify pleadings even in absence of any
formal document authorising such person by virtue of the office such person
holds; and if he does so, the action can be ratified by the corporation
subsequently expressly by a resolution, or impliedly by conduct. Here
admittedly, the plaint is signed and verified by a person who is neither
secretary, nor director, nor Principal Officer of the plaintiff. Hence, he is
not a person who is able to depose to the facts of the case. This becomes
abundantly clear when one reads the verification of the plaint.
30. In the plaint in
paragraph 25 it is stated that one Mr. Shridhar Burke a Constituted Attorney of
the plaintiff who has made himself conversant with the facts of the case on the
basis of instructions, information and documents received has signed and
verified the plaint. Page No. 14 is the verification and the same reads as
under :
“I, Shridhar Burke, of adult, Indian
Inhabitant, having my office at .... the Constituted Attorney of the plaintiffs
abovenamed do hereby solemnly declare that what is stated in the foregoing
paragraph Nos. 1 to .... is based on documents made available to me and
instructions received by me and what is stated in the remaining paragraph Nos.
..... to ..... is based upon legal advise and I believe the same to be true.
Solemnly declared at Ahmedabad this 1st day of
March, 2004.”
As can be seen
from the verification the said gentleman after stating having my office at
......., has left the space for inserting address blank and in relation to
paragraph numbers also except for mentioning paragraph No. 1 the remaining
portion has been left blank; as to what are the paragraphs which are based on
documents made available to him and what are the paragraph numbers in relation
to instructions received by him as well as what are the paragraphs based on
legal advice has been conveniently omitted. Thereafter, reply dated 5-3-2004
tendered in OJMCA has been affirmed by Luany Rodriguez Salas, a shareholder of
the plaintiff company. Subsequently an affidavit dated ..... day of March, 2004
sworn at Mumbai by Luany Rodriguez Salas has been placed on record on 8-4-2004.
In the said affidavit the deponent has not been identified by anyone nor does
the notary state that he personally knows the lady. Similarly another affidavit
has been tendered again sworn at Mumbai which has been counter signed by the
learned Advocate for the plaintiff and notarized on the same day, viz.,
7-3-2004. Today, i.e., 9-3-2004 one more affidavit has been filed wherein it is
stated to have been sworn by Luany Rodriguez Salas but once again the deponent
has not been identified by anybody though the rubber stamp has been affixed
showing.
Identified by me.
Advocate.
31. In
reply to OJMCA in paragraph 5 Mrs. Luany Rodriguez Salas states : “An
application for restoration of the plaintiff to the register has been made and
the restoration shall, in law, relate back”. In the same paragraph further it
is stated : “the plaintiff had filed the suit in extreme urgency and could not
make an application for restoration”. This affidavit is sworn on 5-3-2004. As
against the two statements made by the same person there is one more affidavit
without date, notarized on 7-3-2004 and presented in the Court on 8-3-2004
wherein it is stated that : “I say that I have signed the witness statement of
claim and sent it to Holman Fenwick and Willan, London Solicitors to enable
them to take all necessary steps for restoration of the company. I have been
informed that the filing procedure will be completed by London opening on Monday,
8th March, 2004 and an application would be made to the Court for urgent
restoration of the company. . . .”
Hence, we have three statements of the same lady stating at one place
that restoration application is already made on 5-3-2004, another where it is
accepted that as the suit was filed in extreme urgency the plaintiff could not
make an application for restoration and third one where it states that the
application is being moved on 8-3-2004. These by themselves do not determine
the lis between the parties, and appear to be small blemishes when viewed in
isolation, but are factors which when cumulatively considered reflect upon the
conduct of the plaintiff/shareholder.
32.
Along with the second affidavit notarized on 7-3-2004 Luany Rodriguez Salas has
annexed a copy of the witness statement of claim. This is what is stated in
relation to dissolution of the company.
“16 I understand that, in
compliance with my instructions, on 16th July, 2003 an application was filed
for the voluntary dissolution of the company (p.2). On 21st July, 2003, the
Registrar of Companies wrote to the directors of the company acknowledging
receipt and stating that he would take the requisite steps to remove the
company from the Register (p. 3, 4).
17. Unfortunately, the sale of the Vessel did not materialize as
expected. Under the MOA, the delivery of the Vessel was to be effected on 7th
July, 2003 with a cancellation date of 7th August, 2003 (in the buyer’s
option). By early August 2003 Simbolo had not paid the balance of the purchase
price and sought time extensions for various reasons. As the Company did not
have another potential purchaser for the Vessel, it did not terminate the MOA.
The first Gazette notice for voluntary strike off was done on 26th August,
2003.
18. At this stage I should have ensured the withdrawal of the company’s
application for voluntary dissolution. I now realise it was inappropriate for
the Company to be struck off from the Register whilst it still held assets and
whilst it still had to perform the MOA (i.e. give delivery of the Vessel under
the MOA).
19. Regrettably, I did not give sufficient consideration to the fact
that the Company Secretary had already instigated a procedure for the voluntary
winding up of the company and that this procedure would be continued with
unless the Company Secretary or I intervened on behalf of the company. This was
a mistake on my behalf and I apologies to the Court.
20. On 2nd September, 2003 the Registrar of Companies gave notice that,
unless cause was shown to the contrary, at the expiration of three months from
the said date the name of the company would be struck off the register and the
company would be dissolved (p. 5). This notice was received but, due to my
failure to appreciate its significance, I did not instruct the Company
Secretary to withdraw the company’s application for dissolution and show cause
as to why the company should remain on the register.
21. Accordingly, the company was struck off from the Register under
section 652(5) of the Companies Act, 1985 on 9th December, 2003 and dissolved
by voluntary dissolution by notice in the London Gazette dated 16th December,
2003 (p. 6).”
Therefore, the contention raised on behalf of the plaintiff that the sole
shareholder-director had no knowledge about the proceedings under section 652
of the 1985 Act, or that it had escaped attention is not only not supported by
any evidence on record, but stands falsified by this statement of claim : when
she accepts that a letter dated 21-7-2003 and then a notice dated 2-9-2003 were
received from the Registrar of Companies. The statement during course of
hearing that she realised (that the company had been dissolved) only when she
was served with OJMCA is thus patently false.
33. In the case of ‘VASSO’ (Formerly ‘ANDRIA’) [1984] 1 LLR 235
the Court of Appeal says :
“It is axiomatic that in ex parte proceedings
there should be full and frank disclosure to the Court of facts known to the
applicant, and that failure to make such disclosure may result in the discharge
of any order made upon the ex parte application, even though the facts were
such that, with full disclosure, an order would have been justified : See R.V.
Kensington Income Tax Commissioners, ex parte Princess Edmond de Polignac
[1917] 1 K.B. 486, Examples of this principle are to be found in the case of ex
parte injunctions (Daglish v. Jarvis [1850] 2 Mac & G.231), ex parte orders
made for service of proceedings out of the jurisdiction under order 11 of the
rules of the Supreme Court (The Hagen [1908] p. 189 at p. 201, per Lord Justice
Farewell), and Mareva Injunctions (Negocios del mar S.A. v. Doric Shipping
Corporation S.A. (The Assios) [1979] 1 Lloyd’s Rep. 331). In our judgment,
exactly the same applies in the case of an ex parte application for the arrest
of a ship where, as here, there has not been full disclosure of the material
facts to the Court.”
34. The High Court of Delhi in the case of
Seemax Construction (P.) Ltd. v. State Bank of India AIR 1992 Delhi 197 has
laid down :
“10. The suppression of material fact by
itself is a sufficient ground to decline the discretionary relief of
injunction. A party seeking discretionary relief has to approach the court with
clean hands and is required to disclose all material facts which may, one way
or the other, affect the decision. A person deliberately concealing material
facts from court is not entitled to any discretionary relief. The Court can
refuse to hear such person on merits. A person seeking relief of injunction is
required to make honest disclosure of all relevant statement of facts otherwise
it would amount to an abuse of the process of the Court. Reference may be made
to decision in King v. General Commissioner for the purposes of the Income-tax
Acts for the District of Kensington 1917 (1) King’s Bench Division 486 where
the Court refused a writ of prohibition without going into the merits because
of suppression of material facts by the applicant. The legal position in our
country is also no different. [See : Charanji Lal v. Financial Commissioner AIR
1978 Punj. & Har. 326 (FB)]. Reference may also be made to a decision of
the Supreme Court in Udai Chand v. Shankar Lal AIR 1978 SC 265. In the said
decision the Supreme Court revoked the order granting special leave and held
that there was a misstatement of material fact and that amounted to serious
misrepresentation. The principles applicable are same whether it is a case of
misstatement of a material fact or suppression of material fact.” (p. 201)
35. The Supreme Court in the case of S.P. Chengalvaraya Naidu v. Jagannath
[1994] 1 SCC 1 states :
“5. The High Court, in our view, fell into
patent error. The short question before the High Court was whether in the facts
and circumstances of this case, Jagannath obtained the preliminary decree by playing
fraud on the Court. The High Court, however, went haywire and made observations
which are wholly perverse. We do not agree with the High Court that there is no
legal duty cast upon the plaintiff to come to court with a true case and prove
it by true evidence’. The principle of ‘finality of litigation’ cannot be
pressed to the extent of such an absurdity that it becomes an engine of fraud
in the hands of dishonest litigants. The courts of law are meant for imparting
justice between the parties. One who comes to the Court, must come with clean
hands. We are constrained to say that more often than not, process of the Court
is being abused. Property-grabbers, tax-evaders, bank-loan-dodgers and other
unscrupulous persons from all walks of life find the Court-process a convenient
lever to retain the illegal-gains indefinitely. We have no hesitation to say
that a person, who’s case is based on falsehood, has no right to approach the
Court. He can be summarily thrown out at any stage of the litigation.
6. The facts of the present case leave no
manner of doubt that Jagannath obtained the preliminary decree by playing fraud
on the Court. A fraud is an act of deliberate deception with the design of
securing something by taking unfair advantage of another. It is a deception in
order to gain by another’s loss. It is a cheating intended to get an advantage.
Jagannath was working as a clerk with Chunilal Sowcar. He purchased the
property in the Court auction on behalf of Chunilal Sowear. He had, on his own
volition, executed the registered release deed (Ex. B-15) in favour of Chunilal
Sowcar regarding the property in dispute. He knew that the appellants had paid
the total decretal amount to his master Chunilal Sowcar. Without disclosing all
these facts, he filed the suit for the partition of the property on the ground
that he had purchased the property on his own behalf and not on behalf of
Chunilal Sowcar. Non-production and even non-mentioning of the release deed at
the trial is tantamount to playing fraud on the Court. We do not agree with the
observations of the High Court that the appellants-defendants could have easily
produced the certified registered copy of Ex. B-15 and non-suited the
plaintiff. A litigant, who approaches the Court, is bound to produce all the documents
executed by him which are relevant to the litigation. If he withholds a vital
document in order to gain advantage on the other side then he would be guilty
of playing fraud on the court as well as on the opposite party.” (p. 5)
36. The concept of fraud has
been enunciated by the Apex Court in its latest decision in the following
words, after discussing the entire case law on the subject, in the case of Ram
Chandra Singh v. Savitri Devi [2003] 8 SCC 319 :
“15.Commission of fraud on Court
and suppression of material facts are the core issues involved in these
matters. Fraud as is well known vitiates every solemn act. Fraud and justice
never dwell together.
16. Fraud is a conduct either by letter or words, which induces the
other person or authority to take a definite determinative stand as a response
to the conduct of the former either by word or letter.
17. It is also well settled that misrepresentation itself amounts to
fraud. Indeed, innocent misrepresentation may also give reason to claim relief
against fraud.
18. A fraudulent misrepresentation is called deceit and consists in
leading a man into damage by wilfully or recklessly causing him to believe and
act in flasehood. It is a fraud in law if a party makes representations which
he knows to be false, and injury ensues therefrom although the motive from
which the representations proceeded may not have been bad.
19. In Derry v. Peek [1889] 14 AC 337 it was
held :
In an action of deceit the plaintiff must
prove actual fraud. Fraud is proved when it is shown that a false
representation has been made knowingly, or without belief in its truth, or
recklessly, without caring whether it be true or false.
A false statement, made through carelessness
and without reasonable ground for believing it to be true, may be evidence of
fraud but does not necessarily amount to fraud. Such a statement, if made in
the honest belief that it is true, is not fraudulent and does not render the
person making it liable to an action of deceit.
20. In
Kerr on Fraud and Mistake, at p. 23, it is stated :
‘The true and only sound principle to be
derived from the cases represented by Slim v. Croucher [1860] 1 De GF & J
518 is thus : that a representation is fraudulent not only when the person
making it knows it to be false, but also when, as Jessel, M.R., pointed out, he
ought to have known, or must be taken to have known, that it was false. This is
a sound and intelligible principle, and is, moreover, not inconsistent with
Derry v. Peek [1889] 10 AC 337. A false statement which a person ought to have
known was false, and which he must therefore be taken to have known was false,
cannot be said to be honestly believed in. ‘A consideration of the grounds of
belief’, said Lord Herschell, ‘is no doubt an important aid in ascertaining whether
the belief was really entertained. A man’s mere assertion that he believed the
statement he made to be true is not accepted as conclusive proof that he did
so.’
** ** **
22. Recently this Court by an order dated 3-9-2003 in Ram Preeti Yadav
v. U.P. Board of High School & Intermediate Education [2003] 8 SCC 311 held
: (SCC pp. 316-317, paras 13-15)
‘13.
Fraud is a conduct either by letter or words, which induces the other person or
authority to take a definite determinative stand as a response to the conduct
of the former either by words or letter. Although negligence is not fraud but
it can be evidence on fraud. (See Derry v. Peek).
14.
In Lazarus Estates Ltd. v. Beasley [1956] 1 All ER 341 the Court of appeal
stated the law thus : (All ER p. 345 C-D).
‘I
cannot accede to this argument for a moment. No court in this land will allow a
person to keep an advantage which he has obtained by fraud. No judgment of a
Court, no order of a minister, can be allowed to stand if it has been obtained
by fraud. Fraud unravels everything. The Court is careful not to find fraud
unless, it is distinctly pleaded and proved; but once it is proved it vitiates
judgments, contracts and all transactions whatsoever;’
15.
In S.P. Chengalvaraya Naidu v. Jagannath [1994] 1 SCC 1 this Court stated that
fraud avoids all judicial acts, ecclesiastical or temporal.’
23. An act of fraud on Court is always viewed seriously. A collusion or
conspiracy with a view to deprive the rights of the others in relation to a
property would render the transaction void ab initio. Fraud and deception are
synonymous.
** ** **
29. In Chittaranjan Das v. Durgapore Project Ltd. [1995] 2 Cal.LJ 388
it has been held : (Cal LJ p. 402, paras 57-58).
‘57. Suppression of a
material document which affects the condition of service of the petitioner,
would amount to fraud in such matters. Even the principles of natural justice
are not required to be complied with in such a situation.
58. It is now well known that a fraud vitiates all solemn acts. Thus,
even if the date of birth of the petitioner had been recorded in the service
returns on the basis of the certificate produced by the petitioner, the same is
not sacrosanct nor the respondent company would be bound thereby.’” (pp.
327-330)
Applying the aforesaid principles it is clear that : (i) there is absence
of full and frank disclosure; (ii) there is a misstatement of a material fact
or suppression of material fact; and, there is withholding of a vital fact by
the plaintiff. This amounts to commission of fraud on the Court.
Misrepresentation itself amounts to fraud. A representation is fraudulent not
only when the person making it knows it to be false, but also when, he ought to
have known, or must be taken to have known, that it was false. The plaintiff is
a limited company - a juristic entity - acting through a living person. That
person herein claimed to be sole shareholder-director, who admits : (i) she
instructed the Company Secretary in July 2003 to apply for having the name of
the company struck off from the Register; (iii) received letter and notice from
the Registrar in July and September 2003 : and yet expects the Court to believe
that there is no suppression. There is no offer/attempt to amend the plaint
even after receipt of OJMCA. The offer, during course of hearing, is only to
substitute the plaint to remove defects. Therefore, this is a clear case of
deception. Fraud and deception are synonymous.
37. As
already seen a non existent entity cannot ratify any action which it could not
have initiated : there is no director, no secretary, no principal officer. The
company having been dissolved there is no entity/person who can authorise
anyone. A shareholder of erstwhile company cannot claim any right, title or
interest in any particular asset/property of the company. Then there is no
question of executing any power of attorney as authorised signatory. - [1986]
BCLC 342 (CA).
38. In
the case of Pierce Leslie & Co. Ltd. v. Miss. Violet Ouchterlony Wakshare
AIR 1969 SC 843 it is laid down thus :
“12. As already stated, technical escheat of
the real property of dissolved company was abolished in England in 1929 and
section 354 of the Companies Act, 1948 now provides that all property and
rights of a dissolved company shall be deemed to be bona vacantia and shall
accordingly belong to the Crown. There was no statutory provision like section
354 before 1929. In the absence of such a provision, the Crown took the real
property of a company dissolved before 1929 by escheat and its personal
property as bona vacantia, except in so far as its right was cut down by
statute, see 1933-1 Ch. 29 (supra). Likewise in this country, the Government
took by escheat or as bona vacantia all the properties of a company dissolved
under the Indian Companies Act, 1913 except insofar as its right was cut down
by that Act. P.B. Mukherjee, J. expressed a similar opinion U.N. Mandal’s Esate
(P.) Ltd., In re AIR 1959 Cal. 493 at p. 498.
13. Accordingly the shareholders or creditors
of the dissolved company cannot maintain any action for recovery of its assets.
No effective relief can be given in such action, as the company is not a party
and the assets cannot be restored to its coffers. On this ground in Coxon v.
Gorst 1891-2 Ch. 73 an action by creditors for recovery of moneys due to the
dissolved company was dismissed, and in re Lewis & Smart Ltd., In re 1954-1
WLR 755 it was held that a pending misfeasance summons abated on the dissolution
of the company.
14. The plaintiffs’ contention that the
properties of a dissolved company passed to its shareholders is based upon
American law, which is stated in American Jurisprudence, 2d, Corporations, Art.
1659 thus :
** ** **
15. The law in our country is very different.
Here the winding up precedes the dissolution. There is no statutory provision
vesting the properties of a dissolved company in a trustee or having the effect
of abrogating the law of escheat. The shareholders or creditors of a dissolved
company cannot be regarded as its heirs and successors. On dissolution of a
company, its properties, if any, vest in the Government. . . .” (p. 850)
39. In
so far as applicability of order VI rule 14 of the Code of Civil Procedure is
concerned : the moot question is : does the non existent company own any
property? The legal position is now well settled : on dissolution, properties
of a company vest in the Government. As can be seen hereinafter, by virtue of
section 654 of the 1985 Act, even if the property of the company is not sold
(as per the plaintiff), the property has vested in the Crown. Then there is no
question of any person, including a shareholder, staking a claim to the
property; and, thus, filing a plaint by self or through a power of attorney
holder.
40. In
light of the fact that the entire case of the plaintiff rests on the effect of
restoration of the name of the company to the register it is necessary to
examine, however briefly, the provisions in relation to restoration. At the
same time it is necessary to bear in mind that the present proceedings are not
for the purpose of restoration and this Court is not called upon to decide any
such issue but so as to appreciate the contentions raised on behalf of the
plaintiff it is necessary to look at the provisions dealing with the
restoration.
41.
Section 651 of the 1985 Act pertains to power of Court to declare dissolution
of company void. Under sub-section (1) of section 651, the Court may at any
time within two years from the date of dissolution, where a company has been
dissolved, make an order, on such terms as the Court thinks fit, declaring
dissolution to be void, on an application made for the purpose by liquidator of
the company or by any other person (appearing to the Court to be interested).
Sub-section (2) of section 651 states that thereupon such proceedings may be
taken as might have been taken as if the company had not been dissolved. Under
sub-section (3) a person making application is required within seven days after
the making of the order by the Court to deliver to the Registrar of the
Companies an office copy of the order. Therefore, under this section only the
liquidator of the company or a person who appears to the Court to be interested
can move the Court; and once the Court declares the dissolution to be void
thereupon such proceedings may be taken as might have been taken as if the
company had not been dissolved.
42. In
the present case admittedly there being no winding up order a liquidator stands
ruled out. Then question that requires to be looked into is whether the
plaintiff or shareholder can be termed as a person who appears to the Court to
be interested. It is not necessary for the present purpose to determine this
question as, on behalf of the plaintiff, it is an accepted position that the
plaintiff does not seek restoration under section 651 of the 1985 Act.
43.
Section 652 of the 1985 Act provides powers to the Registrar to strike off a defuntct
company off the register. Sub-sections (1) and (2) of section 652 pertain to
the procedure to be adopted. Sub-section (3) provides that if the Registrar
either does not receive an answer in response to the communication required to
be sent under sub-sections (1) and (2), or receives an answer to the effect
that the company is not carrying on business or is not in operation, he may
publish in the Gazette a notice and also send a notice by post to the company
that at the expiration of three months from the date of such notice the name of
the company will be struck off from the register and the company will be
dissolved, unless a contrary cause is shown. Sub-section (4) of section 652
pertains to a situation where a company is being wound up and hence, is not
relevant for the present purpose. Sub-section (5) of section 652 stipulates
that at the expiration of the time mentioned in the notice the Registrar may
strike the name of the company off the register, unless contrary cause has been
shown by the company and shall publish notice of such striking off in the
Gazette; and the company is dissolved on the publication of such notice in the
Gazette.
44.
Admittedly, in the present case sub-sections (1) & (2) of section 652 of
the 1985 Act have no play. It is an accepted position that it was the plaintiff
who had moved the Registrar for having the name of the company struck off from
the register, and the Registrar had acted in pursuance of such application
resulting in dissolution of the company, publication in the Gazette as required
both under sub-sections (3) and (5) of section 652 having been complied with.
The application for striking off had been made on 18-7-2003. The first notice
for voluntary strike off had been published in the Gazette on 26-8-2003 and the
final notice for voluntary striking off had been published in the Gazette on
16-12-2003, resulting in dissolution on the said day.
45.
Section 653 of the 1985 Act pertains to objection to striking off by an
aggrieved person. Sub-section (1) of section 653 states that the following
sub-section applies if a company or any member or creditor of the company feels
aggrieved by the company having been struck off the register. Under sub-section
(2) on an application by the company or a member or creditor within stipulated
period of limitation the Court, may, if satisfied that the company was at the
time of striking off carrying on business or in operation, or otherwise that it
is just that the company be restored to the register, order the company’s name to
be restored. Sub-section (3) of section 653 is made up of two parts : The first
part states that on an office copy of the order being delivered to the
Registrar of Companies for registration the company is deemed to have continued
in existence as if its name had not been struck off; while the second part of
the provision stipulates that the court may by order give such directions and
make such provisions as seem just for placing the company and all other persons
in the same position (as nearly as may be) as if the company’s name had not
been struck off.
46.
Thus, on a conjoint reading of provisions of sub-sections (1) and (2) of
section 653 of the 1985 Act it is apparent that a company or any member or
creditor can apply to a Court if the company or member or creditor feels
aggrieved by the name of the company having been struck off from the register,
while sub-section (2) of section 653 of the 1985 Act provides for the condition
on fulfilment of which the Court may exercise discretion of restoring the company
to the register. The Court is required to be satisfied that at the point of
time when the name of the company was struck off from the register (a) company
was carrying on business or was in operation, (b) or otherwise, that it is just
that the company be restored to the register. Therefore, the person applying
for restoration has to be a person who is aggrieved. The concept of ‘aggrieved’
here means that the order of striking off has resulted in a situation which is
detrimental to the applicant, viz., company or any member or creditor.
Therefore, unless the applicant is ‘aggrieved’ there is no question of making
an application seeking restoration. Upon an application being made the Court is
required to ascertain whether the company was carrying on business or was in
operation at the time of the striking off the name from the register. In
effect, it means that the reasonable belief entertained by the Registrar of
Companies under section 652(1) of the 1985 Act is found to be incorrect. For
the Court to record such a finding there must be some material available on
record. The other alternative contention which permits the Court to exercise
discretion requires that ‘it is just’ that the company be restored to the
register. This requirement has to be backed by facts and circumstances
prevailing in a given situation so as to enable the Court to exercise
discretion in favour of the applicant, namely that the action of the Registrar
striking off the name of the company of the register would result in creating a
situation which is unfair and unjust to the applicant.
47. In the present case, admittedly, the
plaintiff cannot seek restoration on the ground that it was carrying on
business or was in operation at the time when its name was struck off, as the
plaintiff had applied that its name be struck off from the register as the
company was not carrying on business or was not in operation. In light of the
fact that an application has been moved, as stated at the bar, it is not
necessary to deal with the alternative situation whether it would be
permissible for the Court to exercise discretion on the basis of the
consequence of striking off being unjust to the applicant. Suffice it to state
that there has to be cogent and sufficient material in this regard.
48.
Section 654 of the 1985 Act stipulates that property and rights of a dissolved
company are deemed to be bona vacantia and accordingly, belong to the Crown.
Once this is the position, the plaintiff cannot seek any relief on the basis of
being owner of the property without either impleading crown or putting it to
notice.
49. In
the aforesaid factual matrix even if the plaintiff has moved an application
seeking restoration of the company to the register it is not necessary to await
outcome of such application. The learned counsel on behalf of the plaintiff had
orally requested that the matter may be adjourned to await outcome of the
restoration application. However, considering the fact that an order of arrest
is operating against the defendant it is not possible to the said request,
especially in light of the fact that the plaintiff was not inclined to permit
vacation of the ex parte interim order of arrest.
50.
There is a serious dispute between the parties as regards whether any sale has
been effected by the plaintiff as averred by the defendants in OJMCA. In this
context the defendants have in paragraphs 10 of OJMCA, in support of their
averments that the plaintiff had executed a sale in favour of the defendants,
placed reliance on factum of the Director of the plaintiff having provided a
copy of her passport for identification purpose and provided confirmation that
she was a Director of the plaintiff company. In support of the averment a copy
of the passport has been annexed and marked as Exhibit-6 of OJMCA. No explanation
is forthcoming on behalf of the plaintiff even though an affidavit-in-reply has
been tendered as to in what circumstances the said lady had furnished a copy of
her passport to the defendants. Therefore, this is one factor which remains
uncontroverted and would go to show that the plaintiff has not approached the
Court with full and true disclosure of all material facts.
51. In
relation to the payment of sale consideration it is averred by the defendants
in paragraph 12 of OJMCA that defendant No. 2 had paid all outstanding dues of
Oostende Port as well as negotiated a settlement with other persons who were
having prior charges over the vessel. In this context reliance has been placed
on a copy of fax message dated 4-11-2003 from Ernst & Young copy of which
is annexed as Exhibit-8. As can be seen from page Nos. 26, 27 & 28 the
various charges and claims outstanding against the vessel have been mentioned.
The plaintiff has in its reply disputed this by stating in paragraph 6(i) that
it is not stated who the creditors were, what were the claims, etc. The details
are available at page 28 of OJMCA, but more importantly, as can be seen from
page 39 which is annexed to the reply of the plaintiff, the plaintiff was aware
that there were seizures in place but these were at the expenses of Audrey
Ventures, viz., the previous owner. In the same communication which is
admittedly generated from the office of advocates of the plaintiff, it is
stated as to which amounts have been paid by the defendants to lift seizures.
Thus, prima facie it appears that there were claims outstanding against the
vessel and the averment made by the plaintiff that it has not been paid full
consideration is not found to be absolutely correct. Whether the defendants
have paid the entire amount of consideration or not by discharging such
existing claim is not the question that is required to be decided. The only
aspect that requires consideration at this stage is whether the plaintiff has
placed all relevant facts before the Court or not.
52. In the plaint paragraph 2 reads as under :
“2. At the outset, the plaintiffs wish to
state that the present suit is being filed under circumstances warranting
extreme urgency. The plaintiffs only a very short while ago learnt about the
arrival of the 1st defendant vessel at Alang/Bhavnagar for scrapping.
Immediately thereupon the plaintiffs instructed their Advocates to address a
letter dated 28th February, 2004 (Saturday) to the Commissioner of Customs,
Bhavnagar, requesting him not to grant beaching permission to the 1st defendant
vessel and not to accept the Bill of Entry relating to the 1st defendant vessel
and informing him that the plaintiff would be adopting appropriate proceedings.
Having regard to the critical urgency that the matter entails, the plaintiffs
have had to file the present suit on the first working day thereafter. The
plaintiffs have thus had very little time to instruct their Indian Advocates
and appraise them of all facts and documents. The difficulty has been
compounded by different time zones, the fact that many of the documents are in
foreign language and the office of their Belgian lawyers being closed over the
intervening week end. Although every attempt has been made in the circumstances
to bring all relevant facts and documents to the notice of this Hon’ble Court,
it is possible that due to oversight and inadvertence and want of translations,
something may be omitted or overlooked. The plaintiffs therefore crave liberty
from this Hon’ble Court to place the same on record at a later stage, should
this be necessary or advised.”
At the time of
hearing on 1-3-2004 a specific query was put to the learned counsel of the
plaintiff as to what had prompted insertion of such paragraph in the plaint.
The answer was that having regard to the urgency and the documents being in
foreign language, it was found necessary to make such averment. All that can be
said after hearing the parties in relation to such averment is that it appears
that the plaintiff has sought to prevaricate and build a proposed defence, with
the knowledge that the suit was being presented on behalf of defunct company
which had already been struck off from the Register.
53. In the aforesaid fact
situation applying the test and adopting the approach stated by the Apex Court in
the case of United Bank of India (supra) it is not possible to state that these
are procedural defects which do not go to the root of the matter and should not
be permitted to defeat a just cause. The plaintiff has failed to make out a
case so as to seek assistance of the aforesaid observations made by the Apex
Court.
54. In the result, the OJMCA
is allowed and as a consequence the suit is dismissed. The order of the arrest
of the vessel made on 1-3-2004 is hereby vacated/set aside. The plaintiff shall
bear the cost of the suit and the OJMCA. It will be permissible to the
defendants to communicate this order by fax at their own costs. At this stage,
Mr. Thakor, learned counsel appearing on behalf of the plaintiff makes a
request that the order of arrest may be continued so as to enable the plaintiff
to approach the higher forum. On the facts and the circumstances which have
come on record the said request is rejected.
[2004]
50 SCL 19 (Ker.)
High
Court of Kerala
v.
Lona Chackola
J.B.
Koshy and K. Padmanabhan Nair, JJ.
C.R.P. Nos. 2196, 2205 and 2285 of 2001
March 20,
2002
Section 34 of the Companies Act, 1956, read
with section 11(3) of the Kerala Buildings (Lease and Rent Control) Act, 1965 -
Incorporation of company - Respondent-landlord formed a registered private
company along with his family members, office of which was being conducted in a
rented premises - Since premise was insufficient to make use of same as office,
respondent being director of company filed a eviction petition under section
11(3) of Kerala Buildings (Lease and Rent Control) Act, to evict revision
petitioner-tenants contending that building was bona fidely needed to
accommodate office of company in which respondent was a director and need of
company was that of respondent himself - Whether once a company is
incorporated, it is entirely different from its shareholders - Held, yes -
Whether company incorporated by respondent was a different entity and need of
company for occupation of building could not be said to be need of respondent
for his own occupation and, therefore, respondent could not file petition under
section 11(3) - Held, yes
Facts
The
respondent-landlord, along with his family members, formed a registered private
company for the construction and sale of flats. The office of the company was
being conducted in a rented premises. The revision petitioners were tenants of
the respondent and occupied line rooms in the same building owned by the
respondent. The respondent submitting that the rented premises was not at all
sufficient and suitable to make use of the same as office filed a eviction
petition under section 11(3) of the Kerala Buildings (Lease and Rent Control)
Act, to evict the petitioners on the ground that the whole building was bona
fidely needed by the respondent to accommodate the office of the company of
which he was a director, and the need of the company was that of the respondent
himself. The
On revision
petition :
Held
It is
well-settled law that whether it is a private limited company or a public
limited company, a registered company is a separate entity. Once a company is
incorporated, it is entirely different from the persons who are shareholders of
the company. In a limited company, liabilities of shareholders are limited
unlike a partnership firm. A shareholder cannot bind another as there is no
joint or several liabilities. A partnership has no legal existence apart from
its members. Unlike partnership, an incorporated company is a separate entity
distinct from its shareholders. A company is a legal person. Therefore, a
company is entirely a different persona. By incorporation under the Companies
Act, a company is vested with a corporate personality which is distinct from
the members who compose it. An incorporated company never dies. It is an entity
with perpetual succession. Even if the landlord transfers his shares, the
company continues. The company will continue despite change of members or
directors. The property of the company is not the property of the shareholders;
it is the property of the company. A company, being a body corporate, can sue
and be sued in its own name unlike a partnership firm. Lifting of corporate
veil allowed in certain circumstances as an exception to Saloman’s principles
in the interests of the revenue, in cases of fraud or liability fixed on
directors in specific cases by statutes will not change the separate
personality of the company. [
In the instant
case, the company wanted to have an office and since the respondent-landlord
was a director of the company, it could not be stated that it was his need or
requirement for his ‘own’ occupation. In the eviction petition, the need of the
company in which the landlord was the director, was projected as his own need.
The same could not be agreed with. Unlike a partnership firm, a company is a
different entity and need of the company in which landlord is a director cannot
be said to be the need of the landlord for his ‘own’ occupation and, therefore,
the landlord cannot file a petition under section 11(3) for the occupation of
the building owned personally by him for the functioning of the company merely
because he is a director of the company. [
In the above
circumstances, the application was not maintainable and the decision of the
Cases referred to
D.N. Sanghavi
& Sons v. Ambalal Tribhuwan Das AIR 1974 SC 1026 (Para 5), Bega Begum v.
Abdul Ahad Khan AIR 1979 SC 272 (Para 7), Govinda Pai v. Sarvothama Rao [1981]
KLT 330 (para 7), Panduranga Prabhu v. Muhammed Kunju [1994] 2 KLT 1043 (para
7), Shantilal Thakordas v. Chimanlal Maganlal AIR 1976 SC 2358 (para 7), Madras
Bangalore Transport Co. (West) v. Inder Singh AIR 1986 SC 1564 (para 8), Janaki
Devi v. Jain [1994] 5 SCC 337 (para 8), Palakkad District Co-operative Bank v.
Mohammed Kaleem [1996] 1 KLT 247 (para 8), Sundaresan Trading Co. Ltd. v.
Narayan [1977] KLT 595 (para 8), Kalinga Tubes Ltd. v. Shanti Prasad Jain AIR
1963 Ori. 189 (para 9), Aron Saloman v. A. Saloman & Co. Ltd. [1897] AC 22
(HL) (para 9) and Tunstall v. Steigman [1962] 2 QB 593 (para 10).
K.G. Sarathkumar for the
Petitioner. C.K. Aravindaksha Menon, A. Balagopalan, Varghese Parambil,
Prakash P. George, M.N. Manmadan, V.N. Gopinathan and Basil Mathew
for the Respondent.
Judgment
J.B. Koshy,
J. - An important question of law to be decided in this case is whether
need for occupation of a registered private company in which the landlord is a
director, is the bona fide need of the landlord for his own occupation. The
revision petitioners are tenants of the respondent. They occupied line rooms in
the same building owned by the respondent. The respondent filed eviction
petition to evict these revision petitioners. The common ground urged is one
under section 11(3) of the Kerala Buildings (Lease and Rent Control) Act
(hereinafter referred to as “the Act”). Other grounds were also urged. The
“(3) A landlord may apply to the
2. The bona fide need put forward
by the respondent landlord is that the respondent along with his two brothers
aged 32, 38 and 28 along with their family members formed a registered company
in the name and style of Chackolas Habitat Pvt. Ltd. for the construction and
sale of flats and it was registered under the Companies Act. The landlord is
one of the directors and the other directors are members of the landlord’s
family. It is further averred as follows :
“The company is receiving good orders one
after another for construction of flats, it is submitted that the company has
no offices of its own. In other words petitioner has no other building to
accommodate the office of Chackolas Habitat. At present the office of the
company is being conducted in a building belonging to Kerala Traders,
3. Therefore, the bona
fide need urged by the respondent landlord is that he needed the above building
for occupation of the company of which he is a director and shareholders of the
company are his family members. All of them are not dependent on him. The
4. In appeal the Appellate
Court found that the need urged by the appellants is for housing company in
which he has substantial interest and therefore lower Court finding is not
sustainable and was set aside. The Appellate Court found as follows :
“In the facts and circumstances of this case,
it can be stated that his family members depend on the appellant for getting a
vacant building. Therefore, merely because of the fact that a private limited
company is a separate legal entity, it cannot be said that appellant’s claim
for eviction for housing a business, in which he has substantial interest,
cannot be allowed under section 11(3) of the Act. Finding entered into by the
Court below on this respect is not sustainable and hence it is set aside.”
5. The whole question to
be considered is can the need of the company in which the landlord is
substantially interested be said to be the landlord’s own needs for the purpose
of section 11(3) of the Act. One decision referred to in this matter is D.N.
Sanghavi & Sons v. Ambalal Tribhuwan Das AIR 1974 SC 1026. There the
Supreme Court stated that the phrase his own occupation used in the Madhya
Pradesh Accommodation Control Act has got very much significance. The Supreme
Court held in paragraph 8 (page 1030) as follows :
“The first proviso to sub-section (2) of
section 39 provides that at the request of the landlord such accommodation may
be allotted to him if he needs it ‘for his own occupation’. As section 39 deals
with a residential as well as a non-residential accommodation, the expression
‘his own occupation’ in the first proviso should be amplified to read as ‘his
own occupation by way of residence or business’. Clauses (e) and (f) of section
12(1) are complementary to the first proviso to section 39(2). While the first
proviso enables the landlord to obtain possession of a vacant accommodation for
his own occupation by way of residence or business, section 12(1)(e) enables him
to obtain a residential accommodation for his or his family’s residence by
ejecting a tenant. Similarly, section 12(1)(f) enables him to obtain a
non-residential accommodation for continuing or starting ‘his business’ by
ejecting the tenant. Considering the complementary nature of section 12(1)(f),
we have little doubt in our mind that the words ‘for the purpose of continuing
or starting his business’ in the section should be amplified to read as ‘for
the purpose of his own occupation by way of continuing or starting his
business’. It cannot be legitimately complained that we are trying to redraft
clause (f). This amplification is necessarily implied, for we think that the
Legislature intended to use the phrase ‘for the purpose of continuing or
starting his business’, as synonym for the phrase ‘for his own occupation’ in
the first proviso to section 39(2) as explained earlier. The words ‘in his
occupation’ at the end of clause (f) fortify our construction. Again, the word
‘own’ in the phrase ‘his own occupation’ should not be discarded as redundant.
It seems to us that the Legislature has deliberately used it to add emphasis to
the possessive force of the pronoun ‘his’ (see the Shorter Oxford Dictionary,
3rd edition, page 1409). It connotes the idea that the accommodation is needed
directly and substantially for his occupation.
On this construction of clause (f) of section
12(1), it is necessary for the respondent to prove that the accommodation is
needed directly and substantially for his occupation for the purpose of
continuing or starting his business.”
6. After holding so, the
Supreme Court held that since the petitioner therein was a sleeping partner he
cannot say that it is for his business. In paragraph 11 of the judgment it was
held as follows (page 1031) :
“If the deed of partnership has excluded him
expressly or impliedly from the management of firm’s business and has made him
a sleeping partner, it cannot be held that the accommodation is needed directly
and substantially for his occupation by way of business. Nor he has power to
shift the business. To sum up, for the reasons already given, his suit should
fail.”
7. Here in this case the
landlord is not requiring the building for his partnership business or his own
occupation for the business of a partnership firm in which he is an active
partner. A partnership is different from an incorporated company which has its
own legal personality. The possibility of the landlord starting a business in
the building is not excluded from the section as held by the Supreme Court in
Bega Begum v. Abdul Ahad Khan AIR 1979 SC 272. In Govinda Pai v. Sarvothama Rao
[1981] KLT 330 it was held that application by a landlord seeking eviction for
the purpose of occupation by a firm of which he is a partner is sustainable. In
Panduranga Prabhu v. Muhammed Kunju [1994] 2 KLT 1043 it was held that eviction
for the bona fide need of his son to accommodate a business which he was
carrying on in partnership with others is sustainable. But in Shantilal
Thakordas v. Chimanlal Maganlal AIR 1976 SC 2358 the landlord, a partner of a
firm sought eviction for his bona fide requirement for the use of the firm.
After his death the firm was reconstituted including some outsiders as
partners. It was held that the requirement of the deceased landlord cannot be
said to be the requirement of the partners.
8. Another decision cited
before us was the decision of the Supreme Court in Madras Bangalore Transport
Co. (West) v. Inder Singh AIR 1986 SC 1564. Therein the case was whether there
was subletting. A firm was in occupation of the premises. The firm was
converted into a limited company. The Supreme Court held in that case that
there is no parting of possession of the premises by the landlord and there is
no subletting. The question to be considered is whether eviction is to be
granted on the ground of subletting and whether there is transfer of exclusive
possession, whereas under section 11(3) bona fide need for ‘own’ occupation has
to be proved. Therefore, the above case is of no help to the petitioners while
interpreting the provisions of section 11(3). (See also Janaki Devi v. Jain
[1994] 5 SCC 337.) In Palakkad District Co-operative Bank v. Mohammed Kaleem
[1996] 1 KLT 247 it was held that the words “his livelihood” mentioned under
the second proviso to section 11(3) of the Act can have reference only to a
natural person and not to an inanimate lifeless legal entity like a
co-operative society or company incorporated under the Companies Act. There the
Court was considering only the effect of the proviso to section 11(3) of the
Act. If the company is the tenant, it cannot claim the protection of the second
proviso to section 11(3). But a company also can claim benefits under section
11(3) of the Act. A company can own property. If the company is a landlord and
if it requires occupation of the employees or extending the business of the
company for its own use, a petition under section 11(3) will be maintainable.
See (Sundaresan Trading Co. Ltd. v. Narayan [1977] KLT 595.) Here the question
is entirely different. Here the question is whether requirement of the company
can be said to be the requirement of the landlord merely because landlord is
the director of the company and shareholders are his family members.
9. It was argued on behalf
of the respondent landlord that a private limited company is different from a
public limited company and a private limited company is more or less equal to a
partnership firm as held by the Orissa High Court in Kalinga Tubes Ltd. v.
Shanti Parsad Jain AIR 1963 Ori. 189. It is well-settled law that whether it is
a private limited company or public limited company, a registered company is a
separate entity. Once a company is incorporated, it is entirely different from
the persons who are shareholders of the company. In a limited company,
liabilities of shareholders are limited unlike a partnership firm. A
shareholder cannot bind another as there is no joint or several liability. A
partnership has no legal existence apart from its members. Unlike partnership
an incorporated company, is a separate entity distinct from the shareholders. A
company is a legal person. This position is well-illustrated in Aron Saloman v.
A. Saloman & Co. Ltd. [1897] AC 22 HL. This principle laid down in the 18th
century is still followed. Therefore, a company is entirely a different
persona. By incorporation under the Companies Act, a company is vested with a
corporate personality which is distinct from the members who compose it. In
this connection we also refer to section 34(2) of the Companies Act, 1956. An
incorporated company never dies. It is an entity with perpetual succession.
Even if the landlord transfers his shares, the company continues. The company
will continue despite change of members or directors as Blackstone has put it
“in the like manner as the river Thames is still the same river, though the
parts which compose it are changing every instant” and Gower has stated
“members may come and go but the company can go on for ever.” The property of
the company is not the property of the shareholders; it is the property of the
company. A company, being a body corporate, can sue and be sued in its own name
unlike a partnership firm. Lifting of corporate veil allowed in certain
circumstances as exception to Saloman’s principles in the interests of the
Revenue, in cases of fraud or liability fixed on directors in specific cases by
statutes will not change the separate personality of the company.
10. A similar case as
claimed by the landlord herein was considered in England in Tunstall v. Steigman
[1962] 2 QB 593. There is landlady’s bid to regain tenanted premises for self
business failed as the business was in the name of an incorporated private
limited company. Here Chackolas Habitat Pvt. Ltd. the company wants to have an
office and since the respondent landlord is a director of the company it cannot
be stated that it is his need or requirement of “own” occupation. In the
eviction petition, the need of the company in which the landlord is the
director is projected as his own need. We are unable to agree with the above.
Unlike a partnership firm, a company is a different entity and need of the
company in which landlord is a director cannot be said to be the need of the
landlord for his “own” occupation and therefore, the landlord cannot file a
petition under section 11(3) for the occupation of the building owned
personally by him for the functioning of the company merely because he is a
director of the company.
11. In the above
circumstances, the application is not maintainable and we agree with the Rent
Control Court and affirm the decision of the Rent Control Court and set aside
the appellate authority’s decision.
All the C.R.Ps. are allowed to the above extent.
[1998] 18 SCL 12 (SC)
SUPREME COURT OF
v.
Arun Commercial Premises Co-Operative Housing Society Ltd.
DR. A.S.
ANAND AND S. RAJEDNRA BABU, JJ.
CIVIL APPEAL NO. 4260 OF 1992
MAY 6, 1998
Section
34, read with section 12, of the Companies Act, 1956 - Incorporation of company
- Under an agreement to leave and licence an association of an unregistered
body became a tenant of a premises - Later association was incorporated under
Companies Act - No separate agreement was entered into between registered body
and landlord - No resolution was produced to show that unregistered body was
converting themselves into an incorporated body nor articles of association of
incorporated body say all members of an unregistered body became automatically
members of registered company - Whether appellant-registered company could not
be said to be a successor of unregistered body and registered company being a
distinct legal entity could not claim to be a tenant in respect of premises in
question - Held, yes
FACTS
An association ECD, which was an unregistered body,
became a tenant of premises under an agreement of leave and licence.
Subsequently a company ECD was incorporated under the Companies Act and the
registered company continued to occupy the same premises of the unregistered
body. The registered company filed suit for a declaration that it was a tenant
of the premises and an eviction suit was filed by the landlord and both the
suits were pending. While so on a dispute under section 91 of the Maharashtra
Co-operative Societies Act an arbitrator was appointed who ordered eviction of
the company which was upheld by the High Court giving a finding that the
appellant-company was distinct legal entity and was in occupation of suit
premises without any agreement of leave or licence and appellant-company was
not a successor to unregistered body.
On appeal to the Supreme Court the company, inter
alia questioned the authority of the arbitrator and the Co-operative Tribunal
to order eviction.
HELD
As per the article of the appellant company, a member
of ECD Association as of right be admitted as a member of the appellant-company
subject to certain conditions. It did not say that all those members in the
unregistered association become members of the association much less any
resolution was produced before the Court to show that they were converting
themselves into an incorporated body. The members of the unregistered body were
all incorporated bodies having a high commercial standing in the corporate
sector, and therefore, could not be expected to be so naive or ignorant as not
to take such steps in the event it was the intention of such body to become an
incorporated body in the manner suggested by the appellant. If really such
action had been taken, it would not have been difficult for the appellant to
produce such material Therefore, the fact that the appellant was a distinct
legal entity as found by the authorities below and affirmed by the High Court,
could not be seriously disputed Since the appellant was a distinct legal entity
other than the unregistered body and there was no material to show that it was
a successor thereto it was not understandable as to how it became a tenant in
respect of the premises in question without an agreement with the society or
respondent No. 2, a member thereof. Therefore the view taken by the High Court
appeared to be correct.
CASES REFERRED TO
O.N.
Bhatnagar v. RukiBai AIR 1982 SC 1097 and Sanwarmal Kejrimal v. Vishwa
Co-operative Housing Society Ltd AIR 1990 SC 1563.
Mukul
Rohtagi, Ms. Bina Gupta and Ms. Rakhi Ray for the Appellant. Anil B. Diwan,
Javed M. Rao, Girish Chandra, Bhimrao Naik, V.N. Ganpule, Manish Garg and R.
Sasiprabhu for the
Respondent.
Babu, J. -This appeal is preferred by a company incorporated
under the Companies Act, 1956 ('the Act'). The claim of the appellants is that
an association which was an unregistered body known as 'Indian Cables Maker's
Association' was inducted in the year 1969 as a tenant in the premises Room No.
503, 5th Floor, Arun Chambers, Tardeo, Bombay by respondent No. 2 under an
agreement termed as leave and licence dated 23-9-1969 at a rental of Rs. 1,500
out of which Rs. 1,000 was towards the premises and rent of Rs. 500 p.m. was
payable towards furniture and fixtures; that the name of the appellant was
changed from Indian Cable Maker's Association into Electrical Cable Development
Association also another unregistered body in the month of August 1972 and with
the said association also a similar leave and licence agreement was executed by
the respondent No. 2 on a rental of Rs. 1,750 p.m. out of which rent of Rs.
1,000 was towards the premises and Rs. 750 towards fixtures and furniture; that
in the year 1976 the unregistered body decided to convert itself into a company in order to carry on
its affairs more effectively and so registered as such under the Act; that
respondent No. 2 continued to receive rents from appellant in respect of the
said premises. The appellant had also been using parking space in the building
in question and had been making regular payments to respondent No. 1 society;
that the appellant filed a suit for declaration in the year 1981 in the Court
of Small Causes at Bombay that they are tenants in respect of the suit
premises; that the second respondent filed a suit bearing No. 210/296 of 1981
seeking for eviction of the appellant; that when those proceedings were
pending, respondent No. 2 egged upon respondent No. 1 to raise a dispute in
terms of section 91 of the Maharashtra Co-operative Societies Act, 1960 for the
purpose of evicting the appellant to enable respondent No. 2 to get the said
premises and use personally through an arbitrator; that the arbitrator made an
award on 23-3-1990 directing eviction of the appellant and that the second respondent
be directed to use the suit premises personally, that the appellant filed an
appeal against the said award before the Maharashtra State Co-operative
Appellate Court which was further dismissed by an order made on 8-1-1991; that
a writ petition was thereafter preferred under article 227 of the Constitution
before the Bombay High Court, that by an order made on 2-4-1991 the High Court
upheld the order made by the Maharashtra State Co-operative Appellate Court and
dismissed the writ petition, however, giving time to the appellant to vacate
the premises by about a month. Hence, this appeal by special leave.
2. On 20-8-1991, this Court made an order
calling for a report from Appellate Court after giving an opportunity to the
appellant to examine such of its witnesses as are considered necessary to prove
the receipts and the agreement and allow the respondent also a similar
opportunity of rebuttal by leading evidence both oral and documentary. A report
has been received by this Court pursuant to the said order. The findings
recorded by the Appellate Court are against the appellant.
3. Shri Mukul Rohtagi, the learned senior
advocate for the appellant contended that (7) the dispute between the appellant
and the second respondent arising under the Bombay Rent Act is pending
consideration in a Court of competent jurisdiction and, therefore, the
authorities exercising powers under section 91 of the Maharashtra Co-operative
Societies Act could not exercise their jurisdiction in the matter; (2) that the
finding recorded by the Appellate Court and affirmed by the High Court that the
appellant-company is a distinct legal entity which came into existence in 1976
and is in occupation of suit premises without any agreement of leave or licence
is incorrect inasmuch as the appellant- company is only a successor to the two
un-registered bodies referred to earlier; and (3) that the finding recorded by
the Appellate Court pursuant to the directions issued by this Court on
20-8-1991 are not correct.
4. Section 91 provides for raising a dispute inter alia touching upon the business of a co-operative society. When a question was raised as to where a society builds houses for the members and such members let out the premises, whether it would be within the scope of business of the society, this Court in O.N. Bhatnagar v. RukiBai AIR 1982 SC 1097, answered the same. It was held that if the business of the society is to construct or buy houses and let them out to its members, such letting out would form part of its business. A society formed with the object of providing accommodation to its members which is its normal business activity, has to ensure that the premises are in occupation of its members in accordance with the bye-laws framed by it rather than of a person in unauthorised occupation as it is the concern of the members who let it out to another under an agreement to leave and licence and wants to secure possession of the premises for his own use after the termination of thelicence. Therefore, a claim by the society together with such member for ejectment of a person who was permitted to occupy, upon the revocation of licence, is a dispute falling within section 91(1). The same view has been reiterated by this Court in SanwarmalKejrimal v. Vishwa Co-operative Housing Society Ltd. AIR 1990 SC 1563. Therefore, it would not be open to the appellant now to contend that the proceedings before the authorities functioning under section 91 would be barred notwithstanding the proceedings filed by respondent No. 2 before the Small Causes Court. As held by this Court in the aforesaid decisions the proceedings under the Act could be maintained and, therefore, we are of the view that the first contention raised by Shri Rohtagi deserves to be rejected.
5. Plethora of material was placed before the authorities and we were also taken through the same to show that there was in existence an unregistered body known as Electrical Cable Development Association and also India Cable Maker's Association, its predecessor. However, there is no material on the record to show that the appellant is the successor to such association. We have also carefully gone through the memorandum of association and the articles of the appellant-company to find out whether in any form the unregistered body has converted itself into a registered body as a company. On the other hand, what is stated in clause 3(a) in regard to membership is as follows:
"3(a) Every person who shall be a member of the
unregistered association known as 'Electrical Cable Development Association' at
the date of registration of this Association shall be entitled as of right to
be admitted as a member of this Association on his submitting a formal
application addressed to the Secretary of the Association agreeing to be bound
by the Rules and Regulations and Bye-Laws made under these presents. Such a
person shall be exempted from payment of entrance fee but shall have to pay
deposit as per rule 5, within the period as may be prescribed and extended by
the Executive Committee."
6. All that is provided under the said article
is that a member of Electrical Cable Development Association as of right be
admitted as a member of the appellant-company subject to certain conditions. It
does not say that all those members in the unregistered association become
members of the association much less any resolution is produced before us of
the Electrical Cable Development Association to show that they are converting
themselves into an incorporated body. The members of the unregistered body are
all incorporated bodies having a high commercial standing in the corporate
sector, and, therefore, cannot be expected to be so naive or ignorant as not to
take such steps in the event it was the intention of such body to become an
incorporated body in the manner suggested by the appellant. If really such
action had been taken, it would not have been difficult for the appellant to
produce such material. Therefore, the fact that the appellant is a distinct
legal entity as found by the authorities below and affirmed by the High Court.
Cannot be seriously disputed. Since the appellant is a distinct legal entity
other than the unregistered bodies and there is no material to show that it is
a successor thereto it is not understandable as to how it became a tenant in
respect of the premises in question without an agreement with the society or
respondent No. 2 who is a member thereof. It baffles us and thus the view taken
by the High Court appears to us to be correct. Therefore, the second contention
raised by the appellant either has no merit and is rejected.
7. So far as the third contention urged on
behalf of the appellant is concerned in the view we have taken, we may at once
state that it is not necessary to examine the evidence adduced before the
Appellate Court and the appreciation of the same by it. Even without deciding
the same if we assume the same for the purpose of appreciation of the matter
that the findings recorded by the Appellate Court are not correct and deserve
to be answered in favour of the appellant, still the appellant has to fail in
view of the findings we have recorded on the second contention raised by the
appellant.
8. Therefore, we hold that the High Court was
justified in not interfering with the order made by the Appellate Court and the
appeal deserves to be dismissed. The appeal is dismissed accordingly. However,
considering the nature and circumstances of the case, we make no order as to
costs. In the circumstances of the case, we grant time to the appellant to
vacate the premises till 31-12-1998 subject to the condition that it shall
voluntarily, without putting the respondents to the necessity of any execution
deliver vacant possession of the premises to respondent No. 2 and shall furnish
the usual undertaking to that effect within four weeks from today.
[2001] 30 SCL 456 (Punj. & Har.)
High
Court of Punjab and Haryana
v.
Bareja Knipping Fasteners Ltd.
Ashok
Bhan, J.
Execution
Petition No. 3/L of 1994,
Section 3 of the Companies Act, 1956 -
Company - Whether decree passed against a company can be satisfied by
attachment and sale of properties belonging to other limited companies managed
by same group of directors - Held, no
Facts
A decree was passed against ‘BKF
Ltd.’, a company-in-liquidation, and three of its directors with costs and
interest. In the instant execution application, the decree holder sought to
recover the amount due by attachment and sale of the property of several
companies owned and managed by judgment debtors. This was objected, contending
that those other companies and their shareholders were different and their
properties could not be attached.
Held
The decree passed against BKF
Ltd., could not be satisfied by attachment and sale of properties belonging to
other limited companies even if it was assumed that they were being managed by
the same group of directors. Other companies were different and distinct
juristic personalities
with different sets of shareholders. This petition, therefore, had to be
dismissed.
H.N. Mehtani for the Petitioner. Suvir Sehgal for
the Respondent.
Judgment
1. In C.P. No. 46 of 1984, this Court passed a preliminary decree on
2-12-1985, and final decree on 15-1-1987, against Bareja Knipping Fasteners
Ltd. (company in liquidation) and three of its directors with costs and
interest. In this execution application, the decree-holder has claimed a sum
of Rs. 19,07,800 due from the judgment debtors with future interest at 12 per
cent. In the execution application, the decree-holder has sought to recover
the amount by attachment and sale of property of Bareja Engg. Industries Ltd.,
Bareja Engineers Ltd. owned and managed by judgment-debtors Nos. 2 to 4, Bareja
Industrial International (P.) Ltd. belonging to Raghunath Rai Bareja,
judgment-debtor, Bareja Industries (P.) Ltd., owned by Raghunath Rai Bareja,
judgment-debtor and other members of his family by attachment and sale of
household goods comprising T.V. set, video cassette recorder, sofa-sets,
tables, chairs, beds, steel almirahs, carpet and dining set lying at Flat Nos.
9A and 9C situated at 9th Floor of 2A Mande-villa Garden, Jay Jayanti
Apartment, Calcutta-19, Bareja Pumps (P.) Ltd. belonging to the
judgment-debtors, sale of office furniture owned by Raghunath Rai Bareja,
judgment-debtor.
2. Objections have been filed by the judgment-debtors under Order 21, rule
23(2) read with section 47 of the Code of Civil Procedure, 1908. It has been
averred that property belonging to the companies such as Bareja Industries (P.)
Ltd., Bareja Pumps (P.) Ltd. cannot be attached and sold in execution of a
decree passed against Bareja Knipping Fasteners Ltd. as these companies and
their shareholders are different and the property of these companies cannot be
sold to satisfy the claim of the decree-holder which arises out of the decree
passed against Bareja Knipping Fasteners Ltd. In para 6, it has been averred
that the decree-holder had earlier filed Execution Petition No. 14/L of 1987.
In this application on a prayer made by the decree-holder judgment-debtor Nos.
2 to 4 were directed to make statements, and disclose all their property,
movable or immovable, debts due to them, etc. and their source of income. This
application was disposed of by I.S. Tiwana, J. (as his Lordship then was) on
23-8-1990, with the following observations :
“Reply has been filed on behalf of the
respondents to the application under Order 21, rule 41(1)(2) of the Civil
Procedure Code, whereby they have disclosed their assets and the property owned
by them. The decree-holder is at liberty to get any property attached for
recovery of the decretal amount. This application is disposed of as indicated
above.”
3. I find force in the objections taken by the respondents. The decree
passed against Bareja Knipping Fasteners Ltd., cannot be satisfied by
attachment and sale of properties belonging to other limited companies even if
it is assumed that they are being managed by the same group of directors.
Other companies are different and distinct juristic personalities with
different sets of shareholders against the assets of judgment-debtor Nos. 2 to
4 which were disclosed by them in their petition No. 14/L of 1987. No prayer
has been made for attachment and sale of those assets. This petition,
therefore, has to be dismissed. It would, however, be open to the
decree-holders to get the decree executed in any other mode or by claiming the
properties which are owned by the original judgment-debtors. With these
observations, this petition is dismissed.
[2004] 50 scl 116 (Mad.)
HIGH COURT OF
v.
K.S. Kasimaris Ceramique (P.) Ltd.
E.
PADMANABHAN, J.
C.P.
NOS. 60 OF 1996 AND 199 AND 274 OF 1998
AND
AND 996
OF 1999 AND 2548 OF 2000
OCTOBER
19, 2001
Section 41 of the Companies Act, 1956 -
Member - Whether shareholder can claim to be owner of property owned or held by
company - Held, no
Section 433, read with section 443(2) of the
Companies Act, 1956 - Winding up - Circumstances in which company may be wound
up - Whether winding up proceedings are not meant for settling personal scores
among family members - Held, yes - Whether where liability of company was
marginal when compared to value of properties and assets owned by company and
company could very well proceed with one or more of objects approved in
Memorandum of association and Articles of association, merely because major
business of company had been stopped, it could be said that substratum of company
had been lost and company could be wound up on that score - Held, no - Whether
further when company petitions were filed out of personal animosity or personal
grudge and no ground had been made out to order winding of company as just and
equitable, petitions under section 433(f) were liable to be rejected - Held,
yes - Whether, apart from that, since alternative remedies were definitely
available and in fact for substantial portion of grievance alternative remedy
had already been invoked and was pending, petitioners could not maintain an
application under section 433(f) - Held, yes
Facts
The first
respondent company was incorporated in 1970 by ‘S’. At the time of inception
‘S’ and his first son were appointed as directors. In due course shares were
allotted to other sons and family members and some of the family members were
also designated as directors. The company carried on business upto 1976 and
thereafter business operations were stopped. ‘S’ passed away in 1995.
Thereafter sons and daughter of ‘S’ filed company petitions for winding up of
the company alleging that there were several irregularities in the matters of
the company, and further that company had lost its substratum as its main
business had been stopped and its lands were being sold fraudulently. In the
petitions, the petitioners had sought not only for appointment of official
liquidator but also to distribute the assets of the company according to will
of ‘S’ which itself was disputed by them in other proceedings.
Held
The petitioner
in both the company petitions and at least one or two of the respondents in the
company petitions proceeded as they were the owners of the entire assets of the
company, while forgetting the fact that they were mere shareholders and they
could not claim to be the owners of the property owned or held by the company.
In fact, proceedings had been instituted as if the petitioners and contesting
respondents were entitled to share in the properties held by the first
respondent-company, which was a misconception. Merely because sons, widow and
daughter of the late ‘S’ held substantial shares, it did not mean they became
the owners of the land or the assets of the company. Substantial portion of the
case and claim had been made only on that misconception. [
It is a
well-settled legal position that there is nothing to warrant the assumption
that a shareholder has any interest in the property of the company, which is
juristic person and which is entirely distinct from the shareholders. The true
position of a shareholder is that as an investor he will be entitled to
participate in the profits of the company in which he holds shares as and when
the company declares, subject to the articles of association that the profits
or portion thereof should be distributed by way of dividends among the
shareholders. That apart, the shareholder has got a further right to
participate in the assets of the company, which would be left over after
winding up, but not in the assets as a whole. [
In the instant
case, liability, if any, was only minimal or marginal when compared to the
value of properties or assets owned by the company. There might be a
misunderstanding between the members of the family, who held majority shares
among themselves and attempted to overreach other members of the family. It
might be that the only major business that was being carried on had been
stopped, but on that score, it could not be said that the substratum of the
company had been lost. Even after the sale of the lands there would be
sufficient surplus and the company could very well proceed with one or more of
the objects, approved in the memorandum and articles of association. [
Therefore, on
that score there could not be an order of winding up on the facts of the
instant case. It was nobody’s case that it was impossible to carry on one or
more business of the company as provided in the memorandum, except by loss or
existing assets were not sufficient to meet the liabilities. [
Though the
petitioner in both the petitions represented themselves that the company could
not be continued and that the company had to be wound up, the entire focus
related to personal dispute between the family members of the late ‘S’ and
major portion of the dispute was whether the will left by ‘S’ bequeathing his
share was genuine and true [Para 60]
In several
places, the petition proceeded as if it was a plaint where the plaintiff
claimed reliefs of personal nature against the defendant and that would
disclose not only the mind of the petitioners, but also their object. The
substantial portion of the averment set out in the petition related to personal
disputes or disputes among the family members and regarding the will. [
Having come to know
of the sale agreements entered into by the board of directors pursuant to a
resolution of the board, if the other shareholders or anyone interested desired
to avoid the same, they should have initiated appropriate proceedings. [
Accordingly, the
petitions could very well be held as an abuse of the process and it was not a
bona fide action, but it was an action, which had been initiated out of
personal animosity or personal grudge or enmity. Winding up proceedings are not
meant for settling personal scores among the family members. The company
proceedings cannot be a proceeding for vendetta among the members of the
family, though the family may be holding substantial shares and third parties
may be minority shareholders and they may not be interested or they may even
keep themselves aloof from the disputes. [
There were
however, no pleadings at all to show that it was just and equitable to order
winding up nor any ground had been made out to order winding up of the
respondent-company as just and equitable. [
Both the
petitioners had come before the Court with unclean hands and had invoked the
equitable jurisdiction with unclean hands and that was sufficient to reject
their petitions. [
When alternative
remedies were definitely available and in fact for substantial portion of
grievance alternative remedy had already been invoked and was pending, the
petitioners could not maintain an application under section 433(f) apart from
the fact that there were no pleadings on that aspect by them. Failure even to
suggest that there was no other alternative remedy in the company petition was
also fatal since admittedly the petitioner in each of the company petitions had
already invoked the other remedies available to them. Also the petitioner in
each of the company petitions had a remedy under sections 397, 398 and/or 402
as the case may be. Therefore, on that ground also, both the petitions were not
maintainable. [
In the
circumstances, all the company petitions having no merits, were to be
dismissed. [Paras 86]
Cases referred to
Mrs. Bacha F.
Guzdar v. CIT [1955] 25 Comp. Cas. 1 (SC) (para 49), Chiranjilal Chaudhari v.
Union of
Rajendran
and R. Subramanian for the Petitioner. Arvind P. Datar and K.M.
Kodaiarasu for the Respondent.
Judgment
1. C.P. No. 60 of 1996 has
been filed by K.S. Mothilal under sections 433(f), 439(1)(c) and 439(1)(b) of
the Companies Act, 1956, praying for appropriate orders or direction under the
Companies Act, 1956, as amended and with reference to the memorandum and
articles of association to safeguard the assets of the first respondent-company
from destruction by respondent Nos. 3, 4 and 5 by winding up of the first
respondent-company to safeguard the petitioner’s genuine share in the assets of
the first respondent-company.
2. C.P. No. 199 of 1998
has been instituted by K.S. Damodaran claiming to be the contributory chairman
under sections 433(f), 439(1)(c) and 439(4)(h) of the Companies Act, 1956,
praying this honourable court to order winding up of the first
respondent-company, namely, K.S. Kasimari Ceramique Pvt. Ltd. appoint the
official liquidator and distribute its assets and share value to the
contributors and creditors and as a partner to allot 60 per cent share to the
petitioner by way of intestate succession or 80 per cent share to the
petitioner by way of testamentary succession and render justice.
3. C.P. No. 274 of 1998
has been filed by Mrs. Mangala Vijayalakshmi under section 433(f) of the
Companies Act, 1956, praying this court to order winding up of the company,
K.S. Kasimari Ceramique Pvt. Ltd. at No. 50, Pulla Avenue, Shenoy Nagar,
Madras, by the provisional liquidator to take charge of the assets of the
company and pass such further or other orders.
4. As all the three
company petitions relate to winding up of the same company, namely K.S.
Kasimari Ceramique Pvt. Ltd., with the consent of counsel appearing for the
petitioner and respondents in the respective company petitions, the three
company petitions were consolidated and taken up together for final disposal.
5. All the three company
petitions have been filed under section 433(f) of the Companies Act. In C.P.
No. 199 of 1998, while seeking for winding up under section 433(f), the
petitioner had sought not only for appointment of official liquidator, but also
to distribute the assets of K.S. Kasimari Ceramique Pvt. Ltd., and their share
values to the contributors and creditors and as a part thereof, allot 60 per
cent share to the petitioner by way of intestate succession or 80 per cent
share to the petitioner by way of testamentary succession. The latter part of
the relief prayed for, namely, distribution of assets and share values or
allotting 60 per cent or 80 per cent as the case may be, will not arise nor
could it be the subject-matter of a winding up petition at this stage, nor
could the claim by the petitioner be the subject-matter of adjudication in this
winding up petition.
For
convenience, C.P. No. 199 of 1998 is taken up at the first instance following
it with C.P. No. 274 of 1998 and C.P. No. 60 of 1996. To begin with, the
parties will be referred as arrayed in C.P. No. 199 of 1998.
Case of the petitioner in C.P. No. 199 of 1998:
6. The late K.
Shanmugasundaram alias Shanmugasundaram Nadar also known as Kasimari Shanmugasundaram,
an entrepreneur, started a mechanized brick manufacturing unit with the
assistance of the Tamil Nadu Industrial Investment Corporation. The said
Kasimari Shanmugasundaram promoted M/s. K.S. Kasimari Ceramique Pvt. Ltd.
(hereinafter referred to as “the company”). The promoter, Shanmugasundaram, had
married Paulthai and through the said wedlock, Shanmugasundaram had three sons,
namely, (1) K.S. Damodaran (petitioner in C.P. No. 199 of 1998), (2) K.S.
Mothilal (third respondent in C.P. No. 199 of 1998) and (3) K.S. Anantharaman
(fourth respondent in C.P. No. 199 of 1998). Apart from the said three sons,
the said Shanmugasundaram had left his wife, Mrs. Paul Thai (second respondent
in C.P. No. 199 of 1998) and his only daughter Mrs. Mangla Vijayalakshmi (fifth
respondent in C.P. No. 199 of 1998). It is claimed that the said
Shanmugasundaram took the help of his son K.S. Damodaran, an engineering
graduate to start the project for manufacturing mechanized bricks, while
promising equal share, benefits and profits in the said company.
7. The company was
incorporated on January 7, 1970, by the said Shanmugasundaram and his son K.S.
Damodaran. K.S. Mothilal was appointed as the general manager from the date of
incorporation. K.S. Mothilal had purchased 200 shares of Rs. 100 each of the
first respondent-company after incorporation. The deceased Shanmugasundaram and
the petitioner K.S. Damodaran have been the directors of the first
respondent-company from its inception. The first respondent-company, though flourished
well at its inception, grew sick and came to a standstill around March, 1976.
The immovable properties remained intact and there have not been any tangible
creditors till date. Though there is reference to promoting of other
partnership firms, such as M/s. Kasimari Auto Products. M/s. Kasimari Machine
Tools Company, etc., by the deceased Shanmugasundaram or one or more of his
sons, since we are not concerned with those firms, it is not necessary to refer
to the same in detail. It would be sufficient to add that there are allegations
and counter allegations with respect to those firms as well as the first
respondent-company.
It is the
further case that the late Shanmugasundaram transferred all movables including
all machines, lathes and shaping machines from the first respondent-company
without any consideration or reward or returns to the new partnership firm
where he was also holding 30 per cent shares along with K.S. Anantharaman, the
managing partner of the firm. The father Shanmugasundaram was biased towards
K.S. Anantharaman and the said firm was started for the benefit of the said
Anantharaman. The deceased Shanmugasundaram did not take any preventive or
punitive action over misappropriation of funds and profits by the said
Anantharaman. The said firm was highly indebted to the first
respondent-company. It is also the claim that the said firm is a holding
company of the first respondent-company. (How it is a holding company and which
is the holding company is not clear from the averments).
8. It is also stated that
the first respondent-company is owning a rice mill at No. 216,
9. It is alleged that K.S.
Anantharaman had entered into an agreement of sale with some party to deceive
the other legitimate owners and legal heirs entitled to the assets of the first
respondent-company. The said lands of 13.77 acres exit out of 42.19 acres owned
by the first respondent-company in Maduravoyal village. 28.47 acres were
acquired for the Tamil Nadu Housing Board, the compensation therefrom was
utilised to discharge the major portion of the known liability to the Tamil
Nadu Industrial Investment Corporation during 1989-90, which mortgage loan was
incurred on April 24, 1970, by the first respondent-company. The petitioner
Damodaran arranged for a loan of Rs. 16.50 lakhs from the Indian Bank and also
offered a sum of Rs. 10 lakhs to enable his father to settle all the
liabilities emanating from the TIIC loan. The title deeds were released and
handed over to the father Shanmugasundaram and Anantharaman or anyone else had
no role in the above activities.
10. The late
Shanmugasundaram deposited the title deeds of the existing Maduravoyal property
belonging to the company with the Indian Overseas Bank, Sowcarpet branch as
security for a loan of Rs. 5 lakhs to meet his family expenses and a mortgage
by deposit of title deeds was created to secure repayment. The mortgage had not
been redeemed till date. It is alleged that the youngest brother, K.S.
Anantharaman had played a fraud on the bank with the collusion of his mother
and sister and redeemed the title deeds for his use in his attempt to generate
funds for his self-misappropriation. K. Shanmugasundaram passed away on July
24, 1995, and he was cremated by Mothilal in his native place at Arumuganeri
village on July 27, 1995. The following are the legal heirs of Shanmugasundaram
alias Shanmugasundara Nadar :
|
“1. Paul Thai Shanmugasundaram |
— 72 years |
— Widow |
|
2. K.S. Mothilal |
— 53 years |
— 1st son |
|
3. K.S. Damodaran |
— 51 years |
— 2nd son |
|
4. C. Mangala Vijayalakshmi |
— 43 years |
— Daughter |
|
5. K.S. Anantharaman |
— 41 years |
— 3rd son.” |
According to the petitioner, being an intestate succession, all the legal heirs are entitled to 1/5th share of the 50 per cent share of Shanmugasundaram in the company with 10 per cent to each legal heir and the remaining 50 per cent owned exclusively by the petitioner, K.S. Damodaran in the first respondent-company. The petitioner claims that he owns 60 per cent share of the total assets of the first respondent-company.
11. It is claimed that the petitioner
as the sole surviving director and founder director of the first
respondent-company, appointed K.S. Mothilal by co-option as director on August
9, 1995, which appointment he had accepted and took the place of the late
Shanmugasundaram. The said change in the director was intimated to the
Registrar of Companies apart from passing of resolutions. The board of
directors also met on November 13, 1995, and January 20, 1996, and passed
necessary resolutions.
12. After the said
appointment of K.S. Mothilal, the youngest brother, K.S. Anantharaman and
Mangala Vijayalakshmi colluded and seized the company records and handed them
over on September 29, 1995, to panchayat committee, in the nature of
arbitration called family welfare committee comprising P.K. Soundarapandi
Nadar, T. Jayaram Nadar, G. Ramasamy Nadar and P. Arumugam Nadar.
13. One Johnson, son of V.
Samy Nadar, residing at Rajamaniyapuram, Arumuganeri, Tiruchendur taluk, is
instrumental in organising the fraudulent alienation of company’s lands at
Maduravoyal by K.S. Anantharaman, even though neither of them has any right or
share or claim in the first respondent-company’s assets.
14. Apprehending fraudulent
sale and cheating, the third respondent, K.S. Mothilal filed C.P. No. 60 of
1996 against the legal heirs of the deceased Shanmugasundaram praying for
winding up of the respondent-company and distribution of assets/share value and
dues. The third respondent had filed a company petition on March 4, 1996.
Notice has been served on all the parties in the said company petition as well
as in the company application seeking for appointment of interim official
liquidator. At the same time, the bare injunction suit was filed by K.S.
Anantharaman against the first respondent, K.S. Mothilal, the second respondent,
K.S. Damodaran in O.S. No. 5560 of 1996 on April 19, 1996, which was disclosed
as seen from the counter affidavit filed by the third respondent in I.A. Nos.
7375 of 1996 to 7378 of 1996 on April 30, 1996. The said Anantharaman was
served with the notice on May 4, 1996, itself. All the company records, it is
alleged, have been confiscated by this hon’ble court by deputing an Advocate
Commissioner to Arumuganeri during January, 1998, in C.A. No. 2556 of 1997 in
C.P. No. 60 of 1996.
15. An order of injunction
was enforced in C.A. No. 1882 of 1997 in respect of the immovable properties of
the first respondent-company at the instance of the third respondent, since
May, 1997, against everyone including all the directors as alleged by
Anantharaman.
16. Winding up of the
company in terms of section 441(2) shall be admitted to have commenced from the
date of presentation of the petition for winding up. C.P. No. 60 of 1996 was
presented on March 4, 1996. Further, in terms of section 442, the company Court
has the power to stay or restrain the judicial proceedings before any other
court. Sections 464 and 465 deal with the appointment and proceedings with the
committee of inspection to assist the winding up proceedings. In terms of
section 465, all the company’s properties vest with the custody of the official
liquidator, where a provisional liquidator is appointed or where a winding up
order is made. The hearing of C.P. No. 60 of 1996 is being delayed at the
instance of the third respondent as he is colluding with other parties by way
of secret and unjust enrichment and withdrawing C.P. No. 60 of 1996 or else by
neglecting the case. Hence, the present company petition.
17. On April 29, 1996, one
S. Shanmugam, an astrologer, resident of No. 9, Govinda Singh Street,
Pulianthope, Chennai 12, who was the astrologer for the late Shanmugasundaram,
came to the petitioner herein and handed over a will stating to be the last
will dated March 22, 1994, of the said Shanmugasundaram. By the said will, the
late Shanmugasundaram had appointed K. S. Damodaran, the petitioner herein, to
be the executor. The contents of the will refer to various reasons for the
disposition of assets made therein and the way the properties of the testator
are to be enjoyed. All the properties have been bequeathed in the name of the
legatees therein. Clause 4 of the will reads as under :
“I own 42.19 acres of land in Muduravoyal
village, in the name of K.S. Kasimaris Ceramique Pvt. Ltd. started and
maintained by myself and son, Damodaran, who signed wherever I wanted. Others
do not have any share or right in this company. The State Housing Board
acquired 28.42 acres of land. My son, Damodaran shall fight in Court and take
the enhanced compensation in full. The property of 13.77 acres of encumbered
land in sub-divisions of survey No. 127 of Maduravoyal village, Saidapet Taluk,
shall go to my son Damodaran with 60 per cent share and to my son Mothilal with
40 per cent share. The properties of Pandian Rice Mill and 25 acres of lands
also be shared by the said two sons with 60 per cent and 40 per cent. The title
deeds shall remain with Damodaran. I owe a lot to my son Damodaran, morally and
financially. I hereby give Damodaran my 30 per cent share in Kasimari Son Auto
Products in full. . .”
The petitioner
had already taken steps as the executor of the will to probate by filing O.P.
No. 147 of 1997 on the original side of this court as early as February, 1997.
All the legal heirs of the late Shanmugasundaram have entered appearance in the
said probate proceedings. In terms of the will, the late Shanmugasundaram had
not allotted the shares to the respondents, but the will emaciates and
castrates the claim of everyone except the legatees including the claims of
K.S. Anantharaman, Paul Thai, Ms. Mangala Vijayalakshmi and Johnson.
18. As per the memorandum
and articles of association of the first respondent-company, the petitioner
herein alone is competent to sue or be sued on behalf of the first
respondent-company in the status of chairman and founder director having 60 per
cent share in the case of intestate succession and 80 per cent share in the
company in the case of testamentary succession. The first respondent has
already filed a suit even during the year, 1997, on the file of this court for
declaration of his shares in the first respondent-company and the same is now
pending on some technical grounds. The petitioner is the owner of the 50 per
cent shares of the share capital in the first respondent-company, which cannot
be denied. One Mr. Johnson, son of V. Swamy Nadar is instrumental in abetting
K.S. Anantharaman, Mangala Vijayalakshmi and Paulthai to conspire and collude
to play a fraud and usurp the company’s assets and other valuables. The
memorandum and articles of association of the company clearly prove the absence
of the name of M/s. Pandian Brick Works. There is no office for the first
respondent-company nor has it any staff nor does it incur expenditure or any
activity whatsoever for the company except the watchman’s salary to safeguard
the valuable vacant lands at Maduravoyal and for whom salaries are being
disbursed by the petitioner from the first respondent-company’s accounts.
19. Even without admitting
the claims of shares of the respondents, there should be at least 25,000 shares
to repay the initial share capital of Rs. 25 lakhs, each share carrying the
value of Rs. 100. But only 20,500 shares have been mentioned. The conspirators
have done a lot of spade work in manipulating the records according to their
evil designs. It appears that the respondents have colluded and harmed the
share certificate vested with Arumuga Nadar. It is stated that 12,500 shares of
Rs. 100 each were given to and owned by the petitioner as a 50 per cent
shareholder of the entire share capital as well as in the assets of the
company, which is manifest in the memorandum and articles of association of the
company. The two directors of TIIC and the company director remained in the
company’s board till the discharge of mortgage on April 22, 1990. Any dispute
between the father and the petitioner could only mean a split in the company
resulting in winding up. Appointment of Shanmugasundaram unilaterally as no
other person as the director is illegal and untrue. Except Damodaran and
Shanmugasundaram, nobody has any share or right in the assets or share capital
of the first respondent-company.
20. The petitioner appointed
K.S. Mothilal, the third respondent as a shareholder-director on August 9,
1995, considering his shares in the company as well as the legal heir of the
deceased Shanmugasundaram. This is in accordance with article 27 of the
articles of association of the first respondent-company.
21. There is no
superstructure to be demolished because the entire superstructure and
machineries of the first respondent-company were taken away by K.S.
Anantharaman to Ambattur for M/s. Kasimari Auto Products. The petitioner does
not know about the fate of M/s. Southern Peninsula Housing Ltd. who paid an
advance of Rs. 10 lakhs by demand draft on September 23, 1996, for MoU for the
loan, but gave up its claim later. The MoU was also terminated. By a later
development, the will gives the petitioner herein 60 per cent right in the late
Shanmugasundaram’s shares in the company’s properties in addition to the
petitioner’s original 50 per cent shares in the assets and share capital of the
first respondent-company. Already steps have been taken to probate the will
left by the late Shanmugasundaram. C.P. No. 60 of 1996 is pending and interim
injunction was granted in C.A. No. 1882 of 1997 on May 27, 1997. When
Anantharaman and his group tried to violate the orders of this court,
emboldened by their success in I.A. No. 7375 of 1996 in the bare injunction
suit and also in C.M.A. Nos. 228 of 1996 and 230 of 1996 dated May 6, 1997,
they landed themselves in Cont. Appln. No. 199 of 1997 and this court ensured
the maintenance of status quo at that stage.
22. The third respondent in
C.P. No. 60 of 1996 filed his reply during August, 1997, in the said company
petition. Paras 24, 25 and 26 are material for the purpose of the present
company petition. The hearing of C.P. No. 60 of 1996 is being delayed at the
instance of the third respondent, who is the petitioner in C.P. No. 60 of 1996,
since he is, with ulterior motives, colluding with other parties for secret,
unjust enrichment and is withdrawing C.P. No. 60 of 1996. Hence, the present
company petition has been filed for joint hearing of both the petitions.
23. While setting out the
above averments, the petitioner had prayed for winding up of the first
respondent-company and to distribute its assets and share values to the
contributors and creditors and as a part thereof, allot 60 per cent shares to
the petitioner by way of intestate succession or 80 per cent share to the
petitioner by way of testamentary succession.
24. Pending C.P. No. 199 of
1998, the petitioner herein filed C.A. No. 1033 of 1998 repeating the same
averments and the company petition as well as the company application proceed
as if it is a dispute between the family members for the assets, besides
claiming succession either intestate or testate succession. A reading of the
company petition also would show that the petitioner had not only described
himself in more than one place as the plaintiff and proceeds as if it is a
claim by the plaintiff against the defendant in respect of the assets. C.A. No.
996 of 1999 also was taken out. K.S. Anantharaman had filed a counter in C.A.
No. 996 of 1999. In fact in C.P. No. 199 of 1998, the first respondent and K.S.
Anantharaman, who is the fourth respondent, took out C.A. No. 2548 of 2000 for
clarification of earlier orders passed in C.A. No. 1033 of 1998, etc., on July
1, 1999. C.A. No. 2548 of 2000 was taken out by the petitioner herein also for
a clarification.
25.Case
of the petitioner in C.P. No. 274 of 1998
Mrs. C.
Mangala Vijayalakshmi, who is the fifth respondent in C.P. No. 199 of 1998 has
filed C.P. No. 274 of 1998 under section 433(f) for winding up of the same M/s.
K.S. Kasimari Ceramique Pvt. Ltd. According to the petitioner in C.P. No. 274
of 1998, the company was incorporated on January 16, 1970. At the time of
inception, the then directors were K.S. Damodaran and K. Shanmugasundaram each
holding one share. In due course shares were allotted to family members of
Shanmugasundaram and some of the family members were also designated as
directors. The company carried on business up to 1976 and the company acquired
immovable properties. After 1976, the business operations were stopped.
Shanmugasundaram passed away on July 24, 1995. The deceased Shanmugasundaram
was the chairman of the first respondent-company and was holding more than 50
per cent shares out of the total shares issued. The details of the shares held
by the members in the first respondent-company as on the date of the death of
K. Shanmugasundaram Nadar are :
|
|
1. |
Thiru Shanmughasundaram Nadar |
15,801 |
|
|
2. |
Smt. Paulthai Shanmugasundaram |
1,100 |
|
|
3. |
Mrs. Mangala Vijayalakshmi |
1,150 |
|
|
4. |
Mr. K.S. Damodaran |
201 |
|
|
5. |
Mr. K.S. Mothilal |
150 |
|
|
6. |
Mr. S. Johnson |
1,200 |
|
|
7. |
Mr. A. Arulraj |
200 |
|
|
8. |
Mr. T. Thirumani Nadar |
100 |
|
|
9. |
Mr. T. Jayaraman |
200 |
|
|
10. |
Mr. John Jayakumar |
200 |
|
|
11. |
Mr. V. Thangamani Nadar |
84 |
|
|
12. |
Mr. A. Thangavelu Nadar |
100 |
|
|
13. |
Mr. Swamy Nadar |
84 |
|
|
|
Total |
20,570 |
26. Shanmugasundaram Nadar
died intestate on July 24, 1995, and on his death his shares devolved on his legal
heirs, namely, his widow, one daughter and three sons. Though some of the
shares were held by some of their nearest relatives, the entire business was
carried on only by Shanmugasundara Nadar and other shareholders did not show
any interest in the business of the company. The petitioner got married on June
2, 1978. The relationship between the petitioner and her three brothers and
mother is not disputed. K.S. Mothilal studied up to S.S.L.C. and was assisting
Shanmugasundaram till 1974 and, thereafter, he did not have good terms with his
father and worked in various other places. Mothilal was not on talking terms
with his father since 1974. The petitioner’s second brother, Damodaran, the
second respondent in the company petition, an engineering graduate was looking
after M/s. K.S. Kasimari Machine Tools established by Shanmugasundaram Nadar,
but in due course the second respondent had converted the said business as a
proprietary concern and appropriated the same for himself. Since then, the
second respondent is not on good terms with the father till his death in 1995.
The deceased Shanmugasundaram incorporated M/s. Kasimari Sons Auto Products at
Ambattur as a partnership firm consisting of Shanmugasundaram, Anantharaman,
Thirugnanam, Mothilal and Mangala Vijayalakshmi, the petitioner herein.
27. After the death of
Shanmugasundaram, disputes arose among the sons and compromise talks went on
thrice in the presence of P.S.K. Soundarapandi Nadar, a close relative of the
family of the petitioner. However, no settlement could be effected or arrived
at.
28. After the death of
Shanmugasundaram, notice was given to the directors on December 30, 1995, for
convening a board meeting on January 12, 1996. K.S. Damodaran, the second
respondent did not attend the meeting nor applied for leave of absence. In the
said meeting, the fourth respondent was inducted as one of the directors and
the third respondent was appointed as managing director to look after the
day-to-day affairs of the company. Presently there are five directors of the
first respondent-company, namely:
“(1) K.S. Anantharaman
(2) Mrs. Paulthai Shanmugasundaram
(3) K.S. Damodaran
(4) Mrs. Mangala Vijayalakshmi
(5) S. Johnson.”
Respondent
Nos. 2 and 5 joined together and started to declare themselves as chairman and
director respectively of the first respondent-company. Hence, the third
respondent instituted O.S. No. 5560 of 1996 on the file of the Second Assistant
Judge, City Civil Court, Madras, and prayed for declaration that respondent
Nos. 2 and 5 herein are not the chairman and director respectively.
29. The first
respondent-company owes dues to the Electricity Board, Indian Bank and also
property tax to revenue authorities, Panchayat tax to local bodies as well as
tax arrears of capital gains tax, etc., and the first respondent has not shown
any interest to pay or discharge the said dues. Respondent Nos. 2, 3 and 5 are
interested only in promoting the properties of the first respondent-company for
themselves with a view to divide the rights of other directors or shareholders
including the petitioner. The second respondent attempted to alienate the
property owned by the first respondent-company and entered into an agreement
with M/s. Southern Peninsula Housing Ltd., and received Rs. 10 lakhs as
advance. The petitioner further states that the third respondent has entered
into an agreement with third parties and has received advance amounts. The
fifth respondent has joined the second respondent and have acknowledged receipt
of the amounts from M/s. Southern Peninsula Housing Ltd. No amount was brought
to the credit of the company nor was used for the discharge of debts due to the
Government. Hence, the first respondent-company has to be ordered to be wound
up on the ground that it is just and equitable.
30. The company is a private
limited company founded on personal relationship involving mutual confidence
between the members of the family. The substratum of the company had gone since
the main object for which the company was started has become impractical. The
company stopped its manufacturing operations and business as early as 1976.
Respondent Nos. 2 and 3 refused to co-operate with other directors and have
taken an adverse attitude with the intention to appropriate the properties of
the company. The petitioner had not received any profit or any amount from the
first respondent-company from the date of death of her father. Respondent Nos.
2, 3 and 5 have joined together and are appropriating the profits.
31. The third respondent
received huge amounts by way of advance for sale of the properties belonging to
the first respondent-company. However, the amount was not brought to the
account of the company and the entire amount had been taken away by the third
respondent. Thus it is an oppression as against the petitioner had as such it
is just and equitable to wind up the company. The third respondent is also
investing funds realised from the property belonging to the first
respondent-company in his own name in one new business, where he and his wife
are the directors. The third respondent had committed breach of good faith,
which the members owe to each other and thereby acted inequitably and, hence,
it is just and equitable that the first respondent-company has to be wound up.
32. While setting out the
same, the petitioner had sought for winding up of the first respondent-company
and also sought to settle the claims of the petitioners. Pending C.P. No. 274
of 1998, various applications were also taken out. These applications were also
contested. In C.P. No. 274 of 1998 and applications, respondent Nos. 1, 3, 4
and 6 filed a common counter statement and it is sufficient to refer to common
case.
33. As seen from the counter
filed in C.P. No. 274 of 1998 by respondent Nos. 1, 3, 4 and 6 stand together,
while respondent Nos. 2 and 5, namely, K.S. Damodaran and K.S. Mothilal, the
first and second son of the late Shanmugasundaram stand aloof.
Counter case of respondent Nos. 1, 3, 4 and 6 in C.P. No. 274 of 1998 :
According to the
said respondents, M/s. Kasimari Sons Auto Products was a partnership concern
and managed by the third respondent, K.S. Anantharaman. It is incorrect to
state that the third respondent, Anantharaman had not taken any interest in the
first respondent-company. The third respondent, Anantharaman was appointed as
director in the meeting held on November 17, 1989, along with the petitioner
and the second respondent. Article 36 of the company does not provide any
qualification shares being held for anybody to become a director of the
company. Therefore, the appointment of the third respondent as director cannot
be undermined on that score. It is stated that no compromise was arrived at the
Panchayat held at Arumuganeri. In the meeting held at Arumuganeri on January
12, 1996, the second respondent had not chosen to attend and in the said
meeting, the fourth respondent, Mrs. Paulthai Shanmugasundaram was nominated as
director and the third respondent, K.S. Anantharaman was appointed as the
managing director.
34. The claim of the second
respondent that he had nominated the fifth respondent as director without
conducting a board meeting and without notice to the other directors and,
further, declared himself as the chairman of the company are invalid and
illegal. The third respondent instituted the suit O.S. No. 5560 of 1998 on the
file of the City Civil Court, Madras, in terms of the resolution, seeking for a
relief of declaration and injunction against the second respondent and it is
binding.
35. The allegation of collusion of the fifth respondent with the
third respondent is denied. It is further stated that the petitioner’s counsel
agreed to the suggestion made by the Hon’ble judge and also suggested expedient
means for settlement. As per the discussions, the petitioner was even ready to
accept a slightly lower share whereas the second respondent was not willing for
a settlement as his claim was to the extent of 60 to 80 per cent. Hence, the
settlement talks failed. The fifth respondent, who desired an amicable settlement,
instituted C.P. No. 60 of 1996 on his own so that there could be family peace
and harmony. It is incorrect to state that respondent Nos. 3 and 5 are
colluding.
36. The liabilities of the
company are true. When the first respondent-company was pressurized for
payment, it was decided at the meeting held on January 12, 1996, to dispose of
the immovable property at Maduravoyal and pay all the debts. Mrs. Paulthai
Shanmugasundaram was the chairman of the meeting wherein various resolutions
were passed in the presence of some of the other directors. Suitable purchasers
were located and sale agreements were entered into with 25 persons. The
petitioner in this company petition is signatory to those agreements.
37. The second respondent
further claiming to be the owner of the aforesaid property agreed to sell the
same to M/s. Southern Peninsula Housing Ltd. and illegally received Rs. 10
lakhs from the company, which has not been accounted for nor been brought into
the accounts of the company. This necessitated the filing of O.S. No. 5560 of
1996 by the company for declaration and injunction against the second and fifth
respondents as also resorting to the filing of O.S. No. 13337 of 1996 against
the said M/s. Southern Peninsula Housing Ltd. for injunction. The fourth
respondent was not willing to accede to the unreasonable request as the
allotment was made according to the requirements of individual children. The
petitioner is permanently residing at Kalpakkam. Though the petitioner had been
allotted a decent residential portion of her family in the same property, she
has refused to take possession of the same, the fourth respondent being an
absolute owner has every right to deal with the property in such manner as he
deems fit.
38. The averments made
against the third and fifth respondents are denied. What happened to the sum of
Rs. 10 lakhs is not known and they were commented upon by the said civil court
as well as by this Court. The third respondent has not entered into unilateral
agreement for sale. The petitioner being a signatory to the resolution as a
director and for sale of the company’s property and receiving advance on behalf
of the company, has dealt with the property of the company and, therefore, she
is precluded from seeking the relief of winding up. Family or shareholders
disputes have to be settled only by ordinary civil courts and/or the Company
Law Board. The petitioner is prevented from seeking any discretionary relief of
winding up before this Court. No money was received by the third respondent as
alleged. The petitioner had already signed the agreements of sale. The
petitioner was accompanied by her husband. S. Chandrasekaran, working as
Scientific Advisor, has filed the present winding up petition as she could not
get the property at No. 50, Pulla Avenue, Shenoy Nagar. It is highly improper
for the petitioner to institute a company petition for personal vendetta.
39. After much persuasion
only, the third respondent agreed to be the managing director. There was no
compelling circumstance for any of the directors such as the petitioner, the
third and fourth respondents to subscribe to all the resolutions. The
petitioner had voluntarily signed all the 25 agreements for sale. The
petitioner’s counsel was also present in all these occasions and never was a
plea raised at any stage regarding her signature being made under compulsion.
Even during the contempt proceedings before the civil court the petitioner has
never raised a plea of being compelled to sign any agreement. The petitioner at
the behest of her husband is deliberately sabotaging the settlement process by
filing the winding up petition and unlawfully retaining the title deeds of
Shenoy Nagar property and the 25 agreements of sale entered into with the third
party purchasers. Family disputes raised, which requires elaborate evidence and
cannot be agitated in winding up proceedings, which are summary in nature. The
petitioner is estopped from seeking for winding up as she is a signatory to the
board resolutions authorising sale of the property at Maduravoyal and has also
signed all the 25 agreements of sale.
40. It is incorrect to
contend that the petitioner’s signature was obtained by compulsion. The
petitioner had refused to hand over the agreement with the company solely on
the ground that she has not been given a major share in the house property at
Shenoy Nagar. Respondent Nos. 1, 3, 4 and 6 pray that this Court may dismiss
the winding up petition.
41. The contesting
respondents in C.P. No. 199 of 1998 have filed counter-affidavit in the
applications and the same is being treated as counter. As and when required,
the very counter filed in the company applications, which is to be treated as
part of the counter in the company petition, will be referred for convenience.
42. According to the
contesting respondents, the petitions are not maintainable, there is no bona
fides, there are no merits and the entire company petition is a misconception.
The contesting respondents also filed detailed typed set of papers wherein they
have included the resolutions of the board, authorised sale agreements as well
as various interim orders passed by the civil court between the parties as well
as the pleadings in the pending suits. The respondent also pleaded that the
entire case of the petitioners is false and they have come before this court
with unclean hands and on this short ground the petitions are liable to be
dismissed.
43. The shares claimed by
the petitioner in C.P. No. 199 of 1998 is denied and the will put forward by
the said petition is also denied. It is also contended that the petitioner in
C.P. No. 274 of 1998 is estopped by her conduct, in that she was a party to the
agreement as well as the resolutions passed by the board. The petitioner in the
respective petitions cannot invoke either section 433(f) or any other
provisions of the Companies Act. The petitioners are not entitled to seek for
winding up under section 433(f) and such a petition is not maintainable.
44. The company petition is
an abuse of the process of the court. It is also contended that the substratum
has not been lost nor is the company unable to pay its debts. The value of the
assets owned by the company is substantial and it is growing day by day. The
company has got a rice mill, besides garden land, which is also fetching
income. The petitioners attempt to treat the company’s assets as their private
property is also impermissible in law and such a claim is a misconception. In
respect of the will put forward by the petitioner in C.P. No. 199 of 1998, it
is contended that the will is not genuine, nor is it true, nor is it binding
and it has been brought up at a belated stage. All the averments set out in the
company petitions are denied and the petitioner in the respective petition is
put to strict proof of the averments. The contesting respondents prayed for
dismissal of the company petitions.
44A.Counter
of respondent Nos. 1, 2 and 4 in C.P. No. 199 of 1998 :
It may not be
necessary to set out in detail the counter statement filed on behalf of
respondent Nos. 1, 2 and 4 in C.P. No. 199 of 1998 as it is verbatim the same
plea in C.P. No. 274 of 1998.
45.
Counter of fifth respondent in C.P. No. 199 of 1998 :
In C.P. No.
199 of 1998, the fifth respondent, Mrs. Mangala Vijayalakshmi, had filed a counter.
It is also verbatim reproduction of the winding up petition in C.P. No. 274 of
1998 wherein she is the petitioner. Hence, it is unnecessary to set out the
same once over.
Heard Mr.
Rajendran, learned counsel appearing for the petitioner in C.P. No. 199 of
1998. Mr. R. Subramanian and Ms. Hemalatha, learned counsel appearing for the
petitioner in C.P. No. 274 of 1998 and Mr. Aravind P. Datar, learned senior
counsel for Mr. K.M. Kodaiarasu, appearing for respondent Nos. 1 and 4 in C.P.
No. 199 of 1998 and for respondent Nos. 1, 3, 4 and 6 in C.P. No. 274 of 1998.
In respect of
C.P. No. 60 of 1996, it is not necessary to refer to any other material or
pleadings as counsel for the petitioner had made an endorsement as early as
September 4, 1998, that the company petition may be permitted to be withdrawn.
Such an endorsement has been made on September 4, 1998. However, arguments were
advanced initially on September 4, 1998, and it came to be posted for
continuation on September 11, 1998. Orders were reserved on September 11, 1998,
but on October 9, 1998, the matter was reopened for further hearing and since
then, the other company petition came to be filed. However, counsel for the
petitioner had not made any different representation than what has been endorsed
by him on September 4, 1998. In the light of the said endorsement, it is
unnecessary to examine C.P. No. 60 of 1996 on merits. In the light of the
endorsement made, C.P. No. 60 of 1996 does not deserve any further
consideration.
Since all the
three petitions relate to the same company and all of them have been filed
invoking section 433(f) on the ground that it is just and equitable to order
winding up of the same company, all the three company petitions could be taken
up together.
In these three company petitions, the following points arise for
consideration :
“(1)Whether C.P. Nos. 199 of 1998
and 274 of 1998 filed under section 433(f) seeking for winding up of M/s.
Kasimari Ceramique Pvt. Ltd. as just and equitable is maintainable ?
(2) Whether section 433(2) of the Companies Act is a bar to C.P. Nos.
199 of 1998 and 274 of 1998 ?
(3)
Whether substratum of the first respondent-company is lost ?
(4) Whether the petitioner in each of the company petitions has made
out a case to order winding up of the company as just and equitable clause ?
(5) Whether the filing of company petitions is
an abuse of the process ?
(6) Whether the petitioner in each of the company petitions has come
before this Court with unclean hands ? If so, whether the company petition is
liable to be dismissed on that score ?
(7) Whether the petitioner in each of the company petitions by their
conduct is disentitled to seek for winding up of the company under section
433(f) ?
(8) Whether the disputed claims of testamentary succession with
respect to the shares left by the late Shanmugasundaram could be the
subject-matter of adjudication under sections 433(f) and 439 of the Companies
Act ?
(9) What are the rights of the shareholders like the petitioner and
contesting respondents in the first respondent-company ?
(10) Whether the shareholder could
claim any specific share or interest in the property held or owned by the
company or seek for partition of the company’s assets ?
(11) Whether the first
respondent-company is liable to be wound up on one or more of the grounds
pleaded by the petitioner in the respective company petitions ?
(12) To what relief, if any ?”
Admittedly,
the company was promoted by the late Shanmugasundaram Nadar during his
lifetime. Shanmugasundaram Nadar and his family members were holding major
share. There were a few third parties holding minimum shares. It is admitted
that substantial shares in the company are held by the family of
Shanmugasundaram Nadar. The promoter, Shanmugasundaram Nadar was holding a
substantial number of shares. Shanmugasundram died leaving his widow, his three
sons and a daughter. It is the claim of one set of the heirs of
Shanmugasundaram that he died intestate, while another branch mainly set up a
will claimed to have been executed by Shanmugasundaram and substantial portion
of the shares held by Shanmugasundaram is claimed under the said testament. The
alleged will is being disputed seriously, challenged by the contesting
respondents. It is also admitted that the executor under the will has already
moved the original side of this court for issue of succession certificate, the
same is being disputed and denied and the same has been converted as a
testamentary original suit and it is pending.
46. At this stage, this
court will not be justified in entertaining any issue nor the company court has
such a jurisdiction to go into the validity of the testamentary disposition
made by the late Shanmugasundaram by the alleged will. Already the civil court
is seized of the matter. Hence, this court not only will not be justified, but
also will not have jurisdiction to decide the dispute as to whether the will
left by the late Shanmugasundaram is true, valid and binding and truth or
otherwise of the said will cannot be gone into. Therefore, it is essential to
point out that this company court has to confine itself to the winding up
petition filed under section 433(f) of the Companies Act and any other
incidental question as sought to be advanced only could be the subject-matter
of consideration or trial before the civil court. It is the ultimate judgment
of the civil court with respect to the will executed by Shanmugasundaram Nadar
and the decree and judgment of the civil court alone will bind the parties.
47.
Point Nos. 9 and 10 :
At the first instance, it is essential to take up points 9 and 10 for
consideration.
48. Also let us not lose sight of the fact that the petitioner in
both the company petitions and at least one or two of the respondents in the
company petitions proceed as if they are the owners of the entire assets of the
company, while forgetting the fact that they are mere shareholders and they
cannot claim to be the owners of the property owned or held by the company. In
fact, proceedings have been instituted as if the petitioners and contesting
respondents are entitled to share in the properties held by the first
respondent-company, which is a misconception. Merely because sons, widow and
daughter of the late Shanmugasundaram Nadar hold substantial shares, it does
not mean they become the owners of the land or the assets of the company.
Substantial portion of the case and claim has been made only on that
misconception.
49. It is well-settled legal
position that there is nothing to warrant for the assumption that a shareholder
has any interest in the property of the company, which is a juristic person and
which is entirely distinct from the shareholders. The true position of a
shareholder is an investor, he will be entitled to participate in the profits
of the company in which he holds shares as and when the company declares,
subject to the articles of association that the profits or portion thereof
should be distributed by way of dividends among the shareholders. That apart,
the shareholder has got a further right to participate in the assets of the
company, which would be left over after winding up, but not in the assets as a
whole. This legal position is well-settled by the pronouncement of the Apex
Court in Mrs. Bacha F. Guzdar v. CIT [1955] 25 Comp. Cas. 1
50. In Chiranjilal Chaudhari
v. Union of India [1951] 21 Comp. Cas. 33 (SC), it has been held that the right
of the shareholder is to elect directors, to give direction by passing
resolutions and in case of loss, to present a petition for the winding up of
the company, which are incidental to the ownership of the shareholders, but
that does not mean the shareholders apart from being shareholders are the
owners of the assets of the property owned or held by the company.
51. A
five-judge Bench of the Apex Court in Mrs. Bacha F. Guzdar’s case (supra) held
thus :
“. . . A shareholder has got no interest in
the property of the company though he has undoubtedly a right to participate in
the profits if and when the company decides to divide them. The interest of a
shareholder vis-a-vis the company was explained in the Sholapur Mills Case ;
Chiranjilal Chaudhari v. Union of India [1950] SCR 869. That judgment negatives
the position taken up on behalf of the appellant that a shareholder has got a
right in the property of the company. It is true that the shareholders of the
company have the sole determining voice in administering the affairs of the
company and are entitled, as provided by the articles of association, to
declare that dividends should be distributed out of the profits of the company
to the shareholders but the interest of the shareholder either individually or
collectively does not amount to more than a right to participate in the profits
of the company.
The company is a juristic person and is
distinct from the shareholders. It is the company which owns the property and
not the shareholders. The dividend is a share of the profits declared by the
company as liable to be distributed among the shareholders. Reliance is placed
on behalf of the appellant on a passage in Buckley’s Companies Act (12th Ed.,
page 894) where the etymological meaning of dividend is given as dividendum,
the total devisible sum, but in its ordinary sense it means the sum paid and
received as the quotient forming the share of the divisible sum payable to the
recipient. This statement does not justify the contention that shareholders are
owners of a divisible sum or that they are owners of the property of the
company.
The proper approach to the solution of the question
is to concentrate on the plain words of the definition of agricultural income
which connects in no uncertain language revenue with the land from which it
directly springs and a stray observation in a case which has no bearing upon
the present question does not advance the solution of the question. There is
nothing in the Indian Law to warrant the assumption that a shareholder who buys
shares buys any interest in the property of the company which is a juristic
person entirely distinct from the shareholders.
The true position of a shareholder is that on
buying shares an investor becomes entitled to participate in the profits of the
company in which he holds the shares if and when the company declares, subject
to the articles of association, that the profits or any portion thereof should
be distributed by way of dividends among the shareholders. He has undoubtedly a
further right to participate in the assets of the company which would be left
over after winding up but not in the assets as a whole. . . . “ (p. 5)
52. The same has been
followed by a three-judge Bench of the Apex Court in Chiranjilal Chaudhary’s
case (supra). It is unnecessary to multiply the pronouncements in this aspect.
No pronouncement to the contra or taking a different view had been brought to
the notice of the court by the learned counsel for the petitioner in both the
company petitions. In the circumstances, the entire arguments of the petitioner
in both the company petitions as if they are the owners of the land and
entitled to proportionate shares in the land is a misconception of law. Hence,
point Nos. 9 and 10 are necessarily answered against the petitioners.
53.
Point No. 3
Taking up the
next question whether the company has lost its substratum, it is to be pointed
out that except making a bald averment that the company has lost its substratum
in C.P. No. 274 of 1998, it cannot be even suggested that the company has lost
its substratum. Mere stoppage of brick manufacturing unit is pointed out as the
loss of substratum. Apart from the Maduravoyal lands, the company owns
extensive agricultural lands in Tuticorin District and a rice mill. Assuming
for the purpose of argument that Maduravoyal land is being offered for sale,
the value of the land is so phenomenal even as admitted by either side, the
liabilities referred to, namely, the liability to pay to the bank, Electricity
Board, Revenue dues, etc., are only marginal and sale of one acre will be more
than sufficient to wipe out the liabilities, yet there is substantial surplus
and valuable lands are available.
54. The company has several
projects which it could carry out by passing a suitable resolution by the
board. In fact on November 27, 1999, in the board meeting, not only is there an
approval regarding the sale of the lands, but also a resolution has been passed
resolving that the company shall not be wound up on any account, the company
may take up manufacturing of bricks and its allied products by acquiring new
loans or probe other avenues as they are the objects of the memorandum of
association for continuance of business. It is resolved to authorise the
managing director to probe avenues for utilising the sale proceeds as and when
received, in new profitable ventures in line which the objects of memorandum of
association. Therefore, as long as funds and valuable assets are admittedly
available, the objects for which the company has been registered could very
well be carried on. Therefore, it cannot be said that the company had lost its
substratum.
55. It is sought to be contended
that loss of substratum or disappearance of substratum of a company is evident,
since the object for which it was incorporated has substantially failed or that
it is impossible to carry on the business of the company except at a loss or
the existing and possible assets are insufficient to meet the existing
liability. This contention is based upon a misconception of the legal position.
In Seth Mohan Lal v. Grain Chambers Ltd. [1968] 38 Comp. Cas. 543 (SC), in a
case arising out of the 1913 Act, it has been held thus :
“Finally, it was urged that by reason of the
notification issued by the Central Government, the substratum of the company
was destroyed and no business could be carried on by the company thereafter. It
was said that all the liquid assets of the company were disposed of and there
was no reasonable prospect of the company commencing or carrying on business
thereafter.
The company was carrying on extensive business
in ‘futures’ in gur, but the company was formed not with the object of carrying
on business in ‘futures’ in gur alone, but in several other commodities as
well. The company had immovable property and liquid assets of the total value
of Rs. 2,54,000. There is no evidence that the company was unable to pay its
debts. Under section 162 of the Indian Companies Act, the court may make an
order for winding up a company if the court is of the opinion that it is just
and equitable that the company be wound up. In making an order for winding up,
on the ground that it is just and equitable that a company should be wound up,
the court will consider the interests of the shareholders as well as of the
creditors. Substratum of the company is said to have disappeared when the
object for which it was incorporated has substantially failed, or when it is
impossible to carry on the business of the company except at a loss, or the
existing and possible assets are insufficient to meet the existing liabilities.
In the present case the object for which the company was incorporated has not
substantially failed, and it cannot be said that the company could not carry on
its business except at a loss, nor that its assets were insufficient to meet
its liabilities. On the view we have taken, there were no creditors to whom
debts were payable by the company. The appellants had, it is true, filed suits
against the company in respect of certain gur transactions on the footing that
they had entered into transactions in the names of other persons. But those
suits were dismissed. The business organisation of the company cannot be said
to have been destroyed, merely because the brokers who were acting as mediators
in carrying out the business between the members had been discharged and their
accounts settled. The services of the brokers could again be secured. The
company could always restart the business with the assets it possessed, and
prosecute the objects for which it was incorporated. It is true that because of
this long drawn out litigation, the company’s business has come to a
standstill. But we cannot on that ground direct that the company be wound up.
Primarily, the circumstances existing as at the date of the petition must be
taken into consideration for determining whether a case is made out for holding
that it is just and equitable that the company should be wound up, and we agree
with the High Court that no such case is made out.” (p. 556)
The above
pronouncement and the principles laid down by the Apex Court squarely apply to
the present case and this contention deserves to be rejected.
56. In Madhusudan Gordhandas
& Co. v. Madhu Woollen Industries (P.) Ltd. [1972] 42 Comp. Cas. 125, the
Apex Court, while examining the question whether the substratum of the company
has gone, held that it is to be alleged and proved as a fact and in that
context held thus :
“. . . In determining whether or not the
substratum of the company has gone, the objects of the company and the case of
the company on that question will have to be looked into. In the present case,
the company alleged that with the proceeds of sale, the company intended to
enter into some other profitable business. The mere fact that the company has
suffered trading losses will not destroy its substratum unless there is no
reasonable prospect of it ever making a profit in the future, and the court is
reluctant to hold that it has no such prospect. . . .The company has not
abandoned objects of business. There is no such allegation or proof. It cannot,
in the facts and circumstances of the present case, be held that the substratum
of the company is gone. . . .” (p.134)
57. The Calcutta High Court
in Lokenath Gupta v. Credits Private Ltd. [1968] 38 Comp. Cas. 599, 601, 602,
while considering an identical situation in respect of a company whose
shareholders were either family members or relatives, held that where the substratum
is not completely gone and other business could be carried on, the company
should not be directed to be wound up on the ground that it is just and
equitable. In that context, the Calcutta High Court held thus :
“The allegations of the petitioners further
are that the substratum of the company is gone.
The said company, according to the petitioners
is in the nature of and in substance a partnership, the shareholders of the
company are relatives and/or friends. . . .
Mr. Subrata Roy Chowdhury appearing on behalf
of the petitioners contended before me that it is just and equitable that the
said company should be wound up inasmuch as (1) the substratum of the company
has gone, (2) there is a deadlock in the board of directors for reasons for
relationship of parties and (3) there is oppression of minority shareholders
which has led to justifiable lack of confidence in the person or persons,
namely, Anand Mohan Gupta and his relatives who are in control of the said
company. Mr. Roy Chowdhury has relied on the relevant passage in Palmer’s
Company Precedents, Part II (17th edition) pages 28, 29, 30, 35 and 36. Mr. Roy
Chowdhury has also relied on the case of Great Indian Motor Works Ltd. v.
Chandi Das Nundy [1953] 23 Comp. Cas. 287 (Cal.) and the case of Loch v. John
Blackwood Ltd. [1924] AC 783. . . .
It is true that where the substratum of the
company has gone or its only business has become impossible it has been held
that it was just and equitable ground for winding up (see Haven Gold Mining
Co., In re [1882] 20 Ch. D. 151; Taldua Rubber Co., In re [1946] 2 All ER 763;
Hindustan Co-operative Insurance Society Ltd., In re [1960] 65 C.W.N. 68. But
where the substratum has not completely gone and other business can be carried
on, the company should not be directed to be wound up on the ground that it is
just and equitable that the said company should be wound up. In the instant
case, in my opinion, it has not been established that the main business or the
only business of the company is gone or that there are no other objects in the
memorandum of the company which can be carried out (see Murlidhar Roy v. Bengal
Steamship Co. Ltd. AIR 1920 Cal. 722).
Mere mismanagement or misappropriation or
misconduct on the part of the directors or the managing director, as has been
alleged in the instant case, by itself is no ground for winding up (see Lawang
Tshang v. Goenka Commercial Bank Ltd. [1961] 31 Comp. Cas. 45 (Cal.),
Halsbury’s Laws of England (3rd edition) volume 6 page 535, article 1035,
Cuthbert Cooper & Sons Ltd., In re [1938] 8 Comp. Cas. 131 (Ch. D.);
(Anglo-Continental Produce Co. Ltd., In re [1939] 1 All ER 99). General
allegations of oppression of minority shareholders also is not a ground. In the
instant case, it has not been alleged that Anand Mohan Gupta and his nominees
or supporters are the majority of the shareholders. Such allegations, if any,
are contained in paragraph 22 of the said petition. The said paragraph 22 has
been verified as submission to this court and cannot be relied upon, in my
view, on a question of fact. In the instant case it has not been proved that
prejudice is being caused to the company by abuse of majority voting power or
that it is impossible for the business of the company to be carried on for the
benefit of the company as a whole, in view of the fact that they show the way
in which the voting power is held and used.
In the instant case, the petitioner has
alternative remedies for the redress of his grievances. The said remedies can
be found in sections 163, 167, 210 and 220 of the Companies Act. The said
remedies can also be found in clauses 66, 69 and 73 of the articles of
association of the said company (see Anglo-Greek Steam Co., In re [1866] 2 Eq.
1; Cuthbert Cooper and Sons Ltd., In re case (supra); Janbazar Manna Estate
Ltd., In re [1931] 1 Comp. Cas. 243 (Cal.).” (p. 601)
This court is in respectful agreement with the said enunciation of legal
proposition.
58. In the present case, on
the admitted materials, liability, if any, is only minimal or marginal when
compared to the value of properties or assets owned by the company. There may
be a misunderstanding between the members of the family, who hold majority
shares among themselves and attempt to overreach other members of the family.
It may be that the only major business that was being carried on had been
stopped, but on that score, it cannot be held that the substratum of the
company has been lost. Even after the sale of the lands, there will be
sufficient surplus and the company could very well proceed with one or more of
the objects, which is approved in the memorandum and articles of association
and already steps have been taken as seen from a resolution.
59. Therefore, this
contention that the company has lost its substratum cannot be sustained and on
that score there cannot be an order of winding up on the facts of the present
case. This contention advanced by the petitioner deserves to be rejected as it
is nobody’s case that it is impossible to carry on one or more business of the
company as provided in the memorandum, except by loss or the existing assets
are not sufficient to meet the liabilities.
60.
Point Nos. 5 and 6 :
Taking up the
next point whether the company petitions instituted are a mere abuse of the process
of this Court, though counsel for the petitioner in both the petitions
represented themselves that the company cannot be continued and that the
company has to be wound up, the entire focus relates to personal dispute
between the family members of the late Shanmugasundaram Nadar and major portion
of the dispute is whether the will left by Shanmugasundaram Nadar, bequeathing
his share is genuine and true or whether the rule of intestate succession
applies is the major controversy, which was concentrated by the petitioner in
both the petitions. In fact, it is to be pointed out that the very relief
prayed for in the company petition reads thus :
“Winding up of the respondent-company and
distribution of its assets and share value to the contributories and creditors
and as a part thereof allot 60 per cent share to the petitioner by way of
intestate succession or 80 per cent share to the petitioner by way of
testamentary succession.”
61. In fact in several
places the company petition proceeds as if it is a plaint where the plaintiff
claims for reliefs of personal nature against the defendant and this would
disclose not only the mind of the petitioner, but also their object. That
apart, the substantial portion of the averment set out in the company petition
relates to personal disputes or disputes among the family members and regarding
the will. This is clear from paragraphs 1 to 21 in C.P. No. 199 of 1998 as well
as paragraphs 6 to 17 in C.P. No. 274 of 1998.
62. Though it may look
incidental, it is the main onslaught by the petitioners that there is an
attempt to dispose of all the company’s property by entering into an agreement
and appropriate it. It is rightly being pointed out that the agreement entered
into by the petitioner, K.S. Damodaran with Southern Peninsula Housing Ltd.,
was without any authority or board resolution and being a private limited
company, there could be no alienation of the company’s assets or property
without there being a valid resolution. It is true a suit in O.S. No. 5560 of
1996 is instituted on the file of the City Civil Court and it is pending in
this respect. Hence, for the limited purpose of this company petition, this
court has to point out that not being supported with the resolution by the
board, there could be no sale agreement, which is binding the company, that
could be entered into by K.S. Damodaran with Southern Peninsula Housing Ltd. At
the same time, it has to be pointed out in respect of the very same lands,
there is a resolution by the board of directors, and the board of directors
have resolved to disburse all the property by way of twenty-five agreements to
various buyers. The said sale agreements are in terms of the resolutions passed
by the board. No one had challenged the said 25 sale agreements nor any proceedings
have been initiated in this respect.
63. Having come to know of
the sale agreements entered into by the board of directors pursuant to a
resolution of the board, if the other shareholders or anyone interested desired
to avoid the same, they should have initiated appropriate proceedings. As
already pointed out, by being the shareholders in the first respondent-company,
neither the petitioners nor the contesting respondents could claim share in the
properties or immovable assets held by the company and a shareholder has not
got a right in the property of the company.
64. In Hindustan Lever
Employees’ Union v. Hindustan Lever Ltd. [1995] 83 Comp. Cas. 30, the Apex
Court held that a shareholder has no interest in the assets of the company when
the company is in existence. Courts have taken a uniform view that a
shareholder of a company has no right in the assets of the company and he has
no right to interfere with the day-to-day administration by its board of
directors.
65. On an overall
consideration of the pleadings, material documents and the contentions advanced
by either side, this court holds that both the company petitions could very
well be held as an abuse of the process and it is not a bona fide action, but
it is an action, which has been initiated out of personal animosity or personal
grudge or enmity, each member of the family had nourished against the other
both during the lifetime of Shanmugasundaram Nadar and after the lifetime of
the promoter, Shanmugasundaram Nadar. Winding up proceedings are not meant for
settling personal scores among the family members. The company proceedings
cannot be a proceeding for vendatta among the members of the family, though the
family may be holding substantial shares and third parties may be minority
shareholders and they may not be interested or they may even keep themselves
aloof from the disputes. Hence, the points 5 and 6 are answered against the
petitioner in both the company petitions.
66.
Point Nos. 1 and 2 :
Taking up the
next question whether it is just and equitable to order winding up of the
company, it has to be pointed out that the expression “just and equitable”
appearing in section 433(f) is not ejusdem generis with the preceding five
clauses in the same section. On a perusal of the pleadings in both the company
petitions and the materials placed, this court is at a loss to find that there
are no pleadings at all to show that it is just and equitable to order winding
up nor a ground has been made out to order winding up of the respondent-company
as just and equitable. The Apex Court in Hind Overseas (P.) Ltd. v. Raghunath
Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91, 104 held thus :
“When more than one family or several friends
and relations together form a company and there is no right as such agreed upon
for active participation of members who are sought to be excluded from
management, the principles of dissolution of partnership cannot be liberally
invoked. Besides, it is only when shareholding is more or less equal and there
is a case of complete deadlock in the company on account of lack of probity in
the management of the company and there is no hope or possibility of smooth and
efficient continuance of the company as a commercial concern, there may arise a
case for winding up on the just and equitable ground. In a given case the
principles of dissolution of partnership may apply squarely if the apparent
structure of the company is not the real structure and on piercing the veil it
is found that in reality it is a partnership. On the allegations and
submissions in the present case, we are not prepared to extend these principles
to the present company.
The principle of just and equitable clause
baffles a precise definition. It must rest with the judicial discretion of the
court depending upon the facts and circumstances of each case. These are
necessarily equitable considerations and may, in a given case, be superimposed
on law. Whether it would so done in a particular case cannot be put in the
strait-jacket of an inflexible formula.
In an application of this type allegations in
the petition are of primary importance. A prima facie case has to be made out
before the court can take any action in the matter. Even admission of a
petition which will lead to advertisement of the winding up proceedings is
likely to cause immense injury to the company if ultimately the application has
to be dismissed. The interest of the applicant alone is not of predominant
consideration. The interests of the shareholders of the company as a whole
apart from those of other interests have to be kept in mind at the time of
consideration as to whether the application should be admitted on the
allegations mentioned in the petition.
The question that is raised in this appeal is
as to what is the scope of section 433(f) of the Act. Section 433 provides for
the circumstances in which a company may be wound up by the court. There are
six recipes in this section and we are concerned with the sixth, namely, that a
company may be wound up by the court if the court is of the opinion that it is
just and equitable that the Company should be wound up. Section 222(f) of the
English Companies Act, 1948, is in terms identical with the Indian counterpart,
section 433(f). It is now well established that, the sixth clause, namely,
‘just and equitable’ is not to be read as being ejusdem generis with the
preceding five clauses. While the five earlier clauses prescribe definite
conditions to be fulfilled for the one or the other to be attracted in a given
case, the just and equitable clause leaves the entire matter to the wide and
wise judicial discretion of the court, the only limitations are the force and
content of the words themselves, ‘just and equitable’. Since, however, the
matter cannot be left so uncertain and indefinite, the courts in England for
long have developed a rule derived from the history and extent of the equity
jurisdiction itself and also born out of recognition of equitable
considerations generally. This is particularly so as section 35(6) of the
English Partnership Act, 1890, also contains, inter alia, an analogous
provision for the dissolution of partnership by the court. Section 44(g) of the
Indian Partnership Act also contains the words ‘just and equitable’.
Section 433(f) under which this application
has been made has to be read with section 443(2) of the Act. Under the latter
provision where the petition is presented on the ground that it is just and
equitable that the company should be wound up, the court may refuse to make an
order of winding up if it is of opinion that some other remedy is available to
the petitioners and that they are acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.
Again under sections 397 and 398 of the Act
there are preventive provisions in the Act as a safeguard against oppression in
management. These provisions also indicate that relief under section 433(f)
based on the just and equitable clause is in the nature of a last resort when
other remedies are not efficacious enough to protect the general interests of
the company.” (p. 104)
Applying this
pronouncement of the Apex Court, this court holds that the petitioners in both
the company petitions have not made out a case to order winding up of the
company as just and equitable and the contention advanced by learned counsel
for the respondents deserves to be sustained.
67. Incidentally it is also
contended that the petitioners in both the company petitions have not come
before the court with clean hands and their objects, as disclosed by their
conduct would disable them from getting an equitable relief before this court.
Equitable relief, namely, making a winding up order on the ground that it is
just and equitable, deserves to be rejected summarily if the petitioner is
found guilty of misconduct with reference to the affairs of the company or had
acted in a manner prejudicial to the interests of the company or had proceeded
as if he is entitled to the share in the assets of the company and that he is
entitled to deal with the company’s assets in any manner he likes. It is
rightly pointed out that the petitioner in C.P. No. 199 of 1998, Mr. K.S.
Damodaran had caused an advertisement to be issued in a daily where he had
declared himself to be the owner of the property, while factually the owner of
the property is the company itself. In the advertisement caused by the said
petitioner, K.S. Damodaran, through his advocate Mr. G. Ramalingam, the
following is the text :
“Notice
Please take notice that Mr. K.S. Damodaran is
the absolute owner of the land and properties of K.S. Kasimari Ceramique Pvt.
Ltd. comprised in Survey Nos. 127, etc., situate at Maduravoyal village,
Saidapet Taluk. . . . Except my client, nobody else has got any right, title,
interest over the above said properties . . . the public are hereby warned not
to deal with any person except my client in respect of the above stated
properties.”
This would
show that the petitioner would go to any extent forgetting the fact that he is
only a shareholder and the company is the owner of the property and he had
mixed up the entire legal position with a view to enrich himself.
68. That apart, the
petitioner, K.S. Damodaran had entered into an agreement of sale on March 23,
1996, on behalf of the company with Southern Peninsula Housing Ltd. agreeing to
sell 13.77 acres of the company’s lands for a consideration of Rs. 3.15 crores
after receiving Rs. 10 lakhs as advance. So also the very same petitioner on
March 23, 1996, on the same day, has entered into an MoU with Southern
Peninsula Housing Ltd. for sale of 13.77 acres of the company’s lands for a
total consideration of Rs. 4.65 crores. In other words, by some underhand
dealing, the said K.S. Damodaran had made arrangement to drain or pocket Rs.
1.5 crores out of the very same dealing, which is to the detriment of the
company and its shareholders. Such is the conduct of the said petitioner. It is
rather shocking that in respect of the same sale agreement there could be one
sale agreement and a separate memorandum of understanding for different
consideration by which a sum of Rs. 1.30 crores is attempted to be pocketed.
Such a sale agreement is not backed by any resolution or authorisation by the
company and the board of directors. This shows the anxious conduct to knock
away the company’s property, which speaks volumes.
69. It is also being pointed
out by counsel for the respondent that the sum of Rs. 10 lakhs received as
advance from Southern Peninsula Housing Ltd., had not been brought to account
nor has it been credited to the bank account of the company nor any other
arrangement has been made to make the said sum of Rs. 10 lakhs available by
opening an account. The amount had not been refunded to the purchaser nor
deposited into the company’s accounts, despite undertaking given before the
learned judges of this court. In fact, Southern Peninsula Housing Ltd. has
filed a suit for recovery in C.S. No. 768 of 2000 and the same is pending. The
said K.S. Damodaran had made very many averments, which are untrue and those
statements are false to his knowledge. As claim of shareholding of 50 per cent,
existence of two directors, claims that he is the founder chairman or the
composition of directors, creditors as well as the valuation of the lands are
not true nor is it correct and this would belie the very bona fides of the
petitioner.
70. So far as the
petitioner, Mrs. Mangala Vijayalakshmi in C.P. No. 274 of 1998 is concerned, it
is to be pointed out that the petitioner is a party to all the decisions or
resolutions of the board of directors including the resolution authorising sale
of the lands at Maduravoyal. The petitioner had also signed the sale agreements
in favour of 25 intending purchasers. Being a party to the sale agreement and
resolutions, it is rather extraordinary on the part of the petitioner, Ms. Mangala
Vijayalakshmi to turn round and accuse the respondent or refute her action in
being a party to the resolutions, being a signatory to the 25 sale agreements.
Belatedly, the said Ms. Mangala Vijayalakshmi had chosen to suggest for the
first time that her signatures were secured by compulsion or force. There is no
merit in the said suggestion. To a certain extent, as has been rightly pointed
out, Mrs. Mangala Vijayalakshmi, petitioner in C.P. No. 274 of 1998 had been
taking not only different but also shifting stands and different attitudes from
time to time. In fact, in the Cont. Application No. 199 of 1997, the said Mrs.
Mangala Vijayalakshmi had supported the board resolutions and admitted that she
had signed the same. Having said so, it is too late in the day for her to plead
that her signature had been secured forcibly. In Cont. Application No. 199 of
1997, the very same Mrs. Mangala Vijayalakshmi had filed a counter-affidavit
and the material portion reads thus :
“I submit that as early as January 12, 1996,
the board of directors passed resolution to dispose of excess lands of the
company in Maduravoyal on the basis as negotiated by my late father chairman
Sri K. Shanmugasundaram Nadar. The board also authorised the present managing
director Mr. K.S. Anantharaman to negotiate with probable buyers and submit
proposal to the board. In the subsequent board meeting held on February 10,
1996, under my mother as chairperson, a resolution was passed to authorise Mr.
K.S. Anantharaman to receive original documents from Indian Overseas Bank,
after paying the dues. In all the above meetings Mr. K.S. Damodaran as a
director was absent.”
Thus, it is
clear that the petitioner, Mrs. Mangala Vijayalakshmi, was a party to the
resolutions and she cannot turn around and say that she had been a signatory
due to compulsion. The above conduct on the part of the petitioner in the
company petitions would show that they have neither a consistent stand nor have
they approached this court with clean hands nor their conduct is above board
nor had they taken a consistent stand right through.
71. So far as the
petitioner, K.S. Damodaran in C.P. No. 199 of 1998 is concerned, there had been
much comment and substantial portion of it relates to the will, this court is of
the considered view that it is unnecessary to refer to the same in detail, lest
it will affect the pending proceedings initiated by the said K.S. Damodaran for
probate. It is, therefore, clear that both the petitioners have come before
this court with unclean hands and they have invoked the equitable jurisdiction
with unclean hands and this is sufficient to reject their respective petitions.
72. Taking up the
controversy regarding holding of shares by the heirs of the late
Shanmugasundaram Nadar, in particular the petitioner in both the company
petitions, and the claim made on the basis of the alleged will, this court will
not be justified in examining such a dispute or issue as it is a complex
question of fact. Shareholding cannot be decided by the company court. The
petitioners have made reference to various aspects such as appointment of the
petitioner as director, which is a self-appointment, the number of directors,
the extent of shareholding the claim of share in excess of what is shown in the
share register, the validity of meetings held on August 9, 1995, the validity
of meetings held by the board on January 12, 1996, are all questions, which
cannot be gone into in summary proceedings. Further, all these matters are
pending consideration before the civil court and this court will not be
justified in permitting the petitioner to agitate the same in this winding up
proceedings, which is summary in nature. The company court, having summary
jurisdiction, will not at all be justified in investigating complex questions
of fact, which are to be decided by letting in evidence. Further, suits or
other proceedings are pending and this court persuades itself not to enter into
these disputes, as it is for the courts having competent jurisdiction to
examine these disputed questions of fact.
73.
Point No. 1 :
Taking up the
issue regarding maintainability of the company petition, it is pointed out that
the company petitions have been filed invoking section 433(f) of the Companies
Act, 1956, namely, winding up the respondent-company as just and equitable.
74. Section 433(f) provides
that a company may be wound up if the court is of the opinion that it is just
and equitable that the company should be wound up. In this respect, sub-section
(2) of section 443 of the Companies Act provides that where the petition is
presented on the ground that it is just and equitable, the court may refuse to
make an order of winding up, if it is of the opinion that some other remedy is
available to the petitioner and that they are acting unreasonably in seeking to
have the company wound up instead of pursuing such remedy. The court has a
discretion to ask the petitioner to pursue the alternate remedy available to
the petitioner and the court has to satisfy itself whether such an alternate
remedy is available and also address the question as to whether the petitioner
is acting unreasonably in seeking for winding up.
75. In the present case, in
respect of a substantial portion of the dispute, which has been raised by the
petitioner in C.P. No. 199 of 1998, already civil suits have been filed either
for probate or for seeking a declaration in respect of certain resolutions
passed or other proceedings, which the petitioners have not chosen to disclose
and it may be that during the pendency of the company petition or just at or
about the time of filing the company petition they came to be instituted. Yet,
it is clear that there are prosecuting the alternative remedies, which are
available. Alternative remedy is definitely available to the petitioner and the
petitioners cannot contend that there is no alternative remedy at all.
76. That apart, the
petitioners mainly seek the relief in respect of their personal rights, shares
in the father’s estate. The probate proceeding is pending at the very instance
of one of the petitioners. Such issues cannot be gone into in a winding up
petition. Such issue can be decided only by a competent civil court before
which probate has been applied for and it cannot be the subject-matter of
adjudication before the company court.
77. The petitioner has
already filed C.S. No. 477 of 2000 on the original side of this court seeking
for a declaration with respect to the number of shares which he claims to hold.
The petitioner has also filed T.O. S.No. 23 of 1998 seeking for a probate of
the alleged will, which is the subject-matter of serious challenge on the
original side of this court. O.S. No. 5560 of 1996 is pending on the file of
the City Civil Court, where a declaration has been sought for that K.S.
Damodaran is not the chairman of the company and he has no right to deal with
the property of the company and for other consequential reliefs. The said suit
is also pending. The petitioner in C.P. No. 274 of 1998, Mrs. Mangala
Vijayalakshmi, had already instituted Suit C.S. No. 372 of 2001 for partition
of all her properties, including the company properties, which would show that
the said petitioner and one or two of the family members have been treating the
company properties as if they are the family properties and that each one of
them is entitled to a share. These are the alternative remedies, which the
respective petitioners, who had come before this court have already instituted,
availed of and which are pending before the competent court.
78. Further, the petitioners
in both the company petitions have nowhere pleaded that they have no other
alternative remedy other than the present company petition, which is a
primordial requirement in a company petition filed under section 433(f).
79. If for any reason the
interest of the petitioners as shareholders is affected or prejudiced, under
section 397 of the Companies Act, the shareholders could move the Company Law
Board. If the board of directors of the first respondent-company act in any manner
prejudicial to the company or suppress one set of shareholders, a relief under
section 398 is also very much available to them by moving the Company Law
Board. The Company Law Board has been conferred with requisite powers under
section 402 of the Companies Act. These aspects, in my considered view, would
disable the petitioners from maintaining the company petitions.
80. In Hind Overseas (P.)
Ltd.’s case (supra), the Apex Court had emphasised that when alternative
remedies are available, the company court may refuse to exercise the
jurisdiction under section 433(f). In that context, it has been held thus :
“Section 433(f) under which this application
has been made has to be read with section 443(2) of the Act. Under the latter
provision where the petition is presented on the ground that it is just and
equitable that the company should be wound up, the court may refuse to make an
order of winding up if it is of opinion that some other remedy is available to
the petitioners and that they are acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.
Again under sections 397 and 398 of the Act
there are preventive provisions in the Act as a safeguard against oppression in
management. These provisions also indicate that relief under section 433(f)
based on the just and equitable clause is in the nature of a last resort when
other remedies are not efficacious enough to protect the general interests of
the company.” (p. 106)
81. In Malabar Industrial
Co. Ltd. v. A. John Anthrapper [1985] 57 Comp. Cas. 717, a Division Bench of
the Kerala High Court held thus :
“Section 433(f) enables the court in
appropriate cases to order winding up of the company only when the court is of
opinion that it is just and equitable so to do. If the court finds that the
petitioner before it has other efficacious remedy, the court will refuse to
make an order of winding up. It is, therefore, necessary for a contributory
seeking the discretionary powers of the court under section 433(f) not only to
establish that the circumstances obtaining in the company are such that a
winding up of the company is the only alternative but also to show that he has
no other remedies available.”
In Hind
Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp. Cas. 91,
the Supreme Court has observed as follows (page 106 of 46 Comp. Cas.) :
“Section 433(f) under which this application
has been made has to be read with section 433(2) of the Act. Under the latter
provision where the petition is presented on the ground that it is just and
equitable that the company should be wound up, the court may refuse to make an
order of winding up if it is of opinion that some other remedy is available to
the petitioners and that they are acting unreasonably in seeking to have the
company wound up instead of pursuing that other remedy.
Again under sections 397 and 398 of the Act,
there are preventive provisions in the Act as a safeguard against oppression in
management. These provisions also indicate that relief under section 433(f)
based on the just and equitable clause is in the nature of a last resort when
other remedies are not efficacious enough to protect the general interests of
the company.
It is necessary to bear in mind that the
relief under section 433(f) is in the nature of a last resort, thus obliging
the court to give relief to the party when moved under the section only under
compelling circumstances.” (p. 723)
This court is
in respectful agreement with the above two pronouncements and the same squarely
apply to the facts of the present winding up petitions.
82. In V.V. Projects &
Investments (P.) Ltd. v. 21st Century Constructions (P.) Ltd. [1997] 90 Comp.
Cas. 346, the Andhra Pradesh High Court had occasion to consider the scope of
section 433(f) and held that an alternative remedy of approaching the Company
Law Board either under section 397 or 398 or section 325 for causing
investigation by the Central Government, if available, then such a petition
cannot be admitted. In that context, it has been held thus :
“Mr. Kannabhiran, learned senior counsel for
the respondent, raised a preliminary objection that the petition cannot be
admitted for two reasons, namely, (i) that the petitioner is not a shareholder
and, hence, has no locus standi to move under section 433(f) of the Act, and
(ii) that there is alternative remedy available under sections 397 and 235 for
investigation by the Central Government. Regarding the first contention, the
parties are at issue regarding the shareholding. While it is the case of the petitioner
that it is still holding 5,730 shares, the respondent-company says that the
petitioner has transferred all its shares for Rs. 9,00,000. The question
whether the petitioner holds 5,730 or for that matter any shares at all in the
respondent-company cannot be decided unless full enquiry is made. For this
reason, the first objection fails. But, the respondent has to succeed on the
second objection. The respondent relies on section 443(2) which says :
‘443(2) Where the petition is presented on the
ground that it is just and equitable that the company should be wound up, the
court may refuse to make an order of winding up, if it is of opinion that some
other remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of pursuing that
other remedy.’
As the petitioner has alternative remedy of
approaching the Company Law Board either under sections 397 and 398 or under
section 235 for causing investigation by the Central Government, the petition
cannot be admitted.
In Lokenath Gupta v. Credits Pvt. Ltd. [1968]
38 Comp. Cas. 599 (Cal.), it was held that mere mismanagement or
misappropriation or misconduct on the part of the directors or the managing
director, by itself or general allegation or oppression of minority
shareholders is not a ground for winding up. It was also held that the petition
for winding up has to be rejected on the ground that the petitioner has
alternative remedy.
In Atul Drug House Ltd., In re [1971] 41 Comp.
Cas. 352 (Guj.), it was held that at the time of admission of a petition for
winding up under section 433(f), the petitioner must convince the court not
only of a just and equitable ground for so doing but also that there is no
alternative remedy open to the petitioner, that this is because if such a
petition is admitted and there is a public advertisement it could cause
irreparable harm to a solvent company even if the company succeeds ultimately.
The next decision is Jose J. Kadavil v.
Malabar Industrial Co. Ltd. [1986] 59 Comp. Cas. 969 (Ker.). There it was held
that the court can refuse to make an order of winding up, if it is of opinion
that some other remedy is available to the petitioners and that they are acting
unreasonably in seeking to have the company wound up instead of pursuing the
other remedy. The court, while interpreting section 433(f) of the Act, held
that there is no restriction or limitation to the effect that an order under
section 433, sub-section (2), can be made only after taking evidence at the
time of the enquiry or at the conclusion of the enquiry. As against these
authorities, Mr. S. Ravi, learned counsel for the petitioner, has relied on a
Division Bench decision of the Bombay High Court in Jeeva Bai Munga Bai Patel
v. Extrusion Processes (P.) Ltd. [1966] 2 Comp. LJ. 74. But, neither the said
report is available nor a copy of the judgment filed. Hence, it is not
considered.
In view of the above, I have no hesitation in
dismissing the petition on the ground of alternative remedy either under
section 397 or under section 235 or any other provision of the Act. No costs.”
(p. 348)
This court is
in respectful agreement with the above pronouncements, which apply to the facts
of these two petitions.
83. When alternative
remedies are definitely available and in fact for substantial portion of the
grievance alternative remedy has already been invoked and are pending, the
petitioner in each of the company petitions cannot maintain an application
under section 433(f) of the Companies Act apart from the fact that there are no
pleadings on this aspect by the respective petitioner. Failure even to suggest
that there are no other alternative remedy in the company petition is also
fatal since admittedly the petitioner in each of the company petitions has
already invoked the other remedies available to them. It is also not in dispute
that the petitioner in each of the company petitions has a remedy under
sections 397, 398 and/or 402 of the Companies Act, as the case may be.
Therefore, on this ground also, this court holds that both the petitions are
not maintainable.
84. There has been much
controversy and allegations as well as suggestion and challenge either with
respect to the land owned by the company or the attempt to dispossess the same.
The company’s properties cannot be dispossessed to all the liking of the
individual shareholders, whether he be an ordinary shareholder or a director
unless the procedure prescribed in this behalf is followed. Definitely in
respect of the petitioner, K.S. Damodaran, there is no resolution signed nor
even a copy of the resolution has been placed nor been pleaded before this
court to support his action. One party claims that the value of the land is Rs.
32 lakhs per acre, while the other claims it to be Rs. 70 lakhs per acre. Be
that Rs. 70 lakhs or Rs. 32 lakhs per acre as the case may be, this court is
not called upon to examine the issue relating to sale agreement or as to what
is the market value or as to whether it is beneficial for the company to
dispose of its assets.
85. A notice from K.S.
Damodaran, petitioner in C.P. No. 199 of 1998, which finds place with the
enclosed agenda would show how some of the shareholders, namely, the family
members of the promoter the late Shanmugasundaram Nadar, had attempted to
divide the company property and as to how the arrangement is sought to be
entered into and this will show not only the approach, but also the mind of the
said petitioner and others who support him. It is only the board that has the
power to sell and not the individual directors, much less, treating it to be
their property or property of their own.
86. In the circumstances, on
a consideration of the entire matter, this court holds that there are no merits
and all the company petitions deserve to be dismissed. In the light of the
above discussions, the points are answered as hereunder :
“(a) On the first point, this Court holds that C.P. No. 199 of 1998
and C.P. No. 274 of 1998 filed under section 433(f) seeking for winding up of
K.S. Kasimari Ceramique Pvt. Ltd. as just and equitable are not maintainable.
(b) On the second point, this court holds that section 443(2) is a
bar with respect to both the company petitions.
(c) On the third point, this court holds that the substratum of the
first respondent-company has not been lost.
(d) On the fourth point, this court holds that the petitioner in
each of the company petitions has not made out a case to order winding up of
the company under the just and equitable clause.
(e) On the fifth point, this court holds that the filing of the
company petitions is an abuse of the process, besides being a misconception of
shareholders’ right.
(f) On the sixth point, this court holds that the petitioner in
each of the company petitions has come before this court with unclean hands and
the company petitions are not bona fide action and are liable to be dismissed
on that score.
(g) On the seventh point, this court holds that the petitioner in
each of the company petitions by their conduct are disentitled to seek for
winding up of the company.
(h) On the eighth point, this court holds that the dispute with
respect to the claim of testamentary succession or otherwise with respect to
the shares left by the late Shanmugasundaram Nadar could not be the subject
matter of adjudication before the company court.
(i) On the ninth and tenth points, this court holds that the
petitioner in each of the company petitions and the contesting respondents are
mere shareholders, who have got a right to share the income or in the case of
winding up, share what remains ultimately of the assets of the company and they
cannot claim any interest in the company’s assets such as movable and immovable
properties. The attempt on the part of the petitioner as to claim a share in
the company’s property, as if the property of the company is divisible among
the shareholders of the company, is totally unknown to corporate law.
(j) On the eleventh point, this court holds that the first
respondent-company is not liable to be wound up in these company petitions.
(k) On the twelfth point, this court holds that C.P. No. 60 of 1996
is dismissed as not pressed. C.P. Nos. 199 of 1998 as well as 274 of 1998 are
dismissed on merits.”
87. In the result, C.P.No.
60 of 1996 is dismissed as not pressed. C.P. Nos. 199 of 1998 and 274 of 1998
are dismissed. Consequently, the connected company applications are also
dismissed. Though these petitions are eminently fit cases where this court
would be justified in awarding costs, but, however taking into consideration
the relationship between the parties, this court directs that the parties shall
bear their respective costs.
[1952] 22 COMP CAS 306 (BOM.)
HIGH COURT OF
Dhulia-Amalner Motor Transport
Ltd.
v.
Raychand Rupsi
Dharamsi
VYAS, J.
Second Appeal Nos. 805 and 809 and Civil Application No. 1155 of 1949
OCTOBER 10, 1951
R.B. Kotwal, for the Appellants.
Purshottam
Tricumdas, G.A. Desai, G.N. Vaidya, S.A. Desai, S. A. Kher and M. A, Kharkar, for the Respondents.
JUDGMENT
Vyas,
J.—These appeals arise out
of an appellate decision of the Civil Judge (Senior
Division) with appellate powers at
In the other appeal (No. 145 of 1943) which arose out of Suit No.
63 of 1942 the learned Judge directed a preliminary decree to be drawn up for
taking accounts of the plaintiff's share in the Dhulia-Amalner Motor Owners' Union from July 22, 1941, up to the date of
the suit. The plaintiff in the said suit (defendant
No. 13 of the other suit No. 82 of 1942) was also given an option to become a
shareholder of the limited company on payment of Rs. 800 together with interest
at 6 per cent. per annum from February 21, 1942, onward.
Now, the facts from which these appeals have arisen may briefly be
stated: Originally individual bus owners used to ply their buses on hire on the
Dhulia-Amalner route and the
Amalner-Marwad route. That used to be done under the
superintendence of the District Superintendent of Police. In due course
the Regional Transport Authorities were established for the various regions and the control and supervision over the
buses plying on hire in the various regions passed to the respective Regional
Transport Authorities. The two routes in question—the Dhulia-Amalner
route and the Amalner-Marwad route—were situated within the jurisdiction of the
Regional Transport Authority,
"It
was one of the fundamental terms of the partnership agreement (Exhibit 167) that the dispute between the partners inter
se were to be decided by a two-third majority, with a right to appeal to an
independent tribunal of three persons to be appointed by the Union from time to
time. The individual owners of the buses were to remain the owners and were
liable to spend for any repairs to their buses, or for such spare parts and
accessories as were necessary to maintain their buses in a roadworthy
condition. Such was in brief the constitution of the
union.....................The Union had decided to run ten buses at a time.
After every one of the ten buses had made one trip and a touring car had
completed two return trips on these roads, 'a circle' was said to become
complete and after 4 or 5 such circles, accounts were made and the income
distributed among the partners. Out of the earnings a Reserve Fund at
the rate of one anna per rupee was set apart and out
of this collection one-half was to remain as the Reserve Fund for the Union and
the other half was to go towards the payment by way of remuneration. Two owners
of cars were to attend for duty at the Dhulia and the Amalner
stands...................."
It is to be remembered that it was a partnership at will. Within a
short time difficulties were experienced in the working of the partnership
business and, on July 23, 1941,
what Mr. Kotwal for the appellant calls a kararnama was
passed. That document is Exhibit 166. It describes itself as a kararnama but in
fact is a letter which was written by 13 partners of the firm to the manager of
the firm.
Therein, amongst other things, it was suggested in this kararnama
that in future the partnership firm should not be carried on in accordance with
the partnership deed, that the said partnership deed should be cancelled and
that a private limited company should be formed. Thereafter a notice, Exhibit
136 dated August 19, 1941, was sent out to the members of the Union for
convening a general meeting. On August 24,
1941, the general meeting was held. It was attended by ten out of the seventeen
partners of the firm and an important resolution which was unanimously passed
by the members present was resolution No. 4 which stated amongst others:
In that as a kararnama signed by the
majority of the parters of the firm had been received
by the manager of the firm suggesting dissolution of the partnership, enquires
should be made and information collected on the subject of the formation of a private
limited company, where after the necessary permission of the Regional
Transport Officer should be obtained and steps should
be taken to form a private limited company as quickly as possible. It is to be
noted at this stage that if we turn to the resolution there is nothing to show
that the plaintiff and his colleagues who constituted a minority of the members
of the partnership attended this general meeting. If we turn to the notice
Exhibit 136 by which this meeting was convened, we find again the signatures
thereon of those who had received the notice in token
of the receipt. A curious circumstance in this connection is that whereas the
signatures of all the members who constituted the majority in the Union were
written in ink, only the alleged signatures of the plaintiff and his colleagues
are to be found in pencil. Whereas all the other signatures are to be found at
the foot of the notice itself, the five alleged signatures of the
plaintiff and his colleagues are to be found on the reverse of the notice. The least that may be said about these
features is that the circumstance of these five signatures only being in pencil
and appearing on the reverse is a suspicious circumstance. It is categorically
alleged by the plaintiff that this notice was never received by him.
On a careful
consideration of the above mentioned circumstances I am not really satisfied
that the plaintiff and his colleagues who were in a minority in the partnership
firm on the question of its dissolution did really know that a general
meeting was to be convened on August 24, 1941, and I think it was therefore that they could not attend that meeting.
This aspect of the case will have an important bearing when we shall proceed to
the consideration of the question whether the resolution passed at the meeting of
August 24, 1941, could amount to a statutory notice within the meaning of Section 43 of the Indian Partnership Act. The next
general meeting of the partnership firm was held on December 25, 1941,
and the pertinent resolution was resolution No. 1
which stated that immediate steps should be taken for making a valuation of the
buses and for taking possession of the buses. The next general meeting of the
Union was held on January 5, 1942, and it is contended for the appellant that
it was an important meeting. My attention was drawn to resolution No. 1 which was
passed then and which stated:
that a company was to be formed, the buses were to be
handed over to the company after making the valuatoion and shares were to be issued
on the basis of the said valuation. It may be noted that this meeting was
attended by all the partners of the firm. Eleven persons were in favour of the
resolution and five remained neutral. Those who remained neutral were the
present plaintiff and his colleagues. The last general meeting of the Union,
which was referred to in the arguments in these appeals, was held on
January 31, 1942, and resolution No. 3 which was
passed then is said to be an important one. It stated that the reserve fund
should be distributed amongst the partners of the firm and account of
the business of the firm should be made up to January 31, 1942, and the amounts should be distributed to the partners according to
their shares. On these facts regard being had to the kararnama Exhibit
166 dated July 23, 1941, the notice Exhibit 136 dated
August 19, 1941, and the resolutions passed at the general meetings dated
August 24, 1941, December 25, 1941, January 5, 1942, and January 31, 1942, it
is contended by Mr. Kotwal for the appellant that the partnership firm
had ceased to do its business from January 31, 1942,
onward, i.e., the firm was dissolved from that date and the private limited
company had begun its business from February 1, 1942.
(3) Mr. Purshottam for the respondents who constitute a minority
Section in the partnership firm has strenuously contended that the partnership
firm has not been dissolved but is still continuing, that the requisite
procedure for the dissolution of a partnership as prescribed by Sections 40 and 43 of the Indian Partnership Act was not
followed, that the business which was done by the
private limited company was the same business which was done by the Union and
that the company was really the same entity as the Union but under a different
name. Relying on Section 37 of the Indian Partnership Act Mr. Purshottam has
contended that the majority section of the partnership firm are using the
artificial creation of the company as their agent for doing the business with
the property of the partnership firm and are therefore liable to render to the
minority section an account of the profits made by them and attributable to the
use of the shares of the minority section in the property of the firm which is
used by them (majority section). In the alternative Mr. Purshottam has relied
on Section 67 of the Indian Trusts Act and has contended that as the majority
section of the members of the partnership firm who have promoted the private
limited company were trustees of the partnership property and as they
had wrongfully employed the said trust property in doing a business of their Own under the name of the artificially created
company, they were liable to render accounts to the minority section of the
profits made by them in the business done under the name of the company.
His
Lordship agreed with the view of the learned Judge of the lower appellate court that the Union (partnership firm) was
continuing to exist and was never dissolved. Although on the question of the
alleged dissolution of the Union which goes by the name of the
Dhulia-Amalner Motor Owners' Union my decision is thus against the appellant,
it is impossible to confirm the decree of the. lower
appellate court which is based on a complete ignorance of the legal position.
It is ignorance of law embodied in the statute.—the Indian Companies
Act—to say that the difference between the Union and
the private limited company in this case lay merely in the change of
name from "the Dhulia-Amalner Motor Owners' Union" to "the
Dhulia-Amalner Motor Transport Limited." The fundamental
basis, which was a wrong basis of the decree passed by the lower appellate
court was as though the business done by the private limited company was a
continuation of the business done by the Union; or else the decree for accounts
which has been passed would be a manifestly absurd decree. Now, it is to
be noted that the limited company, in substance and
in form, was 'not' the same entity as the Union with merely a changed name. The
company has a distinct entity of its own, quite different from the entity of
the Union and the entities of the shareholders, and the business which was done
by it was not the same business as was done by the Union, nor was it a
continuation of the same business. The business which was done by the company
was distinctly its own business. It was not the business of its shareholders
either. What happened in this case was this: After the partnership firm worked
its way for sometime, some of the partners, i.e., defendants Nos. 1 to 12 and
defendant No. 15, formed a private limited company, which they could do under
the law even while the partnership continued to be a running concern,
Such of the partners of the Union, who formed a
limited company, sold to the company their buses which were hithertofore being
used by the Union.
Under
the terms of the partnership deed (vide Clause 6 of Exhibit 167) it was
perfectly competent to a partner to sell to a third person his bus or buses which he had given to the Union for use for the business
of the Union. The company was the said third person to whom defendants Nos. 1
to 12 and defendant No. 15 who were partners in the Union, sold their buses
after withdrawing them from the Union. Now, if two parties fall out, how can
one of them call upon the other to render to it the accounts of a business done
by a third party? The buses, with which the company was doing its business,
were the property of its own. They were not the property of the Union. They
were never the property of the Union.
The Union had only the use of them. The proprietary interest in them had always
belonged to such partners as were the owners thereof before the Union was
formed. The said buses had become the property of the company by
purchase from defendants Nos. 1 to 12 and defendant No. 15, to whom it was open under the partnership agreement to sell
their buses to any person they liked after withdrawing their use from the
partnership firm. Therefore it is a crux of the matter to remember (1) that the
buses which the company was plying were not the property of the partnership
firm, nor the property of any of the partners of the firm, nor the property of
the shareholders, but the property of the company itself; (2) that the business of the company was not the business of the Union;
and (3) that the company was a corporate body whose entity was entirely
different from the entities of its shareholders or the entities of the Union
and its members. Such being the position in law which the learned Judge of the
lower appellate Court failed completely to appreciate, how can one set of
partners of the partnership firm call upon another set of partners to render
accounts of a business done by a third person altogether, and yet that is what
in substance and effect has been done by the decree of the lower appellate
Court.
Now,
it is a well settled principle of law that a limited company has a distinct
entity of its own, which is created by the statute, in this case the Indian
Companies Act. If we turn to the Indian Companies Act, Section 23 thereof lays
down:
"(1) On the
registration of the memorandum of a company, the registrar shall certify
under his hand that the company is incorporated, and in the case of a limited company that the company is limited.
(2) From the date
of incorporation mentioned in the certificate of incorporation, the subscribers
of the memorandum, together with such other persons as may from time to time
become members of the company, shall be a body corporate by the name contained
in the memorandum, capable forthwith of exercising all the functions of an
incorporated company, and having perpetual succession and a common seal, but
with such liability on the part of the members to contribute to the
assets of the company in the event of its being wound
up as is mentioned in this Act."
It is thus clear that a limited company is
a body corporate which has an entity of its own, with
a perpetual succssion and a seal of its own.
It is contended for the plaintiff Raychand
Rupsi Dharmsi Shet that the private limited company's
name "the Dhulia-Amalner Motor Transport Limited" is merely an alias
for "the Dhulia-Amalner Motor Owners'
Union", that in reality the company is no different concern and is not a
different entity from the Union itself and that the business which was
done by the company was the same as was done by the
Union, and on that basis he has asked for certain declarations and injunction's
and also for accounts of the business done by the company and for a share in
the profits made by the company and attributable to the use, by the company, of
the vehicles, etc., which, says the plaintiff, are the property of the Union
which has not been dissolved. Now, in Salomon v. Salomon & Co. Lord
Halsbury, L.C, in his address to the House of Lords
said (page 29):
"My Lords,
the important question in this case, I am not certain it is not the only
question, is whether the respondent company was a company at all —whether
in truth that artificial creation of the Legislature had been validly constituted in this instance; and in order to determine
that question it is necessary to look at what the statute itself has determined
in that respect. I have no right to add to the requirements of the statute, nor
to take from the requirements thus enacted. The sole guide must be the statute
itself.
Now, that there were seven actual living persons who held shares in the company has not been doubted. As to the proportionate amounts held by each I will deal presently; but it is important to observe that this first condition of the statute is satisfied, and it follows as a consequence that it would not be competent to any one—and certainly not to these persons themselves—to deny that they were shareholders.
Still less is
it possible to contend that the motive of becoming shareholders or of making
them shareholders is a field of inquiry which the statute itself recognises as
legitimate................
I am simply
here dealing with the provisions of the statute, and it seems to me to be
essential to the artificial creation that the law should recognise only
that artificial existence—quite apart from the motives or conduct of individual corporators. In saying this, I do not at all
mean to suggest that if it could be established that this provision of the
statute to which I am adverting had not been complied with, you could not go
behind the certificate of incorporation to shew that a fraud had been
committed upon the officer entrusted with the duty of
giving the certificate, and that by some proceeding in the nature of scire
facias you could not prove the fact that the company had no real legal
existence. But short of such proof it seems to me impossible to dispute that
once the company is legally incorporated it must be treated like any other
independent person with its rights and liabilities appropriate to itself, and
that the motives of those who took part in the promotion of the company, are
absolutely irrelevant in discussing what those rights and liabilities are...............I can only
find the true intent and meaning of the Act from the
Act itself; and the Act appears to me to give a company a legal existence with,
as I have said, rights and liabilities of its own, whatever may have been the
ideas or schemes of those who brought it into existence.
Either
the limited company was a legal entity or it was not. If it was, the business belonged to it and not to Mr. Salomon. If it was
not, there was no person and no thing to be an agent at all; and it is
impossible to say at the same time that there is a company and there is
not."
Now, with great respect, these are very weighty observations which
establish beyond any doubt the
fact that the Dhulia-Amalner Motor Transport Limited
(the private limited company) was an independent person in the eye of law, a
legal entity, and the business of plying motor buses on Dhulia-Amalner
route and Amalner-Marwad route belonged to it and not to its shareholders. Here
also, the sole guide for determining whether the
Union and the company are the same entity or different entities is the statute
itself, namely, the Indian Companies Act, and all that we have got to see is
whether the "artificial creation of the legislature", i.e., the
company, was validly constituted or not. Here also, it is not disputed that
several actual living persons are holding shares in the company. We are not concerned
with the proportionate amounts held by each, but the important point is
that the first condition of the statute is satisfied, and it would be futile for any one to deny that some of the
partners of the partnership firm are shareholders in the company. The plaintiff
alleges dishonesty of motive against defendants Nos. 1 to 12 and
defendant No. 15 who were responsible for promoting
the company, but the motive for becoming shareholders is not a field of inquiry
which is recognised as legitimate by the Indian Companies Act. The law
recognises the existence of the company, quite irrespective of the motives,
intentions, schemes or conduct of the individual shareholders. There is no
allegation whatever in this case that any fraud had been committed upon the
officer who gave the certificate of registration of the company and therefore
the following observations of Lord Halsbury are particularly appropriate
(page 30):
"..................But short of such proof (i.e., proof of
fraud in getting the certificate of registration) it seems to me impossible to
dispute that once the company is legally incorporated it must be treated like
any other independent person with its rights and liabilities appropriate to
itself, and that the motives of those who took part in the promotion of the
company are absolutely irrelevant in discussing what those rights and
liabilities are."
As his Lordship
put it tersely (page 31):
"Either the limited company was a legal entity
or it was not. If it was, the business belonged to it and not to Mr. Salomon.
If it was not, there was no person and no thing to be an agent at all; and it
is impossible to say at the same time that there is a company and there is
not."
There is thus no
substance in the argument urged for the plaintiff that those who promoted an
artificial creation in the shape of this company did so to employ the said
creation as an agent for their own business. There is also no force in the
plaintiff's contention that there is a company in the sense that the majority
section of the partners of the partnership firm are employing it as an agent to
do their own business and that there is no company in the sense that the entity
of the Union and the company is the same with only a change in the name. As
Lord Halsbury said, you cannot say at the same time that there is a company and
there is not.
In Ramkanai Singh v. Mathewson, a patni
lease actually granted was challenged and one of the
grounds of the challenge was that the transaction which was sanctioned was a
transaction of a grant of a patni lease to Robert Watson & Co., in other
words, to a firm of individual men, and not to Robert Watson & Co.,
Limited, i.e., a different and incorporated persona. In considering that
objection to the grant of the patni lease their Lordships of the Privy Council
observed (page 101):
"This
demands careful consideration. There is this to be said for the objection, that
the persona in the latter case (i.e., in the case of Robert Whatson & Co.,
Limited) is different from the persona in the former (i.e., in the case of
Robert Watson & Co.,) and that a change in the lessee or patnidar ought to
be treated as a change in essentials."
On the authority of this decision also,
there would be no difficulty in holding that the
persona of the company is different from the persona of the partnership firm
(Union), in other words the company is a persona altogether different from the
partners in the firm or from the shareholders who promoted the company. It is a
third person.
In E. B. M. Company Ltd. v. Dominion Bank, also it was held:
"The distinction should be clearly marked,
observed and maintained between an incorporated company's legal entity and its
actions, assets, rights and liabilities on the one hand, and the individual
shareholders and their actions, assets, rights and liabilities on the other
hand."
It is thus clear
that the legal entity, actions, assets, rights and liabilities of the company
are quite different from those of the individual shareholders. The business of
plying motor buses on the routes in question and the assets of the said
business (buses, etc.) belong thus to the company and not to the shareholders.
That being so, on the two sets of partners in the Union falling out on any
question one set cannot call upon the other set, who may have promoted a
limited company, to render accounts of the business, which is neither the
business of the first set of partners nor the business of the second set of
them, bat is the business of the company, a third person altogether.
Mr. Purshottam for the plaintiff has referred the court to Section 37 of-the Indian Partnership Act, Section 67 of the Indian Trusts Act, certain observations at pages 444 and 448 of Aggarwala's Indian Trusts Act and decisions in Ahmed Musaji Saleji v. Hashim Ebrahim Saleji, and Ramlal Thakursidas v. Lakhmichand Muniram. In my opinion, however, the references to the above sections and authorities are altogether beside the point. Section 37 of the Partnership Act can obviously not apply to the facts of this case for the simple reason that the business of the company is not the business of the shareholders who are partners in the partnership firm and are also the promoters of the company. It is impossible to say in this case that the business which is done by the company is the business which certain of the partners of the partnership firm are doing with the property of the firm or that the profits which accrue from the business are the profits of the above-mentioned partners or the firm attributable to the use, by them, of the property of the firm. Section 67 of the Indian Trusts Act also has no relevance here, since there is no question at all of any trust or fiduciary relationship between the company and the minority section of the partners in the firm (plaintiff and his colleagues defendants Nos. 13, 14 and 16) and no question at all of any breach of trust by the company.
In Ahmed Musaji Saleji v. Kashim Ebrahim
Saleji, on which Mr. purshottam has relied, it was
observed by their Lordships of the Privy Council (page 96):
".................It is well-settled that in certain cases, when on the dissolution of a firm one of the partners retains assets of the firm in his hands without any settlement of accounts and applies them in continuing the business for his own benefit, he may be ordered to account for these assets with interest thereon, and this apart from fraud or misconduct in the nature of fraud."
These
observations, weighty as they are with great respect, have no relevance in the
present case. In the first place, this is not a case in which the dissolution
of the firm has taken place. Secondly, this is not a case in which any of the
partners of the Union are continuing the business, with the assets of
that firm, for their own benefit. There is hardly and need to repeat that the business of the private
limited company is its own and could not be called the business of any of the
partners of the partnership firm.
Clearly, therefore, the decision in Ahmed Musaji v. Hashim Ebrahim, has no application to the facts of this case.
The next case which was relied upon by Mr. Purshottam was the case
of Ramlal Thakursidas v.
Lakhmichand Muniram, and I fail to understand how
this decision could possibly apply in the present instance. It was a case where
the surviving partners of a firm, in the absence of a representative of a
deceased partner, adjusted the partnership accounts and agreed to hand over a
portion of the partnership property to one of the partners in compromise of his
claim, and the partner whose claim was so agreed to be compromised prayed for a
dissolution of the firm upon the basis of such compromise; it was held that a
representative of the deceased partner was a necessary party to the suit, and
it was further observed that surving partners were treated as trustees of the
partnership property for the benefit of the representative of a deceased
partner; and an agreement entered into by such surviving partners in the
absence of the representative of the deceased partner which was inconsistent
with the nature of such trust—to deal with the partnership assets only
by way of sale—would not be specifically enforced. There is no question in this
case of defendants Nos. 1 to 12 and defendant No. 15
employing the company as their agent for doing business as trustees of the
partnership property for the benefit of the remaining partners of the
partnership firm. That being so the decision in Ramlal Thakursidas v.
Lakhmichand Muniram, is beside the point for the purpose of these appeals.
At page 444 of Aggarwala's Indian Trusts Act we find that this is
what is stated:
"If a trustee pay trust-money into a bank to the account of
himself, not in any way earmarked with the trust, and also keep private money
of his own to the same account, the Court will disentangle the account, and
separate the trust from the
private money, and award the former specifically to the cestui que trust. In the case of a person occupying a fiduciary
position, although not an express trustee, as a factor or agent, the same rule
is equally applicable".
Here again it is to be noted that defendants Nos. 1 to 12 and
defendant No. 15 as promoters of the company and shareholders thereof did not
occupy any fiduciary position in
relation to the plaintiff and defendants Nos. 13, 14 and
16 and therefore also the observations relied upon by Mr. Purshottam would not
help him.
For the above-mentioned reasons, although I am in agreement with
the conclusion of the learned Judge of the lower appellate Court that the partnership firm has not been dissolved in this case, I
find myself unable to confirm the judgment and decree of the learned Judge.
The plaintiff has no legal right, and
cannot sue, for accounts of the business done by the
Dhulia-Amalner Motor Transport Limited. If he has any remedy at all, and I am
expressing no opinion on that point, against any of the partners of the firm
for breaches, if any, of the terms of the partnership agreement, that remedy is
to sue in damages such partners as may have committed a breach of the terms of
the agreement. But surely the remedy is not to sue an altogether third person,
an independent person, namely, the company, for accounts of the business done
by it, a business which does not belong to any of the members of the
partnership firm and does not also belong to any of the shareholders of the
company. In these circumstances, therefore, Appeal No. 805 of 1949 is allowed,
although I hold, on a question of fact, that the partnership firm known as the
Dhulia-Amalner Motor Owners' Union has not been dissolved. On the question of
costs, I think it would be proper to make no order as to costs in this appeal,
since on a point on which a very considerable amount of argument was advanced
by both sides, namely, a point of alleged dissolution of the partnership firm,
the appellant has lost.
[1970] 40 COMP. CAS. 1154 (MYS)
HIGH COURT OF
International Cotton Corpn. (P.)
Ltd.
v.
Bank Of
G. K. GOVINDA BHAT AND
M. SADANANDASWAMY, JJ.
APRIL 11, 1969
SADANANDASWAMY, J.—These two appeals are filed against an order made by the
learned company judge on Company Application No. 143/67 and No. 20 of 1968 in
Company Petition No. 4 of 1967 in the matter of Sree Yellamma Cotton, Woollen
& Silk Mills Company Ltd. (in liquidation).
The appellant in O.S.A. No. 9/68 is the International Cotton Corporation
(Private) Ltd., an unsecured creditor; respondent No. 1 is the Bank of
Maharashtra Ltd.,
2. The learned
company judge framed the following points for consideration:
"1. Whether the liquidator's Application No. 20
of 1968 is incompetent or unsustainable either because the liquidator should
have filed a suit or because the court fee should have been paid on it as for a
suit;
2. Is the bank entitled to sell the lands and buildings,
machinery, spares and parts mortgaged or hypothecated to it, without the
intervention of court?
3. Is the bank entitled to retain possession
of the said properties, immovable and movable, for the purpose of exercising
the right of private sale claimed by it?
4. Are the mortgages and hypothecations
claimed by the bank invalid for contravention of the provisions of section 293
of the Companies Act?"
On
the first point he held that the official liquidator's Application No. 20/68 is
competent and sustainable, and points Nos. 2, 3 and 4 were decided in favour of
the bank. He, accordingly, held that the bank is a mortgagee of the immovable
properties and hypothecatee of the movable properties of the company described
in exhibits R-8, R-15, R-21, R-31, R-34 and R-39, and that in exercise of the
rights and powers conferred upon it by the said documents, it is entitled to
take and retain possession of the properties described in the said documents for the purpose of
recovering monies due to it by enforcing its security against the said
properties, that it has also the power of selling the said properties without
the intervention of court for the purpose of recovering the moneys due to it in
accordance with the provisions of the Transfer of Property Act and the Contract
Act, that the bank will be accountable to the company in liquidation as a
mortgagee in possession and if it exercises its power of sale without the
intervention of court, it will be accountable for the moneys realised by sale
in accordance with the terms of section 69 of the Transfer of Property Act. He
expressed no opinion as to the exact amount due to the bank and directed the
bank to deliver all articles of furniture belonging to the company now in its
possession to the official liquidator. It is against that common order in the
above two applications that the present appeals have been filed.
The
Bank of Maharashtra Ltd. has filed cross-objections in O.S.A. No. 9/68 against
the decision of the learned company judge on point No. 1 above said.
We
now deal with O.S.A. No. 9/68. The first contention urged by Sri Sundaraswamy,
the learned counsel for the appellant, is that the power of sale given to the
bank under the mortgage deeds is invalid since there is a contravention of
section 69(1)(a) of the Transfer of Property Act. His contention is that the
mortgage deeds are executed not only by the company in liquidation, but also by
its eight directors who are Hindus. In the several documents, the company is
described as the mortgagor and the eight directors as the sureties. It is
admitted that the properties mortgaged belonged only to the company and none of
the properties belonged to any of the directors. The directors, therefore, have
been correctly described as sureties and the mortgagor is only the company
whose properties constituted the mortgage security. Hence, there is no
contravention of the provisions of section 69(1)(a) of the Transfer of Property
Act, and this contention of the appellant must be rejected.
The
next point urged on behalf of the appellant is that the mortgagor under section
69 of the Transfer of Property Act must be a natural person since under clause
(1)(a) of that section neither the mortgagor nor the mortgagee may be a Hindu,
Muhammadan or Buddhist or a member of any other race, sect, tribe or class,
specified in this behalf by the State Government. But we are unable to see how
such an inference can be drawn. Section 69(1) refers to the powers of a
mortgagee or any person acting in his behalf and the property dealt with in that
section is the mortgaged property and what is referred to is the mortgage
money. A mortgage is defined under section 58(a) of the Transfer of Property
Act as the transfer of an interest in specific immovable property for the
purpose of securing the payment of money advanced or to be advanced by way of
loan, an existing or future debt or the performance of an engagement which may give rise to a
pecuniary liability. The transferor is called a mortgagor, and the transferee a
mortgagee; the principal money and interest of which payment is secured for the
time being is called the mortgage money and the instrument by which the
transfer is effected is called a mortgage deed. Section 69 forms part of
Chapter IV of the Transfer of Property Act. Section 69(1)(a) deals with an
English mortgage and an English mortgage is defined in section 58(e) of the
Act. Under the definition there is no prohibition for an incorporated company
from being a mortgagor. Hence, we are unable to see how a company can be said
to be precluded from being a mortgagor under English mortgage or how the power
to sell the mortgaged property becomes invalid in the case of a company
executing an English mortgage in favour of the mortgagee. Hence, this
contention of the appellant must also be negatived.
The
next point urged on behalf of the appellant is that the mortgages and
hypothecations claimed by the bank are invalid since they contravene the
provisions of section 293(1)(a) of the Companies Act. Section 293(1)(a)
provides that the board of directors shall not sell, lease or otherwise dispose
of the whole, of substantially the whole, of the undertaking of the company
without the consent of such public company. It is admitted that no such consent
has been taken, but what is pleaded on behalf of respondent No. 1 is that
consent of the company has been taken under clause (d) of section 293(1) of the
Companies Act. That clause provides that the board of directors shall not
borrow moneys after the commencement of this Act, where the moneys to be borrowed,
together with the moneys already borrowed by the company, will exceed the
aggregate of the paid-up capital of the company and its free reserves without
the consent of the company. Section 293(1)(a) of the Companies Act will apply
when the whole or substantially the whole of the undertaking of the company is
sold, leased or otherwise disposed of. Webster's New Standard Dictionary
describes the word "undertaking" as meaning a business or project
engaged in. The word "undertaking" has been defied as "any business
or any work or project which one engages in or attempts as an enterprise
analogous to business or trade", according to the decision in Madras
Gymkhana Club Employees' Union v Management.
The business or undertaking of the company must be distinguished from the
properties belonging to the company. In this case, it is only the properties
belonging to the company that have been dealt with by the board of directors
under the deeds of hypothecation and mortgage in favour of the bank. Hence, the
learned company judge was right in holding that no part of the undertaking of
the company was disposed of in favour of the bank.
It
was contended on behalf of the appellant that clause 5(i) of the deed of
mortgage (exhibit 15) empowers the bank not merely to take possession of the
properties as mortgagee for the purpose of realising its dues from out of the
properties expressly given as security but also actually to take over the
management of -the business of the company, and that therefore the transactions
under exhibits R-15 and R-35, which has a similar clause also, have the effect
of disposal of the undertaking of the company within the terms of clause (a) of
section 253(1). The learned company judge has held this clause to be invalid
and that except to the extent of clause 5(i) of exhibit R-15 and the
corresponding clause of exhibit R-34 which empowered the bank to take over the
management of the business of the company, neither the mortgages nor the
hypothecations are invalid for contravention of clause (a) of sub-section (1)
of section 213 of the Companies Act, 1956, and that the said offending clauses
are invalid and unenforceable. The said clauses in the document are severable.
Hence, it cannot be said that they invalidate the transactions themselves. We
are in agreement with the learned company judge on this point also, and reject
the contention of the appellant.
For
the reason stated above both the appeals are dismissed. In view of the opinion
expressed by us on the abovesaid points, Sri G. S. Ullal, the learned counsel
for the respondents did not find it necessary to urge the cross-objections in
O.S.A. No. 9/68. The appellant will pay the costs of respondent No. 1. The
costs shall be paid in one set out of the assets of the company. We fix the
advocate's fee at Rs. 250.
[1986] 60 COMP. CAS. 568
(AP)
HIGH COURT OF ANDHRA PRADESH
v.
Sri Ramanuja Ginning and Rice
Factory P. Ltd
JAYACHANDRA REDDY and KODANDARAMAYYA JJ.
DECEMBER 26, 1983
T. Veerabhadrayya for
the Appellant.
P. Ramachandra Reddy and A. Venkatrami Reddy
for the Respondent.
Kodandaramayya J.—Among numerous questions of law, two interesting company
law problems are raised in this civil appeal by Sri T. Veerabhadraiah, the
learned counsel for the appellants :
(1) Whether a conveyance is necessary to vest the property of
a firm when the same was converted into a company ?
(2) Similarly whether such conveyance is necessary to claim
title by the company in respect of property acquired by the promoter before its
incorporation ?
A considerable time and
lengthy debate had taken place and, hence, we are impelled to state this in the
forefront. Now, we shall state the facts.
The plaintiffs in O. S. No.
36 of 1969 on the file of the Subordinate Judge's Court,
The first defendant, a
private limited company, registered under the Indian Companies Act, 1913, filed
a written statement contending that the lease dated July 10, 1903, was a
permanent lease in favour of Nidumukkala Subbarayudu and the said property is
continuously under the possession and enjoyment of the lessee and his
successor-in-interest and is being used for the purposes contemplated in the
original lease and there is no default in payment of rent and the allegation of
breach of covenants of the lease deed is incorrect. The original lessor, his
son and the present plaintiffs know that the first defendant is running the
factory and acquiesced in the manner of enjoyment by the first defendant and,
hence, they are estopped from questioning the rights by the first defendant and
the plaintiffs have taken considerable amounts by way of advance from the first
defendant and having committed default in payment of those amounts, the first
defendant obtained a decree in O. S. No. 1 of 1966 on the file of Principal
Subordinate Judge's Court, Vijayawada, against the plaintiffs and the same is
being executed and the plaintiff's suit for the adjacent land on the basis of
trespass passed in O. S. No. 79 of 1969 is frivolous and vexatious and the
second defendant has no rights in the property and is not a necessary party and
the same is liable to be dismissed.
Second defendant is the
former managing director of the first defendant firm and after his death, defendants
Nos. 3 to 12 were added as his legal representatives. 13th defendant was added
by the plaintiffs themselves as adopted son of the original lessor. 14th
defendant was also a supplemental defendant. The second defendant set up a
claim for a portion of the land and filed a separate written statement. But his
claim for that land was dismissed in O. S. No. 139 of 1973 which was tried
along with this suit and the same has become final and, hence, it is
unnecessary to examine his defence in this appeal. The present suit was also
tried along with the other suit, O. S. No. 79 of 1967, filed by the very same
plaintiffs claiming that the first defendant trespassed into the adjacent land
belonging to them and not covered by the original lease deed. The court below
dismissed the said suit holding that the first defendant is in possession of
less than the original extent mentioned in the lease deed and hence no question
of trespass would arise and that judgment and decree have become final and
hence we are concerned only with the controversy in O. S.No.36 of 1969.
On the material issues
framed by the trial court, it found that the lease deed dated July 10, 1903, is
a permanent lease and it can enure beyond the lifetime of the original lessee
and the first defendant did not commit any breach of covenants of the lease,
the plaintiffs and their predecessors-in-interest have acquiesced in the mode
of enjoyment of the plaint schedule property by the first defendant and, hence,
they are estopped from filing the present suit and there is no default in
payment of the rent by the first defendant, and the second defendant and their
legal representatives have no rights in the suit property and the plaintiffs
have no right to terminate the lease and obtain possession of the property and
consequently dismissed the suit. Issues Nos. 4 and 6 were deleted and issue No.
11 was found to be unnecessary which relates to the validity of lease deed as
being opposed to public policy and the rule of perpetuity, and the termination
of the lease, and validity of the quit notice, issued by the plaintiff
respectively.
Sri T. Veerabhadraiah, the
learded counsel for the appellants, raised questions Nos. 1 to 8, some of them
not raised in the court below. Sri P. Ramachandra Reddy, appearing for the
respondents, besides refuting those questions raises questions Nos. 9 and 10
and they are :
(1) Exhibit
A-1 is not a permanent lease.
(2) The rights under exhibit A-l are only heritable but not
transferable and, hence, section 108 (j), proviso, of the Transfer of Property
Act, 1882, is attracted.
(3) No transfer of original lessee's interest in fact took
place under the terms of exhibit B-53 to the firm formed by the said lessee,
and, if so, the said transfer is void as section 14 of the present Partnership
Act 9 of 1932 has no application.
(4) The partnership entered into by the original lessee
consisting of more than 20 persons is illegal under the Indian Companies Act,
1913, and any transfer of his interest to the said firm is illegal and
inoperative.
(5) When the previous firm was converted into first defendant
company, a conveyance is necessary to vest the property of the firm in the
company.
(6) Similarly, a conveyance is necessary for the first
defendant-company to claim title in the leasehold interest acquired by the
original lessee under exhibit A-l.
(7) The possession of the first defendant is only that of a
tenant holding over after the death of the original lessee and the tenancy is
terminable on quit notice.
(8) The first defendant is liable to be evicted as there is a
breach of covenant for non-payment of rent and for committing waste.
(9) The plaintiffs and their predecessors-in-interest had
acquiesced in the enjoyment by the first defendant company of the suit property
and, hence, they are estopped from seeking eviction.
(10) The first defendant has perfected title by adverse
possession for permanent lessee's interest.
Before examining these
questions, let us notice the facts that are not in controversy. Under exhibit
A-1 dated July 10, 1903, which is a registered deed, a permanent lease was
granted by the grandfather of the plaintiffs one Vali Subbarayudu of an extent
of 16,423 sq. yards situate in Vijayawada town to one Nidumukkala Subbarayudu
for a sum of Rs. 180 to be paid in two half-yearly instalments of Rs. 90 each.
The lessee under the said document entered into a partnership, exhibit B-53,
dated November 12, 1906, with 47 other persons for constructing the factory.
The said deed recites that the partners obtained the lease under exhibit A-l
for the purpose of constructing a factory jointly and they constructed the
buildings and installed machinery and were carrying on the business since May
4, 1904. Subsequently, those partners and the lessee, under exhibit B-54,
converted the said firm into a private limited company named as Sri Ramanuja
Ginning and Rice Factory (P.) Ltd., Vijayawada, the first defendant herein in
the year 1920. The original lessor, Vali Subbarayudu, died in the year 1921 and
the original lessee, Nidumukkala Subbarayudu, died in the year 1951, It appears
that the lessee, Nidumukkala Subbarayudu, has no children. The thirteenth
defendant was added as a party defendant by the plaintiffs but subsequently
they disputed his right in the suit property and the court below also held that
he is not entitled to any rights in the suit property on additional issue No. 1
framed on January 28, 1974. During the lifetime of Vali Subbarayudu, he
collected the rent from the first defendant and, subsequently, his son,
Raghavaiah, collected the rent from the first defendant till 1956. It is
admitted that the rent was paid till January 1, 1960, and, subsequently, the
first defendant filed Suit, O.S. No. 1 of 1966, on the file of Principal
Subordinate Judge's Court obtained a decree against the plaintiffs and brought
their interest (lessor's interest) in the suit property for sale. The present
suit was filed to interdict the sale of further proceedings in execution. It is
also not disputed that the subsequent rents are deposited in the court by the
first defendant. The plaintiffs having failed to satisfy the money decree
obtained against them instituted the present suit in order to avert the sale of
their interest in the suit property and issued quit notice dated February 24,
1967, terminating the tenancy and filed the present suit. This narrative
clearly discloses that since 1903, the plaintiffs and their
predecessors-in-title are receiving the rents from the firm created by the
original lessee under exhibit B-53 on November 12, 1906, and also from the
first defendant company which came into force in 1920 till the present suit is
filed terminating the tenancy. The first defendant categorically stated in the
written statement that the plaintiffs took advances and loans from the first
defendant which are far higher than the aggregate of total amount of rents
payable to the plaintiffs and having failed to pay those loans, the plaintiffs
did not care to take any interest either in discharging the aforesaid debts
payable by them or with regard to the collection of the rents from the first
defendant and they are willing to pay the rents and the plaintiffs are at
liberty to collect the actual rents due to them. Hence, we have to examine
under the facts and circumstances whether the plaintiffs are entitled to evict
the defendants from the suit land on the contentions now raised before us.
[After
stating the facts and the case-law, the court held (i) that the lease, exhibit
A-1, was a permanent lease and it was heritable and transferable].
** ** **
Questions Nos. 3 and 4: We
must say that these two questions are not raised in the trial court. In fact,
the plaint states that the original lessee constituted the first defendant firm
with himself and other sharers and erected the first defendant factory in the
plaint schedule property and since then carried on business therein under the
name and style, "Sri Ramanuja Ginning and Rice Factory (P.) Ltd.,
Vijayawada". This statement clearly discloses that the plaintiffs are
aware of the fact that the original lessee joined the third parties as partners
and a firm was created and, subsequently, it was converted into a private
limited company, the first defendant. The terms of exhibit B-53 dated November
12, 1906, a registered partnership deed state that the suit site was taken in
the name of Nedumukkala Subbarayudu for the purpose of erecting a factory
jointly. It also recites that the lease amount payable under the said permanent
lease shall be payable out of the income of the firm and it shall be the
responsibility of the person who will be the managing partner from time to
time. It is not permissible to dispute the recital of this document which is an
ancient one of more than thirty years old and no material is placed to displace
the correctness of those recitals and hence we are proceeding on the basis that
the original lessee brought into the stock of the firm his leasehold interest
and has become the part of the firm's property.
The second limb of the
argument of the learned counsel is that in the absence of a registered deed
conveying interest of the original lessee to the firm, the title will not pass
to the firm and inasmuch as the firm was formed prior to the Indian Partnership
Act 9 of 1932 and section 14 of the said Act has no application and the
decisions rendered by courts on the construction of section 14 have no
application as the transaction in question is governed by section 253 of the
Indian Contract Act of 1872. It is true that the partnership in question is
governed by the provisions of the Indian Contract Act of 1872 that embodied the
rules of partnership in sections 239 to 266. The section corresponding to
section 14 of the Partnership Act is section 253(1) of the Indian Contract Act,
1872. It is necessary to notice the said provision:
"S. 253. In the absence
of any contract to the contrary the relations of partners to each other are
determined by the following rules :
(1) all partners are joint owners of all property originally brought into
the partnership stock, or bought with money belonging to the partnership, or
acquired for purposes of the partnership business. All such property is called
partnership property. The share of each partner in the partnership property is
the value of his original contribution, increased or diminished by his share of
profits or loss."
We do not find any material
difference for the purpose of this question between section 14 and section 253(1).
In fact, the Statement and Objects of the Indian Partnership Act recites thus ;
"Sections 14 and 15
contain the substance of sub-section (1) of section 20 and of section 21 of the
English Act, and of section 253(1) of the Indian Act, but the matter has been
re-arranged. An important difference is the introduction of the goodwill of the
business, which is now specifically included among the property of the firm. It
will, subject to contract between the partners, be included automatically in
all accounts for the determination of shares."—S.O.R.
"In the second
paragraph, we have substituted the word 'acquired' for the word 'purchased' in
order to cover the acquisition of leases, mortgages, etc. We have also
assimilated the wording in this paragraph to that in the first."—S.O.R.
It is clear that the main
principle is that the property brought into the stock of the firm by the
partner becomes the property of the firm. On the other hand, the previous
section 253(1) is more specific in stating that all partners are joint owners
of all properties originally brought into the partnership stock and thus we
have no doubt in our mind that the construction placed by the Supreme Court on
section 14 of the present Partnership Act in Addanki Narayanappa v. Bhaskara Krishnappa,
AIR 1966 SC 1300, holding (at p. 1303) that "whatever may be the character
of the property which is brought in by the partners when the partnership is
formed or which may be acquired in the course of the business of the
partnership, it becomes the property of the firm, and..... since a firm has no
legal existence, the partnership property will vest in all the partners and in
that sense every partner has an interest in the property of the partnership.
During the subsistence of the partnership, however, no partner can deal with
any portion of the property as his own. " would usually apply to a firm
formed prior to the coming into force of the present Partnership Act and
governed by the provisions of the Contract Act. In fact, no words of dispositive
character are necessary to bring the property to the common stock (Vide State
v. Chidambaram, AIR 1970 Mad 5 [FB]. The declaration of the rights of partners
in exhibit B-53 is enough to make the property as the property of the firm.
This answers the third question.
Question No. 4: Realising
this, the learned counsel raised yet another limb of this argument, the fourth
question stating the partnership formed under exhibit B-53 is illegal as it
contravened section 4 of the Companies Act, 1913, as it admittedly consists of
the original lessee and 47 other partners and, as such, section 14 of the
Partnership Act or the corresponding earlier provision of section 253(1) of the
Contract Act cannot be invoked as in law there is no firm as such. It must be
remembered that the partnership was formed on May 4, 1904, as recited in the
registered partnership deed, exhibit B-53, dated November 12, 1906.
It is necessary to trace
the history of the company law in our country. In this country, following the
English Companies Act of 1844, an Act for the registration of joint stock
companies was for the first time enacted as Act 43 of 1850. The Indian
Companies Act, 1913 (7 of 1913), was passed which is said to be almost a
verbatim reproduction of English Companies (Consolidation) Act, 1908. Though a
provision similar to section 4(2) of the Indian Companies Act 7 of 1913
prescribing the upper limit for any trading associations to carry on a business
was found in existence in previous Indian Acts since 1866, sub-sections (3),
(4) and (5) were added to section 4 of the Act 7 of 1913 by the Amending Act 22
of 1936. It is sub-section (4) that declared that a company, association or
partnership carrying on business shall be personally liable for all liabilities
incurred in such business and it is sub-section (5) that declared that any
person who is a member of the company, association or partnership firm in
contravention of the said section shall be punishable with fine not exceeding
Rs. 1,000. Thus, it is clear the contravention is made illegal and punishable
as an offence by virtue of the Amending Act 22 of 1936. In the present case, as
exhibit B-54, the 1st defendant company was formed on December 6, 1928, as per
the certificate of incorporation and hence it is not permissible for the appellants
to contend that the partnership was illegal either on the date of its formation
or 1904 or subsequently by the provisions of the 1913 Act as the offending
clauses (3) to (5) of the said section came into force on January 15, 1936, as
per the notification dated November 28, 1936, in the Gazette of India, dated
November 28, 1936, Part I, page 1492. Hence, we overrule this objection.
We may also add in this
connection that even assuming that the property in question was in the hands of
the firm which was illegal for some time before it was converted into a limited
company, the rights cannot be adjudged on the basis of the past event which is
no longer in existence for deciding the rights of the parties at present. It is
enough if we note that courts have ruled that the members of partnership or a
company hit by this section can, however, have beneficial interest in the
property. (Vide Queen
v. Tankard [1894] 1 QB 548 and Nibaran Chandra v. Lalit Mohan, AIR 1939 Cal 187). If the partnership agreement is illegal
the court cannot adjudicate in respect of such contract which the law declares
to be illegal. (Vide Seth Badriprasad v. Seth Nagar Mal [1959] 29 Comp Cas 229
(SC)). This legal position would not in any way advance the case of plaintiffs.
Questions Nos. 5 and 6: We
must again say that these questions were not raised in the court below.
We have already held that
the partnership firm in which the original lessee is a partner was legally
constituted, and the firm continues to be lawful and the properties belonging
to all the partners have become the, properties of the firm. The question is
whether the property of the said firm had vested in the first defendant company
when the firm was registered under the provisions of the Indian Companies Act,
1913. For that it is necessary to notice the terms of section 263 of the Indian
Companies Act, 1913, that corresponds to section 575 of the present Companies
Act, 1956. Section 263 reads as follows:
"All property, movable
and immovable, including all interests and rights in, to and out of the
property, movable and immovable, and including obligations and actionable
claims as may belong to or be vested in a company at the date of its
registration in pursuance of this part, shall, on registration, pass to and vest
in the company as incorporated under this Act for all the estate and interest
of the company therein."
The word
"company" occurring in section 263 is not a company registered under
the Act. It is used in the sense of a group, assembly or association of persons.
In fact, throughout the Act the word "company" was used in several
sections in the general sense of association of persons. In fact, section 11 of
the present Companies Act (section 4 of the previous Act) itself which enacted
the prohibition of associations exceeding a certain members for carrying on
trade starts with saying that no company or association or partnership
consisting of more than ten members shall be formed. Section 253 of the
previous Act corresponds to section 565 of the present Act. Section 565(1)(b)
of the present Act corresponds to section 253(1)(ii) of the 1913 Act, which
permits any company otherwise duly constituted according to law consisting of
seven or more members to be registered as a company. A partnership must be one
such. This is made clear by the provisions of section 255 of the 1913 Act
(present Act section 567) and section 256 of the 1913 Act (present Act section
568) whereunder a deed of partnership has to be filed before the Registrar
before seeking the registration. Hence, a partnership which was treated as a
company for the purposes of the Companies Act can be registered under Part 8 of
the previous Act (Part 9 of the present Act) and the vesting is provided by
section 263 of the 1913 Act (section 575 of the present Act). The provision is
mandatory and there will be statutory vesting in the corporation so
incorporated under the provisions of the Companies Act. The Registrar is bound
to give a certificate of registration under section 262 (present section 574)
which is a conclusive proof of incorporation, vide section 35 of the present
Act that corresponds to section 24 of the previous Act. Hence, it is clear that
no conveyance is necessary when a partnership is converted and registered as a
company. However, it is not possible to acquire such title statutorily under
this section if the previous firm purports to convey title to the company in
which event a separate deed of conveyance is necessary. Thus, we hold that if
the constitution of the partnership firm is changed into that of a company by
registering it under Part 9 of the present Act (Part 8 of the previous Act),
there shall be statutory vesting of title of all the property of the previous
firm in the newly incorporated company without any need for a separate conveyance.
A similar view was taken in Ramasundari Ray v. Syamendra Lal Ray, ILR [1947] 2
Cal 1.
D. W. 2 deposed that in
1920 the partnership was converted into a private limited company and filed the
articles of association, exhibit B-54. This evidence stood uncontradicted. In
fact, the plaintiffs and their pre-decessors-in-title treated the first
defendant as successor-in-interest of the previous firm and hence we are of the
opinion that the leasehold interest that has become firm's property by virtue
of the original lessee bringing into the firm has vested in the first defendant
company after its registration.
Question No. 6: Sri
Veerabhadrayya, the learned counsel for the appellants, argued that the terms
of exhibit B-54 do not show that the partnership was converted into a company
but it reads as if for the first time the company was formed and in which event
it cannot be treated that the partnership as such was converted into a company
and hence a conveyance is required to confer title on the first defendant. For
this he relied upon Alapati Venkataramaiah v. CIT [1965] 57 ITR 185 (SC). But
that was a case where a third party purported to sell his property to the
company and it is clear in such event a conveyance is necessary. But if a
promoter acquires property before the incorporation of the company, the legal
position is different.
The original lessee
undoubtedly played the part of a promoter of the company. We have already
noticed that lease deed, exhibit A-1, recited that the land was taken for
purpose of constructing the factory and the necessary buildings for running the
same. Exhibit B-53, the deed of partnership, recited that the original lessee
took the permanent lease of the land in his name for the benefit of erecting
the ginning factory and the firm was carrying on business for the benefit of
the members of the firm since 1904. Exhibit B-65 is the first list of
shareholders of the first defendant company signed by all the shareholders and
the original lessee is one of the signatories and four shares were given to
him. Exhibit B-54, the articles of association, recites that the permanent
lease was taken by the original lessee on behalf of all the shareholders and,
hence, the permanent leasehold rights in the said lease and also the buildings
constructed in the land, machinery and other equipment shall be treated as
property of the factory. The capital of the factory was declared at Rs 41,600
divided into 104 shares each valued at Rs. 400 and this arrangement was adopted
by a special resolution of the directors. It was also recited that this capital
can be enhanced further by a special resolution by the directors. Exhibit B-54
is the latest copy of the articles of association adopted in the general body
meeting of the company dated December 30, 1955, and the company itself is
called Sri Ramanuja Ginning and Rice Factory (Private) Limited. The question is
whether this leasehold interest in the factory has become the property of the
first defendant private limited company. In view of the part played by the original
lessee in securing the lease for the purpose of the first defendant as promoter
we have to see the legal consequences. For this purpose we have to examine :
(1) The nature of jural relationship between the promoter and the company. (2)
The rights of the company in respect of contracts before its incorporation. (3)
Whether this transaction comes under the purview of section 5 of the Transfer
of Property Act.
The word
"promoter" is not defined by the Companies Act, 1956 (1 of 1956), or
by its predecessor Act VII of 1913. It is said that it is not a term of law but
of business. The earliest definition given in Phosphate Sewage Co. v. Hartmount
[1876] 5 Ch D 394, as a person who as principal procures or aids in procuring
the incorporation of a company, was generally accepted as the correct
definition which was subsequently approved by the House of Lords in Official
Receiver and Liquidator of Jubilee Cotton Mills Ltd. v Lewis [1924] AC 958
(HL).
A person although is not a
director may be a promoter of a company. The promoter stands in a fiduciary
position towards the company and his position was defined so in Emile Erlanger
v. New Sombrero Phosphate Co. [1877-78] 3 AC 1218 (HL), by the House of Lords.
Halsbury's Laws of England, fourth edition, paragraph 38, states :
"A promoter stands in
a fiduciary position with respect to the company which he promotes from the
time when he first becomes until he ceases to be a promoter thereof; but his
relation to the company is not that of trustee and beneficiary, or agent and
principal."
Lord Cairns L.C. observes
in the above case (at p. 1236 of [1877-78] 3 AC):
"They (promoters)
stand, in my opinion, undoubtedly in a fiduciary position. They have in their
hands the creation and moulding of the company ; they have the power of
defining how, and when, and in what shape, and under what supervision, it shall
start into existence and begin to act as a trading corporation. If they are
doing all this in order that the company may, as soon as it starts into life,
become, through its managing directors, the purchaser of the property of
themselves, the promoters, it is, in my opinion, incumbent upon the promoters
to take care that in forming the company they provide it with an executive,
that is to say, within a board of directors, who shall both be aware that the
property which they are asked to buy is the property of the promoters, and who
shall be competent and impartial judges as to whether the purchase ought or
ought not to be made. I do not say that the owner of property may not promote
and form a joint stock company, and then sell his property to it, but I do say
that if he does, is bound to take care that he sells it to the company through
the medium of a board of directors who can and do exercise an independent and
intelligent judgment on the transaction, and who are not left under the belief
that the property belongs, not to the promoter, but to some other person."
Again Lord Blackburn, at
page 1269, observes :
"They must make a reasonable
use of the powers which they accept from the Legislature with regard to the
formation of the corporation, and that requires them to pay some regard to its
interests. And consequently they do stand with regard to that corporation when
formed, in what is commonly called a fiduciary relation to some extent."
He further observes : (at
p. 1269):
"Where, as in the
present case, the company is formed for the purpose of becoming purchasers from
the promoters as vendors, the interests of the promoters and of the company
clash. It is the vender's interest to get as high a price as possible, and they
have a strong bias to overvalue the property which they are selling ; it is the
purchasers' interest to give as low price as possible, and to secure that the price
actually given is not more than the property is really worth to them."
Thus, it is seen that they
have got both fiduciary relationship and at the same time they have individual
interest to be served in the process of floating the company and hence it is
ruled that a promoter cannot therefore retain any profit made out of a
transaction to which the company is a party without full disclosure. It is
necessary in this connection to see the binding nature of the contracts entered
into by them before the incorporation. The law in our country varies from that
obtained in England. Again Halsbury states in fourth edition at page 435,
paragraph 727 :
"A company is not
bound by contracts purporting to be entered into on its behalf by its promoters
or other persons before its incorporation. After incorporation, it cannot
ratify or adopt any such contract because in such cases there is no agency and
the contract is that of the parties making it The adoption and confirmation by
a director's resolution of a contract made before the incorporation of the
company by persons purporting to act on its behalf does not create any
contractual relation between it and the other party to the contract or impose
any obligation on it towards him."
Hence, the commentator
states in paragraph 728 that:
"In order that the
company may be bound by agreements entered into before its incorporation, there
must be a new contract to the effect of the previous agreement."
The editors of Palmer's
Company Law, in their 22nd edition, volume 1, at page 271, state regarding
pre-incorporation contracts :
"In common law. Before
its incorporation a company has no capacity to contract. Consequently, in
common law, nobody can contract for it as agent because an act which cannot be
done by the principal himself cannot be done by him through an agent, nor can a
pre-incorporation contract be ratified by the company after its incorporation.
There is, however, nothing to prevent the company, when incorporated, from
entering into a new contract to put into effect the terms of the
pre-incorporation contract. But the mere acting after incorporation on the
preliminary contract does not in itself constitute sufficient evidence of the
creation of a new contract."
Thus, virtually a new
contract has to be entered into in order to bind the company in respect of
contracts entered before its incorporation. But, in India, both the Specific
Relief Acts 1 of 1877 and 47 of 1963, made provisions making the
pre-incorporation contracts binding on the company. Section 21(f) of the 1877
Act which corresponds to section 14 of the 1963 Act did not retain in the said
provision as the said clause is covered by section 9. The present section 15
(h) corresponds to section 23(h) of the previous Act and section 19 (e) of the
present Act corresponds to section 27 (e) of the previous Act. Section 15(h)
provides that the company can enforce pre-incorporation contracts, if such
contract is warranted by the terms of the incorporation and the company has
accepted the contract and has communicated such acceptance to the other party.
The converse position is covered by section 19 (e) where a third party can
enforce the contract against the company if such contract is warranted by the
terms of the incorporation of the company and the company has accepted the
contract and communicates such acceptance to the other party to the contract,
and, hence, the dicta in Natal Land and Colonization Co. Ltd. v. Pauline
Colliery Syndicate Ltd. [1904] AC 120,126 (PC) of Lord Davey speaking for the
Judicial Committee "that a company could not by adoption or ratification
obtain the benefit of a contract purporting to have been made on its behalf
before the company came into existence", cannot be invoked in our country.
No doubt it is true that the sections in the Specific Relief Act are concerned
with the executory contracts and cannot be applied to conveyances of immovable
property and, hence, we have to see whether the title has passed to the company
and whether the provisions of the Transfer of Property Act stand in the way.
For this purpose we have to
examine sections 5 and 9 of the Transfer of Property Act. Sections 5 and 9 are
in the following terms :
"Section 5. In the
following sections, 'transfer of property' means an act by which a living
person conveys property, in present or in future, to one or more other living
persons, or to himself, or to himself and one or more other living persons; and
to transfer property is to perform such act.
In this section, ' living
person ' includes a company or association or body of individuals, whether
incorporated or not, but nothing herein contained shall affect any law for the
time being in force relating to transfer of property to or by companies,
associations or bodies of individuals."
"Section 9. A transfer
of property may be made without writing in every case in which a writing is not
expressly required by law."
We shall divide section 5
into component parts and examine. It lays down that if a living person conveys
property in present or in future, to—
(1) one or
more other living persons ; or
(2) to
himself; or
(3) to himself and one or more other living persons. The
words "living person" are said to include—
(i) a company, or
(ii) association or
body of individuals, whether incorporated or not.
So it is clear that the transfer
must be by one living person to another living person. It must be inter vivos
(During life : between living persons). Though a company is a living person for
the purpose of this section before its incorporation, it is not a company. The
words "whether incorporated or not" in the second paragraph applies
to other associations or body of individuals that are unincorporated. The
second conspicuous element of this definition is that a transfer to oneself is
contemplated. Thus, a person may create a trust and constitute himself the
first trustee so that the legal estate in the property continues to vest in him
though in his capacity as a trustee. (Vide Tulsidas Kilachand v. CIT [1961] 42
ITR 1 (SC). It is necessary in this connection to state that the Transfer of
Property Act is not exhaustive of the law relating to a transfer of property by
act of parties. The preamble itself indicates two things. (1) It purports to
define and amend certain parts of law relating to transfer or property. (2) It
relates to the transfer of property by act of parties. Thus, it excludes from
its purview sales in execution of decrees, insolvency proceedings, testamentary
and intestate succession. The word "convey" occurring in the first
paragraph of the section is of wider import. The sweep of this expression can
usefully be gathered from the definition given in section 205(1)(ii) of the Law
of Property Act of England. "'Conveyance' includes a mortgage, charge,
lease, assent, vesting declaration, vesting instrument, disclaimer, release and
every other assurance of property or of any interest therein by any instrument
except a will."
Let us turn to section 9
which states that a transfer of property may be made without writing in every
case in which a writing is not expressly required by law. The said provision is
enacted as ex abundanti cautela though it is really unnecessary. The Act did
not deal with all types of transfers. It deals only with enumerated and
specified transactions of sale, mortgage, lease, exchange and gift. That is why
the inclusion of Chapter 8 relating to transfer of actionable claims in this
Act was criticised by jurists as being not consistent with the scheme of the
Act. It is true that other than the provisions of this Act also require certain
documents to be in writing such as Indian Trusts Act and the Indian Succession
Act. But section 9 lays down that if a transaction is transfer of property and
there is no express provision of law requiring it to be in writing, section 9
will enable it to be made without writing. But, if on the other hand, the
transaction is not a transfer of property and there is no express provision of
law requiring it to be in writing, then it can also be done without writing.
Thus, there are innumerable instances where courts recognised oral transfers
such as release, relinquishment, surrender, compromise, partition, transfer of
easementary rights, settling maintenance claims, creating charge, dedication to
an idol and family settlements to name a few. Further, in view of section 5, a transfer
to an unborn person can be made only by a machinery of trust and hence section
13 of the Act used the expression " transfer " for the benefit of an
unborn person.
Thus, we see a promoter of
a company though fulfils some fiduciary duties, he cannot be described as a
trustee as there is no beneficiary as defined under section 3 of the Indian
Trusts Act. He cannot also be an agent as there is no principal born by that
time. Hence, the promoter occupies a peculiar position of a quasi-trustee.
Hence, the question is whether the declaration made by him constitutes transfer
of property and whether the company can claim any interest in the property so
declared belonging to it by the promoter. The declaration of the promoter that
the property is held by him for the company to be formed does not constitute
either a sale, mortgage, lease, exchange or gift and the company before its
incorporation is not a living person and, hence, section 5 is not attracted.
Such declaration also does not constitute a transfer to himself and the company
has not come into force as a beneficiary and, hence, it will not become a
trust. Hence, the transaction is outside the purview of section 5 of the
Transfer of Property Act and also the Trusts Act and it does constitute a
conveyance as a vesting instrument or other assurance of property and can be
made orally under section 9 of the Transfer of Property Act.
If he purchases property
from a third party, he will be acquiring the title though apparently in his
name for the benefit of the company yet to be formed. The property vests in him
for the benefit of the company though his assurance is sufficient to clothe the
company after its birth to claim full title. Hence, we hold that the property
acquired by a promoter can become the property of the company by its acceptance
and adoption after its birth. A Division Bench of the Madras High Court had an
occasion to consider in an unreported judgment in Writ Appeals Nos. 85 and 86
of 1963 dated August 5, 1964, whether a promoter of a private limited company
prior to its incorporation can make a valid application on its behalf for the
grant of a stage carriage permit and it was held that if the company came into
existence before the actual determination by the authorities, it can be
justified either on principle of adoption or novation by a subsequent
application. But if the company is incorporated subsequent to the last date of
consideration, it cannot ratify the application of the promoter. In that case,
section 57(2) of the Motor Vehicles Act requires an application to be made on
behalf of the legal person. So their Lordships had some difficulty in
sustaining the claim on behalf of the company before its incorporation as the
application itself must be made on behalf of a legal person. In Weavers Mills
v. Balkis Ammal, AIR 1969 Mad 462, Justice Veeraswami, as he then was, held
that the benefit of the purchase made by the promoter passed to the company on
its incorporation without any registered deed. But, in that case, the claim of
the company was negatived on the ground that the previous proceedings operate
as res judicata and, hence, the company lost its claim for the said property.
We find from the reasoning of the learned judge a clear supportable legal
principle to sustain the claim of a company in respect of the property acquired
by a promoter on its behalf.
Hence, we hold that the
property acquired by the promoter can be claimed by the company after its
incorporation without any need for conveyance.
However, we may add even
assuming that the legal position is, otherwise as the promoter is a quasi
trustee, he can be compelled to convey the property to the company and if
necessary on payment of consideration in view of the part played by him for
obtaining the benefit before its incorporation.
Hence, we hold that the
leasehold interest obtained by the original lessee would enure for the benefit
of the first defendant company without any separate conveyance. Further, we are
of the opinion that if the original lessee or his successor-in-interest disputes
the assignment of leasehold Interest so made by him, he can be compelled to
convey the said interest specifically to the company in view of the benefit
obtained by him.
Question No.7: TENANCY
HOLDING OVER AND TERMINATION OF TENANCY :
The plaint as originally
filed stated that the lease deed dated July 10, 1903, purported to be a
permanent lease and the said Subbarayudu constituted the first defendant firm
with himself and other sharers and erected the first defendant factory in the
plaint schedule property and since then carried on business therein under the
name and style of Sri Ramanuja Ginning and Rice Factory (Private) Limited. As
per the orders in I. A. No. 3370 of 1973 dated December 31, 1973, the plaint
was amended and the word "purporting" was struck off and the word
"calling" was used and a new paragraph was added stating that the
said lease though called a permanent lease was really a tenancy at will of
either party under law, as the lessee was given the right to give up the
leasehold right if he did not require the lease hold property and, as such, the
lessor was also entitled to the same right to cancel the lease and take back
the leasehold property at his will and even if otherwise the lease can enure
only for the lifetime of the lessee and not beyond his lifetime and the use of
the word "putra, poutra" in the lease deed are superfluous and would
have no legal effect. In the court below, it was contended by the defendants
that the plaintiffs filed this application purporting to be a consequential
amendment petition arising out of the order of the court permitting the
thirteenth defendant to be added as a party and they were not aware of these
insertions and consequently they filed an application to receive the additional
written statement in I. A. No. 1090 of 1974. Two more applications are filed to
strike off the amendment portion in the plaint (LA. No. 842 of 1975) and for
striking of the pleading relating to the version that the lease would enure
only for the lifetime (I. A. No. 1973 of 1974). Though the defendants were
permitted to file additional written statement, the later two applications were
dismissed permitting them to raise the contentions at the time of the
arguments. So it is seen that in the original plaint, the plaintiffs stated that
the lease deed, exhibit A-1, is a permanent lease but urged forfeiture of the
lease as there is violation of the covenants of the lease as stated in
paragraph 7. In fact, even in the registered notice issued by the plaintiffs in
exhibit A-2 to the first defendant, it was categorically admitted that the
lessee and his representatives were carrying on the business of the said
premises for manufacturing purposes under the name of Sri Ramanuja Ginning and
Rice Factory (Private) Limited, Vijayawada (first defendant), and the lessee
and his representatives paid the rent till January 1, 1959, but subsequently
committed default in payment of rent and also committed breach of covenants of
the lease and hence liable to be evicted. The theory that the tenancy under
exhibit A-l is a tenancy at will is built upon those line of cases where
lessees were to hold for such time as they require or wish, the tenancy was
construed as tenancy at will of the lessee and by implication of law, such
tenancy is tenancy at will of the lessor also. The earliest authority is K.R.
Manicka Mudaliar v. T. Chinnappa Mudaliar [1912-13] ILR 36 Mad 557. In an
ordinary lease, such term stood by itself and was construed to be tenancy at
will but when the document was construed as a permanent lease considering the
other terms of the lease, the term in the lease that a lessee can surrender if
he does not want to continue cannot be construed as tenancy at will. In fact,
we have already held on question No. 1 on the authority of the judgment of Sivayogeswara Cotton Press v.
Panchaksharappa, AIR 1962 SC 413, that this
term is not destructive of the lease being a permanent lease. Once we hold the
lease is a permanent one, it is not possible to contend that exhibit A-l creates
only a tenancy at will. Realising this, the learned counsel argued that the
first defendant has become a tenant holding over as after the death of the
original lessee, the lessor and his successors have accepted the rents and
hence the first defendant has become a tenant holding over and his tenancy was
terminated under exhibit A-2. This is again a new question raised.
Hence we have to examine
whether the first defendant can be described as a tenant holding over. We must
look to section 116 of the Transfer of Property Act, 1882, which defines the
effect of holding over which is in the following terms :
"If a lessee or
underlessee of property remains in possession thereof after the determination
of the lease granted to the lessee, and the lessor or his legal representative
accepts rent from the lessee or underlessee, or otherwise assents to his
continuing in possession, the lease is, in the absence of an agreement to the
contrary, renewed from year to year, or from month to month, according to the
purpose for which the property is leased, as specified in section 106."
For the application of
section 116 as held by the Supreme Court in Karnani Industrial Bank Ltd. v. Province of Bengal, AIR
1951 SC 285, two things are necessary. (1) The
lessee should be in possession after the termination of a lease. (2) The lessor
or his representative should accept the rent or otherwise assent to his
continuing in possession. The contention of the learned counsel is that the
tenancy is for life of the original lessee or heritable but not transferable
and once the original lessee has no progeny, the tenancy came to an end and the
acceptance of the rent from the first defendant would only mean that the first
defendant is a tenant holding over. We have already held that exhibit A-1 is
heritable and transferable, and also held that the first defendant is the
assignee from the original lessee and the rent is being received by the
plaintiffs and their predecessors-in-title and consequently there is no
termination of the lease. In fact, there is no determination of lease in any of
the modes contemplated under section 111 of the Transfer of Property Act. But
if the lease is determined on the death of the original lessee and the
assignment is not valid, there might arise the question of termination of the
tenancy. But the plaintiffs did not plead any fresh lease after the death of
the original lessee. Hence, it is not possible to hold that there is a
termination of lease and the continuance of the tenancy thereafter with the
first defendant. Issue No. 6 which was framed on this question is in the
following terms. "Whether the plaintiff is entitled for the declaration
that the suit lease dated July 10, 1903, was duly terminated and not binding on
the plaintiffs ?" That issue was deleted by the court as per the order
dated January 9, 1974, in I.A. No. 8901 of 1973 and hence it is not a case of
termination of tenancy and a subsequent creation of jural relationship by
acceptance of rent. In view of the foregoing, we hold that the first defendant
is not a tenant holding over and such a tenancy is not terminated.
Question No. 8. The
forfeiture of lease due to non-payment of rent and waste.
In the plaint in paragraph
7, seven grounds were urged to show that the defendants committed breach of covenants
of the aforesaid lease and hence liable to be evicted. This pre-supposes that
the first defendant is a tenant. This contention is on the basis even assuming
that the first defendant is successor-in-interest, he forfeited the tenancy
right. The learned counsel urged before us only two grounds. Forfeiture due to
nonpayment of rent and waste. It is admitted in the plaint that the rent was
paid up to January 1, 1959. The court below found that the subsequent rent due
has been deposited in the court during the pendency of the suit and hence this
ground is factually baseless. Further, exhibit A-1 provides 12% interest for
non-payment of rent till the date of payment and there is no clause entitling
the lessor to evict the defendants for nonpayment of rent and hence this ground
is factually incorrect.
The ground of waste pleaded
in the trial court is causing material damage to the leased premises by
wasteful and destructive acts due to gross negligence. The court below found in
paragraph 43 of its judgment that there is no proof that any material damage to
the leased premises was done by wasteful acts or destructive acts. Under this
ground, the learned counsel argues that there is deficiency in the extent of
land leased out as found by the court below in the connected suit in O. S. No.
79 of 1967 and hence a portion of the land is lost to the estate and hence it
constitutes a waste and there shall be forfeiture of the lease. We must say
that this is not the ground urged in the court below. However, we see under
exhibit A-l property was described with specific boundaries. A commissioner was
appointed in O. S. No. 79 of 1967 when these very plaintiffs filed the said
suit on the ground that the first defendant trespassed on the adjacent land
belonging to them. The Commissioner submitted a report along with a plan which
were marked as exhibits A-28 and A-29. The court below found that there is no
trespass on the part of the first defendant of the adjacent land as the first
defendant was in possession of 15,092 sq. yards instead of 16,423 square yards
as originally said to have been granted under exhibit A-l. The plaintiffs
having failed in O. S. No. 79 of 1967 to establish trespass on the adjacent
land raise the present contention that in view of the diminution of the extent
of land in the possession of the first defendant, it should constitute a waste
and that shall be a ground for forfeiture of the lease. The court below found
that the lease was given by the boundaries and three plots of land were given.
It found that when the lease deed, exhibit, A-1 was executed, some extent of
land after measuring the three plots shown in the lease deed has not been
measured and the first defendant was in possession of the original extent of
land as given by the boundaries and hence the diminution of any extent cannot
be ascribed as any loss to the estate. It is true as held by the Supreme Court
permanent tenancies are within the rule of section 111 (g) of the Transfer of
Property Act and are liable for forfeiture if there is a disclaimer of tenancy
or denial of the landlord's title. (vide Raja Mohammad Amir Ahmad Khan v.
Municipal Board of Sitapur, AIR 1965 SC 1923. But these two grounds now do not
constitute forfeiture of permanent lease and we hold accordingly.
Question
No. 9 : Estoppel by acquiescence: The term "acquiescence" is used when a person refrains from seeking redress when there
is a violation of his rights to his knowledge. There is an element of laches in
it. It is defined as "quiescence" to infer assent on the part of the
owner. This doctrine of acquiescence operating as an estoppel was founded on
fraud. Acquiescence differs from estoppel in that for acquiescence it is not
necessary that a person should have made any representation by words or conduct
that he did not intend to enforce his rights. (See Proctor v. Bennis, [1887] 36
Ch 740 Bown L.J. This doctrine is intended to relieve persons against fraud
when a person refrains from interfering when his legal rights are being
violated. Let us see the facts to apply this principle.
We have already referred to
the allegations in the original plaint and also the quit notice, exhibit A-2,
wherein the first defendant was described as a successor-in-interest of the
original lessee. In fact, in the connected suit filed in O. S. No. 79 of 1967,
the plaintiffs themselves have admitted that the first defendant is a
representative-in-interest of the original lessee. That suit relates not to the
leased property but an adjacent land and no doubt the first defendant denied
the said allegation. Now, in the present suit, the first defendant pleaded that
they are the successors-in-interest of the original lessee. Even the amended
plaint in paragraph 4 as already extracted, earlier portion of our judgment
states that Nidumukkala Subbarayudu, the original lessee, took the plaint
schedule property for constructing and running a ginning, rice and oil factory
and it is he who constituted the first defendant firm with other sharers. So
the plaintiffs and their predecessors-in-title are fully aware that the purpose
of lease is for raising of the factory and that the lessee himself constituted
the first defendant firm. Though the first defendant is now a private limited
company, the plaintiffs and their predecessors-in-title were still treating it as
a firm not knowing the legal significance of conversion of the firm into a
company.
D. W. 1,one Malladi
Satyanarayana, was examined to bear out the circumstances under which the first
defendant became the representative of the original lessee. This witness is
aged about 76 years. He states that Nidumukkala Subbarayudu executed the lease
for the benefit of the partners and his father was the first managing director
and this witness wrote accounts for the firm even since 1920. The court below
accepted his evidence which is not challenged before us that the firm itself
paid the amount to Vali Subbarayudu and Nidumukkala Subbarayudu was not paying
the rent in his personal capacity. After the death of Vali Subbarayudu, the
plaintiff's father accepted the rent. This witness filed a certified copy of
the first list of the shareholders of the first defendant company, exhibit
B-165, in which his father was shown as a shareholder against serial No. 32 and
the original lessee, Nidumukkala Subbarayudu, was shown as serial No. 25. He
also states that the original shareholders have sold away their respective
shares and the present shareholders are the assignees of the original
shareholders constituting the first defendant firm. Therefore, the plea that
the first defendant is not successor-in-interest of Nidumukkala Subbarayudu is
opposed to the very plaint case. The original lessor is fully aware that the
lease was taken for the purpose of raising a factory. D. W. 2 deposed the value
of building is Rs. 4,00,000 and factory is Rs. 2,00,000 and rent was received
by lessor initially from the firm consisting of original lessee as per exhibit
B-53 since 1906 and from the first defendant since. 1920 till suit notice was
issued on February 24, 1967, for over a period of six decades. The account
books of the first defendant firm show that the rent was received by the
plaintiffs and their predecessors from the first defendant company. They have
also borrowed from the first defendant. D. W. 1 deposed that he is prepared to
deposit arrears with interest or adjust the amount towards the decree debt due
from the plaintiffs. The evidence is clear that the first defendant was treated
as successor-in-interest of the original lessee. These facts clearly disclose
that this is not a case of a mere acquiescence without any representation by
words or conduct but the plaintiffs and their predecessors-in-title have
accepted the assignment in whatever manner the original lessee did to the first
defendant and received the rent from the first defendant and hence they are
estopped from contending that the first defendant is not a
successor-in-interest and no leasehold interest was passed to it and
consequently we hold that all principles of equitable and legal estoppel are
attracted to the facts of the present case, and we accordingly affirm the
finding of the trial court on issue No. 3 that the plaintiffs and their
pre-decessors-in-interest have acquiesced in the mode of enjoyment of the
plaint schedule property by the first defendant and they are now estopped from
contending to the contrary.
QUESTION
NO. 10 ADVERSE POSSESSION
In view of the fact that we
have permitted the plaintiffs to raise new grounds challenging that the first
defendant is not a successor-in-interest of the original lessee, we have to permit
the defendent to urge the ground of adverse possession. It is true that there
is no plea of adverse possession raised by the first defendant. Facts forming
the basis of this ground are not in controversy or at least found by the court
below and further no evidence is necessary while examining questions 7 and 9
relating to the tenancy holding over and also the estoppel. We have already
stated that the plaintiffs and their predecessors-in-title are fully aware of
the fact that the leasehold interest is being enjoyed by the first defendant
after it is formed and before that by the firm consisting of the original
lessee. If the lease stood terminated on the death of the original lessee and
the assignment in favour of the first defendant is invalid and inoperative for
any reason as there is no conveyance in its favour, and the principle of
estoppel also is not attracted to the facts of this case, then we have to
alternatively see whether the lessee's interest is acquired by the first
defendant by prescription.
Now, it is well settled
that a permanent tenancy may be acquired by prescription. Mulla on Transfer of
Property Act, sixth edition, states that 3
"A permanent tenancy
may be acquired by prescription, for it is a well established rule that there can
be adverse possession of a limited interest in property as well as of the full
title of the owner."
The Supreme Court ruled in
Raja Rameshwar Rao v. Raja Govind Rao, AIR 1961 SC 1.442, that there is no
doubt that there can be adverse possession of a limited interest in property as
well as of the full title as owner. The learned counsel for the appellants
argued that the legal position is altered after the death of the original
lessee and a new tenancy must be deemed to have been created after the death of
the original lessee as the original lessor accepted the rent subsequent to the
death of the original lessee. We have already held that no fresh tenancy was
created and the jural relationship between the first defendant and the original
lessor cannot be that of a tenant holding over. If we proceed on the basis that
the tenancy was terminated on the death of the original lessee and no fresh
tenancy was created, the first defendant is in possession of the property
paying the rent claiming under the original lessee, for over the statutory
period and hence the question is whether the first defendant had perfected
title by adverse possession for a limited interest of permanent lessee.
It is fairly settled that
when a tenant dies and the rent is accepted by the landlord from a person
claiming to be the heir of the original tenant for a period of twelve years,
the relationship of landlord and tenant is not effected and the heir acquires
the status of the tenant: Sadanand Mandal v. Jyotish Kanta Ray, AIR 1926 Cal 952.
Recently in a case arising under the Andhra Pradesh Buildings (Lease, Rent and
Eviction) Control Act of 1960 our learned brother, Seetharam Reddy J., held
that when a person continues in possession in a building after the death of his
grandfather who is the original tenant for over a statutory period, he
prescribes interest of tenancy. (Vide M. Vijaya Ram v. Kamaran [1983] 1 AP LJ
45 ; [1983] 1 ALT 79. The rule that a landlord's cause of action to recover
possession from a tenant or any one claiming under the tenant only accrues from
the time when he determines the tenancy was first enunciated by Sir Barnes
Peacock C. J. in Davis v. Kazee Abdool Hamed [1867] 8 Suth WR 55 which is
followed in several decisions and was finally accepted by their Lordships of
the Privy Council in Katyayani Debi v. Udoy Kumar Das, AIR 1925 PC 97. In Davis
v. Kazee Abdool Hamed [1867] 8 Suth WR 55. Sir Barnes Peacock C.J. observed at
page 58 :
"When the forfeiture
is committed, and the landlord elects to put an end to the lease on the ground
of forfeiture, the landlord's title to recover possession accrues. He could
not, pending the lease, recover possession from the tenant or any one claiming
under the tenant, nor even from a trespasser."
This view was reiterated by
Vivian Bose J., delivering a judgment as a member of the Full Bench in Punjaram
Jagoba Teli v. Ramu Chintoo Gond, AIR 1940 Nag 49, 64 stating that:
"...in England the
landlord cannot sue for possession during the continuance of a tenancy even if
there is a trespasser on the land. His rights in that respect do not accrue
until the tenancy is determined. Until then all he can do is to sue in respect
of injuries to his reversionary interest ; and this of course entails the right
to institute a declaratory suit under section 42 of the Specific Relief Act but
not one for possession. The law in India is the same."
This dicta that the cause
of action will not accrue even in a case of trespass during the continuance of
tenancy is not accepted by Sundara Iyer J. in Ambalavana Chetty v. Singaravel
Udayar [1912] MWN 669; 15 IC 146, contrary to views expressed in a number of
cases. We are not concerned with the case of trespass. (See page 1704 of U. N.
Mitra's Law of Limitation and Prescription, 9th edition).
In Kumar Kamakhya Narayan
Singh v. Ram Raksha Singh, AIR 1928 PC 146, it was ruled that where after the
death of the original lessee to whom a life estate alone was given, the heirs
remained in possession and paid rent to the lessor but receipts are given in
the name of the original lessee, the case is not governed by section 116 of the
Transfer of Property Act and the suit for recovery of possession brought beyond
12 years is barred. Hence, it is seen in this case, if the
assignment is void after the death of the original lessee, the possession of
the first defendant becomes adverse and subsequent payment of rent creates in
them a limited title of permanent tenancy.
Sri Veerabhadraiah, the
learned counsel, very strongly relied upon Datto v. Babasaheb, AIR 1934 Bom
194, to show that when the tenant is shown to have paid rent, the presumption,
in the absence of evidence, is, he is yearly or monthly tenant. That was a case
where the permanent lease deed granted was held to be inadmissible for want of
registration and the terms also could not be looked into in view of section 92
of the Evidence Act. Mulla's on Transfer of Property Act, sixth edition, at
page 657, remarks about this case as a clear case of permanent tenancy acquired
by prescription. The tenant came into possession in 1865 under a permanent
lease which was inadmissible as evidence of a lease for want of registration
and hence that case is of no assistance to the appellants. In fact that was
distinguished in In re Vadasseri Tharawattil Karnavan and Manager Ittichathara Valia
Mannadiar, AIR 1957 Mad 73, where a Division Bench held that the said case
cannot be an authority for the proposition that the right of permanent lessee
cannot be acquired by prescription.
Sri Veerabhadraiah next
contends on the strength of Nainapillai Marakayar v. Ramanathan Chettiar [1924]
ILR 47 Mad 337, that no tenant of land in India can obtain right of permanent
tenancy by prescription against his landlord. But this case was already
explained in a number of decisions and the earliest judgment is Periyanan
Chetty v. Govinda Rao [1932] 62 MLJ 496; AIR 1932 Mad 328, holding that the
dicta in Nainapillai Marakayar v. Ramanathan Chettiar [1924] ILR 47 Mad 337,
that permanent right of occupancy can only be obtained by a tenant by custom or
by grant from an owner of the land who happens to have power to grant such
right or under an Act of Legislation, means that a tenant who has entered into
possession under a valid lease which is not permanent, cannot by his own
assertion or act during the tenancy enlarge his rights into a permanent
tenancy. (Also see page 757 of Rustomji on Law of Limitation and Adverse
Possession, sixth edition), In Atyam Veerraju v. Pecheti Venkanna, AIR 1966 SC
629, the Supreme Court refrained from pronouncing upon the correctness of the
observation of the Full Bench of the Patna High Court when a tenant can
prescribe permanent rights of prescription. The Full Bench of the Patna High
Court in Bastacolla Colliery Co. Ltd. v. Bandhu Beldar, AIR 1960 Pat 344 [FB],
observed regarding the acquisition of permanent tenancy by prescription (at p.
348):
"There are, however,
some cases in which a lessee can acquire the right of a permanent tenant by
prescription in spite of payment and acceptance of rent. Those are cases where
the lessee pays rent on the basis of a notorious claim of permanent tenancy to
the knowledge of the owner. The acceptance of rent by the owner on the basis of
the lessee's claim as a permanent tenant will not prevent the acquisition of
such a right by the lessee. If the lessee tenders the rent on the basis of
permanent tenancy and the owner refuses to accept it on that basis, the parties
are at arm's length and no relationship of landlord and tenant can come into
existence between them. Hence, the lessee's possession is adverse to the
lessor, and he may acquire a limited right of permanent tenancy by being in
adverse possession for the statutory period."
The Supreme Court observed
adverting to this passage (at p. 634 of AIR 1966 SC):
"As we did not hear
any argument on that point, we do not also decide whether this passage lays
down the correct law. This passage must be read with the following observation
of the Patna High Court in the same case. If once a tenancy of some kind comes
into existence either under an express lease or under a lease implied by law,
the tenant cannot convert his tenancy into a permanent one by doing any act
adverse to the landlord."
The view expressed by the
Supreme Court was again considered by the same High Court in Administrator of District Board, Gaya
v. Shri Deonath Sahay, AIR 1970 Pat 256,
holding that once a tenancy of some kind has come into existence, any
subsequent assertion of permanent tenancy right by the tenant cannot create any
such right in his favour by adverse possession. So it is clear that if an
ordinary tenant got into possession by his mere assertion, he cannot convert
the tenancy into one of permanent tenancy. But exhibit A-1 created a permanent
tenancy, and we hold so and hence we conclude that if the assignment of
interest of the original lessee, in whatever form, to the first defendant is
invalid and inoperative, the possession of the first defendant becomes adverse
to the original lessor and the acceptance of the rent for over the statutory
period of 12 years makes the assignee to prescribe for the limited title of
permanent interest. In fact, the possession of the first defendant had all the
qualities of adequacy, continuity, exclusiveness and publicity to constitute
its possession as adverse. There is clear animus on the part of the first
defendant under the colour of assignment of the interest under exhibit A-1 to
it. It is true that there is no lease granted to the first defendant but the
first defendant is claiming under the colour of title, viz., the lease granted
to one of its shareholders. We have already held that the interest under
exhibit A-l has become part of the firm's property, and it was declared to be
the property of the company under exhibit B-54. Assuming that the declaration
does not convey any title to the first defendant, the first defendant continued
in possession of suit property for over a statutory period to the knowledge of
the plaintiffs and their predecessors-in-title and thus perfected title by
adverse possession to the limited interest of the permanent lessee.
We have completed the
bundle of inconsistent and incongruous pleas and reject the claim of the
plaintiffs for possession as clearly unsustainable.
Now, we state the result of
our discussion. It is clear that the lessee can transfer his interest by way of
an assignment. We have already examined the scope of section 108(j) of the
Transfer of Property Act and held that the lessee can transfer absolutely his
interest and there is no prohibition on such alienation. It is well-settled
that an absolute assignment of the whole interest of a lessee creates privity
of estate between the lessor and the assignee and the assignee becomes liable
to the lessor of covenants running with the land including the covenants to pay
the rent. In fact, the present suit was filed treating the first defendant as
successor-in-interest on the basis of such assignment paying court fee on the
basis of annual rent. If the plaintiffs consider that the first defendant is
not the representative-in-interest of the original lessee, the suit should not
have been framed as one for eviction of tenant paying court fee on yearly rent.
They should treat him as trespasser and the suit must be based on title. The
plaintiffs did not plead any fresh tenancy and once the assignment is found to
be true and valid and there is no forfeiture of permanent lease and the first
defendant continues to be successor-in-interest of the original lessee and so
long as he is willing to pay the rent stimulated in the lease deed, the present
suit for eviction is not maintainable. We also held that the plaintiffs are
precluded from contending that the first defendant is not a
successor-in-interest as the principle of estoppel stands in the way.
Even assuming that the
assignment in favour of the first defendant by the original lessee is not valid
for want of conveyance or otherwise, so long as the permanent lease is not
forfeited and validly terminated, even the licensee or any one claiming from
the permanent lessee can continue in possession. This is not a case of abandonment
of estate by the lessee. Hence, a permissive possession from the lessee cannot
be removed so long as the lease is not validly terminated. The suit is not
maintainable without terminating the lease. The grounds of forfeiture of lease
are found to be factually incorrect and legally untenable. The plaintiffs have
not sued any heir of the lessee and we cannot accept that he died heirless
though he may not have any progeny and hence the suit against the first
defendant must be treated as one based on privity of estate. We also
alternatively hold that even assuming that the assignment is invalid and
inoperative, the first defendant perfected title by adverse possession for
permanent lessee's interest as he continued in possession of the property since
the death of the original lessee in 1951 till the date of suit. Hence, we see
no legal basis on which the plaintiffs' suit can be decreed and hence the
appeal is dismissed but, in the circumstances, without costs.
The appeal coming on for
further consideration on the oral application of the counsel for the appellant,
Mr. T. Veerabhadrayya, for leave to appeal to the Supreme Court and upon
hearing the arguments on both sides, the court made the following order:
After the judgment is
pronounced, the learned counsel for the appellant made an oral application for
grant of leave to appeal to the Supreme Court.
This appeal involves a
substantial question of law of general importance and in our opinion it
requires to be decided by the Supreme Court of India. Accordingly the
certificate will be issued under article 133(1) of the Constitution.
[1951] 21 COMP. CAS. 297 (MAD.)
HIGH
COURT OF
Narasaraopeta Electric Corpn. Ltd.
v.
State of
RAJAMANNAR, C.J.
AND SATYANARAYANA RAO, J.
APRIL 27, 1951
C.V. Dikshitulu, N. Rajeswara Rao, K.V.R. Sarma, D. Narasaraju,
K.P. Krishnamurthi and A. Krishnaswami. for the Petitioner.
V.K. Thiruvenkatachari, Counsel
on behalf of the State.
Satyanarayana Rao. J.—These two petitions raise the
question of the validity of the Madras Electricity Supply Undertakings
(Acquisition) Act, 1949 (Act XLIII of 1949) (hereinafter called the impugned
Act) and they were therefore heard together. In C.M.P. . No. 975 of 1951 the
petitioner is the Narasaraopeta Electric Corporation, Ltd , by its managing
director V. V. Sastry, and the company was incorporaced under the Indian
Companies Act. The petitioner in C.M.P. No. 4697 of 1951 is the Rajahmundry
Electric Supply Corporation, Ltd., by its Vice-Chairman, Appana Rangarao, and
this company was also incorporated under the Indian Companies Act. The
petitioners in both the petitions obtained licences for the supply of
electricity under the provisions of the Indian Electricity Act, 1910. The
memorandum of association of the two companies authorised each company not only
to carry on the business of electricity supply but also several other objects
enabling the company to carry on trade or business of various kinds. In G.O.
No. Misc. 3496, dated 18th September, 1950 the Government issued a notification
under Section 4(1) of the Act declaring that the undertaking of the
Narasaraopeta Electric Corporation under the licence shall vest in the
Government of the State of Madras from 25th January, 1951 and called upon the
Corporation to appoint an accredited representative under Section 8 of the Act
and also to submit inventories and all other particulars required under Section
17 of the Act. A similar notification dated 2nd September, 1950, under Section
4(1) of the Act was issued by the Government in respect of the Rajahmundry
Electric Supply Corporation, Ltd., also fixing the date of vesting. In the
first of the petitions the petitioner prayed for the issue of a writ of mandamus
or other appropriate writ or directions restraining the State of Madras from
taking over the undertaking in pursuance of the notification. The relief in the
second petition is for the issue of a writ of certiorari or other appropriate
writ calling for the records and quashing the orders of the Government issued
under Section 4(1) of the Act. The grounds on which the notification is
impugned are substantially the same in both the petitions.
The contentions raised are:—
(1) that the Act is beyond the legislative power of the
Provincial Legislature as it is in substance and in effect a law in respect of
companies which is within the exclusive jurisdiction of the Central
Legislature;
(2) that the Act offends Section 299(2) of the Government of
India Act, 1935, and the fundamental rights recognised and guaranteed, under
Articles 19(f) and 31 of the Constitution; and
(3) that
even if the whole of the Act is not void, at least some of its provisions are
invalid.
It was faintly argued that the impugned Act is inconsistent
with Article 14 of the Constitution; but the argument was not elaborated and
pursued and therefore may be left out of consideration.
I shall now proceed to consider the first contention The
impugned Act was enacted at a time when the Government of India Act, 1935, as
modified and adapted by the Indian Independence Act, 1947, and the Indian
Provisional Constitution Order, 1947, were in force. The competence, therefore,
of the Provincial Legislature to enact the Act must be decided by reference to
the provisions of the Government of India Act, 1935 . The Indian Electricity
Act, 1910, enacted the law relating to supply and use of electrical energy in
India by individuals or Corporations under a licence obtained from the Local
Government. As part of the post-war reconstruction and development schemes, the
Central Government decided in 1947 to develop electricity in India on a
regional basis and as there was no co-ordinated system of development of
electricity in India, it was decided to introduce what is known as the
"grid system" which came into vogue in the United Kingdom under the
Electricity Act, 1926. The need for extending the benefits of electricity to
semi-urban and rural areas in an efficient and economic manner was also felt;
but it was found that the Electricity Act of 1910 was wholly inadequate to
achieve the object and legislative power was needed to link together under one
control electrical development in the country With this object in view, the
Electric Supply Act of 1948 (Act LIV of 1948) was placed on the Statute Book in
September, 1948, its main object being to constitute a central electricity
authority and to enable the Provincial Governments to constitute electricity
boards. The powers and duties of these boards were defined by the Act. In 1949,
the Government of Madras felt that the supply of electricity should be
nationalised in order to ensure supply to other areas and also to extend the
benefit of the electric power to rural aras for agricultural and other
purposes. The result was the passing of the Madras Electricity Supply
Undertakings (Acquisition) Act (Madras Act XLIII of 1949) which is now impugned
as invalid. It received the assent of the Governor-General on 18th January,
1950, and after the Constitution came into force, was also certified by the
President under Article 31(6) of the Constitution.
The Act applies to all undertakings of licensees whether
they belong to individual owners or firms or corporations or companies or local
authorities. Section 4 of the Act empowers the Government to take over any
undertaking by order in writing declaring that the undertaking shall vest in
the Government on a specified date which should not however be earlier than
four months from the date of the declaration. The Government is given the power
to postpone the date of vesting from time to time. Section 5 provides for the
compensation payable to a licensee who is not a local authority. The basis of
compensation is divided into three classes, A, B and C, and option is given
under Section 9 to the accredited representative of the undertaking to choose
any one of the three basis of compensation. Under basis (A) the compensation
payable is 20 times the average net annual profit of the undertaking during a
period of five years preceding the vesting date. Basis (B) fixes the
compensation on the aggregate value of the shares of the company constituting
the share capital of the undertaking reckoned in the manner laid down in
Section 5. Under basis (C) compensation is calculated on the book value of the
assets of the undertaking computed in the manner indicated in sub-section (3)
of Section 5. I have avoided the details as they are not relevant. Section 6 of
the Act provides for the payment of compensation and the manner of determining
it where the licensee is a local authority. Section 7 provides for the vesting
of rights and liabilities of the undertaking in the Government in cases where
the compensation is payable in respect of an undertaking under basis (A) or
basis (B) and sub-section (2) to Section 7 provides for the vesting of the
properties and liabilities if compensation is payable under basis (C). Section
8 of the Act requires that in cases where the licensee is not a local authority
within three months of the receipt of an order under Section 4(1), intimating
the vesting date, the licensee should appoint an individual as an accredited
representative in connection with the handing over of the undertaking or the
fixed assets as the case may be to the Government and performing on behalf of
the licensee the functions specified in the Act. If the licensee is a company,
however, under sub-section (2) to Section 8, the accredited representative is
required to be appointed by the shareholders of the company at a meeting
specially convened for the purpose. Power is conferred upon the Government to
appoint an accredited representative if the licensee fails to appoint an
accredited representative within the time specified. The accredited
representative may be removed for causes specified in sub-section (4) to
Section 8 and the remuneration is payable to him from the compensation
deposited under the Act. Under sub-section (6) of Section 8 all assurances
conveyed, and all statements made, by such representative shall be binding on
the licensee. Section 10 empowers the Government to deduct from the
compensation payable to the licensee under the Act the loss incurred by it by
reason of certain transactions which are not bona fide and effected after 1st October, 1947.
Section 11 deals with the deductions from the compensation and Section 15
relates to the termination of managing agency agreements between the licensee
and the managing agent or managing director. Section 16 provides for the
termination by the Government of the services of the existing staff after giving
notice and Section 17 relates to inventories to be prepared and Section 18
confers power on any officer or servant authorised by the Government in that
behalf to enter upon any land or premises in the possession of the licensee to
make a survey or examination or investigation for the purposes of the Act after
giving due notice. Section 19 deals with the penalties and Section 20 is a
special provision relating to offences by corporations. Section 21 is the usual
clause protecting persons acting in good faith under the Act or under any rule
or order made thereunder. Section 22 provides for the rule-making power and
Sections 23 and 24 provide for certain formal matters. There are two schedules
to the Act, one relating to calculation of net profits under Section 5(1) and
other details and the other dealing with certain deductions and the method of
calculating them. I have given the general scheme and the purposes of the Act
to better appreciate the arguments advanced.
Under the Government of India
Act, 1935, the power to make laws with respect to corporations is conferred on
the Federal Legislature as is evident from item 33 of List I of the Federal
Legislative List, which is in these terms:—
"Corporations, that is to say,
the incorporation, regulation and winding up of trading corporations, including
banking, insurance and financial corporations, but not including corporations
owned or controlled by a Federated State and carrying on business only within
that State, or co-operative societies, and of corporations, whether trading or
not, with objects not confined to one Unit."
"Electricity" is in the
Concurrent List, List III, and is item 31. The short but a difficult question
to decide is, is the impunged Act a law with respect to electricity or a law
with respect to corporations. If the latter, undoubtedly, the Provincial
Legislature has no power to enact the law aud the impugned Act must be declared
ultra vires of the Provincial Legislature. If the former, the impugned Act must
be upheld.
It is in my opinion wise to bear
in mind and to adhere to the note of warning sounded by Sir Montague Smith in
the judgment of the Judicial Committee in The Citizens Insurance Company of
Canada v. Parsons and repeated by Viscount Haldane. L.C, in John Deere Plow
Company Ltd. v. Wharton, that while discharging the difficult duty of arriving at a reasonable construction of the
language of the sections relating to constitution to confine oneself to the
interpretation of the particular provisions in the Statute on which the
decision depends. Section 100 of the Government of India Act, 1935, defines the
powers of the Federal and Provincial Legislatures:—
"With respect to any of the matters enumerated in List
I (Federal Legislative List), List II (Provincial Legislative List) and List
III (Concurrent Legislative List)."
The language employed is, it may be noted, "with
respect to any of the matters enumerated." In the British North America
Act, the expression used is "in relation to all matters." The
language of the Government of India Act is analogous to the language employed
in Section 51 of the Commonwealth of Australia Constitution Act where also the
expression "with respect to" occurs. Notwithstanding this difference
in language, the meaning of both the expressions is, in my opinion, not
materially different. The matter enumerated in item 33 of the Federal
Legislative List, List I of the VII Schedule to the Government of India Act, is
"Corporations, that is to say, the incorporation, regulation and winding
up of trading corporation, etc." The subject-matter, therefore, is
"corporations" in item 33 of List I and "Electricity" in
item 31 of the Concurrent List and these are the legislative subject-matters
with which we are concerned. The consequential effects of legislation are not
the same as the legislative subject-matter. A legislation may have many results
but in order to determine the subject-matter of legislation, one has to look at
its true nature and character not its ultimate effect: vide Russell v. The
Queen. In other words, as has been repeatedly laid down, the pith and substance
of the enactment must be considered to determine the nature and character of
its subject-matter. It is impossible to conceive of a legislation which does
not in some manner trench upon other fields reserved for a different
legislature. In other words every legislation has got a double aspect, i.e.,
from one aspect and for one purpose the legislation may fall under one he; d
but for another purpose and in another aspect, it may be possible to treat it
as falling under a different head The solution in such cases in order to arrive
at and determine the category under which it falls is to have regard to the
true nature and character of the legislation in the particular instance to
ascertain the class or subject to which it legitimately belongs and this is the
pith and substance of it. To illustrate the difficulty in drawing the line and
the correct approach to the problem, I am tempted to quote the observation of
Higgins, J., in Huddart Parker & Co. Proprietary, Limited, v. Moorehead:—
"Now how are we to determine
what is the subject of any law of any legislation, when two or more things that
might be subjects of legislation are mentioned in it? The mere fact of mentioning
corporation in these Sections 5 and 8 does not necessarily make them a law
'with respect to' the subject of corporations. If a Licensing Act provides that
the Licensing Court shall not transfer the licence of a wife to her husband
unless the husband be approved by the Court as a holder of a licence, we should
not call it legislation 'with respect to' marriage or of marital relations. If
an act provides that every marriage shall be celebrated in the presence of two
witnesses of full age, and shall be registered, we should not call it
legislation 'with respect to' witnesses, or 'with respect to' infancy or 'with
respect to' registration. The first is a law 'with respect to' dealing in
intoxicating liquors; the second is a law 'with respect to' marriage. To use
the words of the Privy Council in Russell v. Reg., we must find what is 'the
primary matter dealt with.' We must find 'the true nature and character of the
legislation in the particular instance under discussion….. in order to
ascertain the class of subject to which it really belongs'."
Is this is a law substantially
with respect to corporations, or is it a law substantially with respect to
trade? The regulation of trade combination is "the primary matter dealt
with" (to use the phrase of Russel v. Reg.) As Lord Watson said during the
argument of Attorney-General for Ontario v.
Attorney General for Quebec:—
" 'that which it' (the Act)
accomplished, and that which is its main object to accomplish, is the object of
the Statute (as distinguished from the motives which influenced the
Legislature)."
In that case, one of the
questions for consideration was whether the Commonwealth Parliament was within
its powers in enacting Sections 5 and 8 of the Australian Industries
Preservation Act, 1906, which undoubtedly interfered with the domestic trade in
a State. It was claimed on behalf of the Commonwealth Parliament that it had
such a power under placitum 20 of Section 5 1 of the Commonwealth of Australia
Constitution Act which is as follows:—
"Foreign corporations, and
trading or financial corporations formed within the limits of the
Commonwealth."
It was held that this power did
not carry with it a power to legislate so as to interfere with the internal
trade and commerce of the States. Section 5 and 8 of the Australian Industries
Preservation Act, 1906, prohibited a foreign corporation or trading or
financial corporation formed within the Commonwealth from making or entering
into contracts or engaging in or continuing in combination with a view to
restrain trade or commerce within the Commonwealth to the detriment of the
public or with intent to destroy or injure by means of unfair competition any
Australian industry the preservation of which is advantageous to the
Commonwealth and also prevented such corporations from acquiring monopolies. As
pointed out by Griffith, C.J., in Huddart Parker and Co, Proprietary, Ltd. v.
Moorehead, it is necessary to distinguish between acts which are ultra vires of
a corporation and acts which, though otherwise within the powers of a
corporation, are prohibited by positive law. The result in either case is
undoubtedly to prevent the corporation from effectually doing the act. But
although the effect is identical, the cause is quite different. In one case
there is no capacity in the corporation to enter into contracts relating to
particular subject-matters because it is beyond its powers. In the other case,
though it is within its powers, it is a thing which the law prohibits the
corporation from entering into. At page 353 Griffith, C.J., says:
"The denial of capacity to
the corporation to enter into contracts relating to the subject-matter of
domestic trade or the particular branch of that trade may rest with the
Commonwealth. But the conditions governing the validity of a contract relating
to any subject-matter rests with the Legislature having control of that
subject-matter which, in the case of domestic trade, is the State Legislature.
The importance of this distinction is apparent when it is remembered that a
particular intent is an element of the offences created by Sections 5 and 8.
The entering into the contracts or combinations specified without that intent
is not prohibited. The sections, therefore, are not directed to the capacity of
the corporation, which is assumed, but to their behaviour while acting within
their capacity."
The subject-matter of item 33 in
the Federal List can only be interpreted as confined to the incorporation and
the capacity and status of the companies or corporations and must be limited to
the manner in which a corporation may be brought into existence and how its
business is to be conducted and how it should be dissolved. The Indian
Companies Act provides for these matters. The Constitution, the management and
the winding up of the companies are within the purview of this item. The
company may carry on any business which is within the objects of the memorandum
of association, i.e., within its capacity, but a State Legislature may under
the appropriate item impose restrictions regarding the method or the manner in
which a particular business or businesses should be conducted. It might impose
restrictions regarding licences in respect of particular businesses, may
acquire part of the business and may provide for various other matters relating
to its activities. The activities and the functions and the business of a corporation are outside its constitution and management and
therefore not within the exclusive legislative power of the Central
Legislature. Under this item the Federal Legislature has power to create,
protect and destroy an artificial person put the power does not extend to its
functions and activities. The law with respect to corporations, there, fore,
must be a law on the subject of corporations.
Mr. Narasaraju, the learned Advocate for one of the
petitioners, relied upon the decisions of the Judicial Committee which dealt
with the. Constitution of Canada under the British North America Act, 1867.
Under Section 91 of that Act, the Parliament of Canada has the power to make
laws for the peace, order and good government of Canada in relation to all
matters not assigned exclusively to the Legislatures of the Provinces. Section
91 gives a list of the matters which are within the exclusive legislative
authority of the Parliament of Canada. Item 2 of the list relates to "the
regulation of trade and commerce." Section 92 enumerates the subjects
which are within the exclusive power of the Provincial Legislature and item 11
relates to "incorporation of companies with provincial objects."
There is no express power conferred upon the Parliament of Canada to make laws
in relation to corporations or companies with extra-provincial objects. It has
been decided as
early as 1881 in The Citizens Insurance Company of Canada v. Parsons that Parliament has the authority to incorporate
companies for inter-provincial objects under the general power conferred upon
the parliament in relation to all matters not coming within the class of
subjects assigned exclusively to the Legislatures of the Provinces. This power,
however, and the power to regulate trade and commerce under item 2 of Section
91 do not carry with it the exclusive right to regulate the contracts of such
corporations in respect of matters within the Provinces.
The words "regulation of trade and commerce" have
been so interpreted as to confer on the Dominion Parliament the power to make
political arrangements in regard to trade which requires the sanction of
Parliament, regulation of trade in matters of inter-provincial concern and
perhaps also a general regulation of trade affecting the whole Dominion. This
decision was considered and the principles enunciated therein have been
followed and applied in later cases by the Judical Committee.
The scheme of distribution of the powers between the
Dominion and the Provincial Legislatures as regards the incorporated companies
came up for consideration before the Judicial Committee in John Deere Plow
Company v. Wharton. In that case a Provincial Legislature passed an Act
prohibiting companies which have not been incorporated in the Province from
taking proceedings in the Courts of the Province in respect of contracts made
within the Province and also imposed penalties if the company carried on
business in the Province without obtaining a licence. The question that had to
be determined was whether the particular legislation in the Province was valid
under the British North America Act. The power of the Legislature to make laws
in relation to matters in item II of Section 92, viz., "incorporation of
companies with provincial objects," cannot extend to a Dominion company,
the objects of which were extra-provincial. The Parliament of Canada, as laid down in The Citizens
Insurance Company of Canada v. Parsons had the
undoubted power under the subject "regulation of trade and commerce,"
to prescribe the limitations on the powers of companies the objects of which
extend to the entire Dominion and the Provinces can only legislate without
depriving a Dominion company of its status and powers which were conferred upon
it by a Dominion legislation. As observed by viscount Haldane, L.C, at pages
340 and 341 of John Deere
Plow Co. v. Wharton:—
"They do not desire to be understood as suggesting
that because the status of a Dominion company enables it to trade in a province
and thereby confers on it civil rights to some extent, the power to regulate
trade and commerce can be exercised in such a way as to trench, in the case of
such companies, on the exclusive jurisdiction of the Provincial Legislatures
over civil rights in general. No doubt this jurisdiction would conflict with
that of the Province if civil rights were to be read as an expression of
unlimited scope. But, as has already been pointed out the expression must be
construed consistently with various powers conferred by Sections 91 and 92,
which restrict its literal scope. It is enough for the present purposes to say
that the Province cannot legislate so as to deprive a Dominion company of its
status and powers. This does not mean that these powers can be exercised in
contravention of the laws of the Province restricting the rights of the public
in the Province generally. What it does mean is that the status and powers of a
Dominion company as such cannot be destroyed by Provincial legislation. This
conclusion appears to their Lordships to be in full harmony with what was laid
down by the Board in
Citizens Insurance Company of Canada v. Parsons, Colonial Building and
Investment Association v. Attorney-General for Quebec and Bank of Toron o v.
Lambe,"
It was held that the law of the Province requiring the
company to obtain a Provincial licence and to register it in the Province as a
condition of exercising its powers conferred upon it by the Dominion
legislation was invalid and inoperative. The Provincial legislation in that case affected the status and
corporate capacity of a Dominion company and the powers which such status and
capacity carried with it. The pecular position of the Canadian Parliament in
respect of companies is that it possesses not only the power to incorporate but
also the authority to legislate regulating the powers of those companies, under
Section 91, item 2, "regulation of trade and commerce." Any
provincial law therefore which trenches upon such power is undoubtedly invalid.
To the same effect is the decision in Great, West Saddlery Company Limited v.
King. There also a company was incorporated under the Dominion law with power
to trade in any Province. A Provincial law required that such companies should
not carry on their business of trading in the Province unless registered or
licensed therein. The legislation of the Province was held invalid and ultra
vires. Viscount Haldane, L.C., states the position at page 100 in these words:—
"If therefore in legislating
for the incorporation of companies under Dominion law and invalidly endowing
them with powers, the Dominion Parliament has by necessary implication given
these companies a status which enables them to exercise these powers in the
Provinces, they cannot be in terfered with by any Provincial law in such a
fashion as to derogate from their status and their consequet capacities, or, as
the result of this restriction, to prevent them from exercising the powers
conferred on them by Dominion law. Their Lordships, however, observed that when
a company has been incorporated by the Dominion Government with powers to trade
in any Province it may nonetheless, consistently with the general scheme, be
subject to Provincial laws of general application, such as laws imposing taxes,
or relating to mortmain, or even requiring licences for certain purposes or as
to the forms of contract; but they were careful not to say that the sanctions
by which such Provincial laws might be enforced could validly be so directed by
the Provincial Legislatures as indirectly to sterilize or even to effect, if
the local laws were not obeyed, the destruction of the capacities and powers
which the Dominion had validly conferred. To have said so would have been to
misread the scheme of the British North America Act, which is one that
establishes interlacing and independent legislative authorities. Within the
spheres allotted to them by the Act, the Dominion and the Provinces are
rendered on general principle co-ordinate Governments. As a consequence, where
one has legislative power the other has not, speaking broadly, the capacity to
pass laws which will interfere with its exercise. What cannot be done directly
cannot be done indirectly. This is a principle which has to be kept closely in
view in testing the validity of the Provincial
legislation under consideration as affecting Dominion companies."
In Attorney-General for Manitoba
v. Attorney-General for Canada, the Judicial
Committee had to consider the validity of a Provincial law which prohibited the
Dominion company from selling their own shares within the Province without the
consent of the Provincial commissioner or Board. In the light of the decisions
already referred to it was held by Viscount Sumner that the Provincial law
affected the status and capacity conferred on the companies by Dominion legislation
and it was ultra vires. It was observed at page 266 as follows:
"An artificial person, incorporated under the powers
of the Dominion with certain objects, invested by these powers with capacities
to trade in pursuit of those objects and with the status and capacities of a
Dominion incorporation, is under these Acts liable in the most ordinary course
of business to be still-born from the moment of incorporation, sterilized in
all its functions and activities, thwarted and interfered with in its first and
essential endeavours to enter on the beneficial and active employment of its
powers, by the necessity of applying to a Provincial executive for permission
to begin to act and to raise its necessary capital, a permission which may be
subjected to conditions or refused altogether according to the view, which in
their discretion that executive may take of the plans, promises and prospects
of a creation of the Dominion."
These decisions clearly establish that the Provincial
Legislature has no power to enact a law which affects the status and capacity
of a Dominion company and also to sterilize and nullify such company from
exercising its functions and activities in pursuance of the powers conferred
upon it by a Dominion legislation. The two things, the status and capacity of a
company on the one hand and the powers and activities and functions which it
can exercise, are different and the power of the Dominion Parliament to
legislate on these subjects is derived from two different sources, the former
under the general power under Section 91 and the latter under the power to
regulate trade and commerce.
But these decisions do not really help the petitioners in
their contention that the impugned Act deprives a part of the business of the
companies and therefore it is ultra vires the Provincial Legislature, as the
subject-matter of legislation is within the exclusive competence of the Central
Legislature under item 33. The preamble to the impugned Act states that the
object is to make provision for the acquisition of undertakings in the Province
of Madras engaged in the supply of electricity. The objects and reasons of the bill as
published in the Fort St. George Gazette make it abundantly clear that the
purpose of the acquisition was for the public benefit. It is no doubt true that
legislative proceedings cannot be called in aid to interpret a statute or its
provisions. They are however certainly not excluded from consideration when one
has to determine the object and purpose of an Act—see Chiranjit Lal Chowdhury v.
The Union of India. The Act applies to all undertakings of licensees whether
the licensees are natural persons or artificial persons like companies or local
authorities or partnerships. The subject-matter of the Act, in my opinion, is
the acquisition of undertakings supplying electricity. It may be that as a
result of the acquisition under the powers conferred by this Act some of the
companies who happen to be licensees may be deprived of part of their business.
But the Act in no way affects the capacity or the status of the company. It
does not alter its constitution. It takes away only part of the business. In
the light of the decisions already referred to it cannot be said that the
subject-matter of the impugned Act is "Corporations" within item 33
of List I of the Seventh Schedule. On the other hand, it comes within the
purview of "electricity" in the Concurrent List.
Reference was made by learned
counsel for the petitioners to the decisions of the Judicial Committee
interpreting "banking" which is item 15 in Section 91 of the British
North America Act. I do not see how these decisions support the contention of
the petitioners. It has been held in Tennant v. The Union Bank of Canada, that
under this item the Dominion Parliament has the authority conferred upon it by
the words, "Banking, Incorporation of Banks, and the Issue of Paper
Money" not only to enact a law relating to incorporation of banks but also
a law conferring upon such companies the power or the privilege of carrying on
the business of bankers. The word "banking" is wide enough, it is
said, to embrace "every transaction coming within the legitimate business
of a banker." The power under this head therefore extends not only to the
incorporation of banks but also to legislate in respect of the powers which a
bank would exercise as appertaining to its business of banking. To the same
effect is the decision in Attorney-General for Canada v. Attorney-General for
the Province of Quebec. It was that the transaction of receiving from
depositors bank deposits repaying such deposits to the depositors is within the
purview of the legitimate business of banking. The pith and substance of the
Act which was impugned in that case related to the business of banking and it
was held ultra vires the Provincial Legislature. Of course, if the Subject-matter of the legislation in question is
undoubtedly and in substance and in effect within the power exclusively
assigned to the Dominion Legislature, it is not open to the Provincial
Legislature to trench on such a field with immunity. A legislation which
transgresses the limits of the Provincial field will undoubtedly be ultra
vires. Of course, as pointed out by the Judicial Committee in Attorney-General for Alberta v. Attorney-General
for Canada, it is not open to either the Dominion
Parliament or the Province under the guise or the pretence of exercising a
legislative power in relation to a subject or subjects assigned to their
respective jurisdictions to carry out the object so as to trespass on the
jurisdiction of another.
It follows that the impugned Act is intra vires the
Provincial Legislature.
The next point for consideration is whether all or any of
the provisions of the impugned Act offend Section 299(2) of the Government of
India Act and Articles 19(1)(f) and 31 of the Constitution. The President
certified the Act under Article 31(6) of the Constitution. The petitioners
therefore are faced with an insuperable difficulty by reason of the
certificate. Article 31(6) states:—
"Any law of the State enacted not more than eighteen
months before the commencement of this Constitution may within three months
from such commencement be submitted to the President for his certification; and
thereupon, if the President by public notification so certifies it shall not be
called in question in any Court on the ground that it contravenes the
provisions of clause (2) of this article or has contravened the provisions of
sub-section (2) of Section 299 of the Government of India Act, 1935."
On plain reading of this provision, it seems to me, that it
is not open to the petitioners to urge before us any grounds based on the
assumption that the Act contravenes the provisions of clause (2) of Article 31
or Section 299(2) of the Government of India Act, 1935. Under Section 299(2) of
the Government of India Act.
"Neither the Federal nor a Provincial Legislature
shall have power to make any law authorising the compulsory acquisition for
public purposes of any land, or any commercial or industrial undertaking, or
any interest in, or in any company owning, any commercial or industrial
undertaking, unless the law provides for the payment of compensation for the
property acquired and either fixes the amount of the compensation, or specifies
the principles on which, and the manner in which, it is to be determined."
If the complaint therefore is that just compensation was
not provided by the Act and even if this contention is well-founded, in view of
the certificate granted by the President that ground is not open to the
petitioners. If this clause however is construed as imposing a limitation on
the Legislatures, Federal or Provincial to acquire only for a public purpose
and as an essential condition for the acquisition, assuming the contention is
correct, even such an objection is not open in view of the certificate. I do
not for a moment agree with the contention that this sub-section imposes a
condition that the acquisition should only be for a public purpose as on a
plain reading of the clause it only requires that provision should be made for
payment of compensation for the property acquired either by fixing the amount
of compensation or at any rate specifying the principles and the manner in
which it has to be determined. It is no doubt true as appears in the Joint
Parliamentary Committee Report that the framers of the Government of India Act,
1935, originally intended that the power of acquisition should be confined only
to public purposes. But while a limited restriction in respect of acquisition
of land is imposed by sub-section (3) of that section, there is no express
language requiring that the acquisition should be only made if it is required
for a public purpose, a power analogous to the power of eminent domain under
the American Constitution. If the contention is open, it should have
necessitated the consideration of the question whether or not the acquisition
is for a public purpose and whether the compensation should be just
compensation as required under the Australian and American Constitutions. It has
been held in Missouri Pacific Railway v. State of Nebraska, that taking by a
State of the private property of one person or corporation without the owner's
consent, for the private use of another, is not due process of law, and is a
violation of the 14th Amendment of the Constitution of the United States. It
was treated as a case of taking property for a purpose other than a public one
and therefore was not covered by the power of eminent domain. That the purpose
in the present case is a public purpose is beyond doubt in view of the objects
and reasons stated when the bill was published and made clear in the course of
the debate. It is therefore unnecessary to consider in this case, these
interesting questions. The Act, therefore, cannot be attacked on the ground
that it contravenes either Section 299(2) of the Government of India Act, 1935,
or Article 31(2) of the Constitution.
It is however open notwithstanding the certificate, for the
petitioners to challenge the validity of the Act on grounds other than those
which are prohibited by the certificate. It does not prevent them from
establishing that the Act is in fact beyond the competency of the Legislature
or that even apart from Section 299(2), the Legislature could acquire property
only for a public purpose. I do not wish to express any final opinion whether
or not it is open to the Gevernment to acquire property for a purpose other
than a public purpose under the provisions of the Constitution as it is
unnecessary to decide that question in the present case.
The only other objection is that it takes away the
fundamental right recognised and conferred by Article 19(1)(f) of the
Constitution, in the first place that sub-clause applies only to
"citizens" and a company incorporated under the Indian Companies Act
does not satisfy the requirements of the definition of citizen in Article 5.
The petitioners, therefore, are not entitled to invoke Article 19. This
question was recently decided by my Lord the Chief Justice and myself in C.M.P.
No. 4652 of 1951. Apart from that the right to acquire, hold and dispose of
property is subject to the right to take away property under Article 31. Under
Article 31(1) which corresponds to Section 299(1) of the Government of India
Act, 1935, no person shall be deprived of his property save by authority of law
and sub-clause (2) of that article provides for acquisition. Deprivation of
property may be brought about for different reasons. It may be confiscation or
may be forfeiture and not necessarily acquisition. Limits on the power of
acquisition are prescribed by sub-clause (2) of Article 31 and sub-clauses (3)
and (4) of the same article. Under the present Constitution in List I, the
Union List, item 33 relates to "acquisition or requisitioning of property
for the purposes of the Union" and in the State List, item 36
"acquisition or requisitioning of property, except for the purposes of the
Union, subject to the provisions of entry 42 in List III (the Concurrent
List)." Item 42 of that list is "principles on which compensation for
property acquired or requisitioned for the purposes of the Union or of a State
or for any other public purpose is to be determined, and the form and the
manner in which such compensation is to be given." The legislative power
to enact a law relating to acquisition of property is derived from these items
in the various lists. A person may acquire for himself and hold and dispose of
property subject to reasonable restrictions which may be imposed by legislation
under sub-clause (5) of Article 19, but all this is subject to the overriding
power of acquisition conferred and recognised by Article 31. The impugned Act
is not in any manner inconsistent with the fundamental rights enumerated in
Part III of the Constitution. It is not seriously disputed that some of the
provisions of the Act are invalid as they encroach upon the rights of the
shareholders and the directors of the company under the Indian Companies Act.
It is not seriously disputed that rule 19 of the rules framed under the Act
compelling the liquidation and winding up of a company whose undertaking is
taken over under the powers conferred by the Act is beyond the legislative
power of the Province. That rule must therefore be declared invalid. The
provision authorising the government to appoint an accredited representative in
case the shareholders of a company default in making the appointment seems to
me to deprive altogether the rights of the company and the directors. The
accredited representative nominated by the Government in such cases is given the
power to bind by his assurances and by the statements and representations, the
licensee. He is the person who has to choose the basis of compensation (a), (b)
or (c), and is also the person authorised to bring about arbitration in respect
of matters enumerated in Section 3. Practically a nominee of the Government is
the person clothed with full authority to deal with all matters relating to the
licensee on his behalf. 4 If the shareholders do not appoint the accredited
representative within the time allowed it is open to the Government to proceed
ex parte regarding the fixation of compensation and drive the licensee to a
court for settling the amount of compensation or a machinary may be provided by
which the directors or the shareholders may be compelled to appoint an
accredited representative on their behalf. The power conferred on the
Government to appoint an accredited representative where the shareholders fail
to appoint one seems to me to be invalid. Section 15 of the Act terminates the
managing agency agreement between the licensee and his managing agent and the
managing director on the vesting date. The two companies have other businesses
which they can legitimately carry on and there does not seem to be any
necessity to put an end to the agency agreement in toto. It may be that this
provision, as pointed out by the learned Advocate General, was enacted for the
benefit of the managing agents, as otherwise they would not have been entitled
to any remuneration or commission. But there is no reason to put an end to the
agreement altogether. As suggested by my Lord the Chief Justice in the course
of the arguments, the difficulty can be got over by reading Section 15 as
terminating the managing agency agreement between the licensee on the one hand
and his managing agent or managing director on the other, restricting it in so
far as it relates to the undertaking covered by the licence and no more. In
this view there is no necessity to hold that Section 15 is also invalid.
For these reasons, I am of opinion that subject to the
modifications mentioned above, the petitions fail and must be dismissed with
costs.
Rajamannar, C.J.—I agree entirely and have nothing to add.
[1951]
21 COMP CAS 33 (SC)
v.
Union of
KANIA,
C.J.
FAZL
ALI, PATANJALI SASTRI, MUKHERJEA AND DAS, JJ.
DECEMBER
4, 1950
V.K.T. Chart, J.S. Dawdo,
Alladi Kuppuswami and C.R. Pattabhi Raman, M. S.K. Aiyengar, Agent, for the
Petitioner.
M.C. Setalvad, G.N. Joshi, P.A.
Mehta, G.N. Joshi and Rajinder Narain, for the Opposite Parties.
Kama, C. J.—This is an application by the holder of one ordinary share
of the Sholapur Spinning and Weaving Co. Ltd. for a writ of mandamus and
certain other reliefs under article 32 of the Constitution of India. The
authorized capital of the company is Rs. 48 lakhs and the paid-up capital is
Rs. 32 lakhs, half of which is made up of fully paid ordinary shares of Rs.
1,000. each.
I have read the judgment
prepared by Mr. Justice Mukherjea. In respect of the arguments advanced to
challenge the validity of the impugned Act under articles 31 and 19 of the
Constitution of India, I agree with his line of reasoning and conclusion and
have nothing more to add.
On the question whether the
impugned Act infringes article 14, two points have to be considered. The first
is whether one individual shareholder can, under the circumstances of the case
and particularly when one of the respondents is the company which opposes the
petition, challenge the validity of the Act on the ground that it is a piece of
discriminatory legislation, creates inequality before the law and violates the
principle of equal protection of the laws under article 14 of the Constitution
of India. The second is whether in fact the petitioner has shown that the Act
runs contrary to article 14 of the Constitution. In this case having regard to
my conclusion on the second point, I do not think it is necessary to pronounce
a definite opinion on the first point. I agree with the line of reasoning and
the conclusion of Mr. Justice Mukherjea as regards the second point relating to
the invalidity of the Act on the ground that it infringes article 14 of the
Constitution and have nothing more to add.
In my opinion therefore
this petition fails and is dismissed with costs.
Fazl Ali, J.—I am strongly of the opinion that this petition should be
dismissed with costs.
The facts urged in the
petition and the points raised on behalf of the petitioner before us are fully
set forth in the judgment of my brethren, Sastri, Mukherjea and Das, JJ., and I
do not wish to repeat them here. It is sufficient to say that the main grounds
on which the Sholapur Spinning and Weaving Company (Emergency Provisions) Act,
1950 (XXVIII of 1950), which will hereinafter be referred to as "the
Act", has been assailed, is that it infringes three fundamental rights,
these being :—
(1) the right
to property secured by article 31 of the Constitution ;
(2) the right to acquire, hold and dispose of property,
guaranteed to every citizen by article 19(1)(f); and
(3) the right
to equal protection of the laws, guaranteed by article 14.
It has been held in a
number of cases in the United States of America that no one except those whose
rights are directly affected by a law can raise the question of the
constitutionality of that law. This principle has been very clearly stated by
Hughes, J.,in McCabe v. Atchison in these words :—
"It is an elementary principle that in order to
justify the granting of this extraordinary relief, the complainant's need of it
and the absence of an adequate remedy at law must clearly appear. The
complainant cannot succeed because someone else may be hurt. Nor does it make
any difference that other persons who may be injured are persons of the same race
or occupation. It is the fact, clearly established, of injury to the
complainant—not to others—which justifies judicial interference."
On this statement of the
law, with which I entirely agree, the scope of the discussion on this petition
is greatly restricted at least in regard to the first two fundamental rights.
The company and the shareholders are in law separate entities, and if the
allegation is made that any property belonging to the company has been taken
possession of without compensation or the right enjoyed by the company under
article 19(1)(f) has been infringed, it would be for the company to come
forward to assert or vindicate its own rights and not for any individual
shareholder to do so. In this view, the only question which has to be answered
is whether the petitioner has succeeded in showing that there has been an
infringement of his rights as a shareholder under articles 31 and 19(1)(f) of
the Constitution. This question has been so elaborately dealt with by
Mukherjea, J., that I do not wish to add anything to what he has said in his
judgment, and all that is necessary for me to say is that I adopt his
conclusions, without committing myself to the acceptance of all his reasonings.
The only serious point,
which in my opinion, arises in the case is whether Article 14 of the
Constitution is in any way infringed by the impugned Act. This article
corresponds to the equal protection clause of the Fourteenth Amendment of the
Constitution of the United States of America, which declares that "no State
shall deny to any person within its jurisdiction the equal protection of the
laws." Professor Willis dealing with this clause sums up the law as
prevailing in the United States in regard to it in these words:—
"Meaning and effect of
the guaranty.—The guaranty of the equal protection of the laws means the
protection of equal laws. It forbids class legislation, but does not forbid
classification which rests upon reasonable grounds of distinction. It does not
prohibit legislation, which is limited either in the objects to which it is
directed or by the territory within which it is to operate, 'It merely requires
that all persons subjected to such legislation shall be treated alike under
like circumstances and conditions both in the privileges conferred and in the
liabilities imposed.' 'The inhibition of the amendment………….was designed to
prevent any person or class of persons from being singled out as a special
subject for discriminating and hostile legislation.' It does not take from the
states the power to classify either in the adoption of police laws, or tax
laws, or eminent domain laws, but permits to them the exercise of a wide scope
of discretion, and nullifies what they do only when it is without any
reasonable basis. Mathematical nicety and perfect equality are not required.
Similarity, not identity of treatment, is enough. If any state of facts can
reasonably be conceived to sustain a classification, the existence of that
state of facts must be assumed. One who assails a classification must carry the
burden of showing that it does not rest upon any reasonable basis". [Page
579, 1st Edition of Constitutional Law by Prof. Willis.]
Having summed up the law in
this way, the same learned author adds :—"Many different classifications of
persons have been upheld as constitutional. A law applying to one person or one
class of persons is constitutional if there is sufficient basis or reason for
it."
'There can be no doubt that
article 14 provides one of the most valuable and important guarantees in the
Constitution which should not be allowed to be whittled down, and, while
accepting the statement of Professor Willis as a correct exposition of the
principles underlying this guarantee, I wish to lay particular emphasis on the
principle enunciated by him that any classification which is arbitrary and
which is made without any basis is no classification and a proper
classification must always rest upon some difference and must bear a reasonable
and just relation to the things in respect of which it is proposed.
The petitioner's case is
that the shareholders of the Sholapur Company have been subjected to
discrimination vis a vis the shareholders of other companies, inasmuch as
Section 13 of the Act subjects them to the following disabilities which the
shareholders of other companies governed by the Indian Companies Act are not
subject to :—
"(a) It shall not be lawful for the shareholders
of the Company or any other person to nominate or appoint any person to be a
director of the Company.
(b) No resolution passed at any meeting of the
shareholders of the Company shall be given effect to unless approved by the
Central Government.
(c) No proceeding for the Winding up of the Company or for the
appointment of a receiver in respect thereof shall lie in any court unless by
or with the sanction of the Central Government."
Prima facie, the argument
appears to be a plausible one, but it requires a careful examination, and,
while examining it, two principles have to be borne in mind: (1) that a law may
be constitutional even though it relates to a single individual, in those cases
where on account of some special circumstances or reasons applicable to him and
not applicable to others, that single individual may be treated as a class by
himself; (2) that it is the accepted doctrine of the American courts, which I
consider to be well-founded on principle, that the presumption is always in
favour of the constitutionality of an enactment, and the burden is upon him who
attacks it to show that there has been a clear transgression of the
constitutional principles. A clear enunciation of this latter doctrine is to be
found in Middleton v. Texas Power and Light Co., in which the relevant passage
runs as follows:—
"It must be presumed that a legislature
understands and correctly appreciates the need of its own people, that its laws
are directed to problems made manifest by experience and that its
discriminations are based upon adequate grounds."
The onus is therefore on
the petitioner to show that the legislation which is impugned is arbitrary and
unreasonable and there are other companies in the country which should have
been subjected to the same disabilities, because the reasons which led the
Legislature to impose State control upon the Sholapur Company are equally applicable
to them. So far as article 14 is concerned, the case of the shareholders is
dependent upon the case of the company and if it could be held that the company
has been legitimately subjeted to such control as the Act provides without
violation of the article, that would be a complete answer to the petitioner's
complaint.
Now, the petitioner has
made no attempt to discharge the burden of proof to which I have referred, and
we are merely asked to presume that there must necessarily be other companies
also which would be open to the charge of mismanagement and negligence. . The
question cannot in my opinion be treated so lightly. On the other hand, how
important the doctrine of burden of proof is and how much harm can be caused by
ignoring it or tinkering with it, will be fully illustrated, by referring to
the proceedings in the Parliament in connection with the enactment of the Act,
where the circumstances which necessitated it are clearly set out. I am aware
that legislative proceedings cannot be referred to for the purpose of
construing an Act or any of its provisions, but I believe that they are
relevant for the proper understanding of the circumstances under which it was
passed and the reasons which necessitated it.
A reference to the
Parliamentary proceedings shows that sometime ago, a representation was made on
behalf of a section of the shareholders of the Sholapur Company to the
Rigistrar of Joint Stock Companies in Bombay, against the conduct of the
managing agents, and the Government of Bombay was moved to order a special
inquiry into the affairs of the company. For the purpose of this inquiry, two
special inspectors were appointed by the Bombay Government and their report
revealed "certain astounding facts" and showed that the Mill had been
grossly mismanaged by the Board of Directors and the managing agents. It also
revealed that the persons who were responsible for the mismanagement were
guilty of certain acts and omissions which brought them under the purview of
the law. The Bombay Government accepted the report of the inspectors and
instructed the Advocate-General of Bombay to take legal proceedings against
certain persons connected with the management of the company. Thereafter, the
Government of India was approched by the Provincial Government and requested to
take special action in order to secure the early opening of the Mill. The
Government of India found that they had no power to take over the management of
a particular Mill, unless its working could be ensured through the existing
managament acting under the direction of a Controller appointed under the
Essential Supplies Act, but they also found that a peculiar situation had been
created in this case by the managing agents themselves being unable or
unwilling to conduct the affairs of the company in a satisfactory and efficient
manner. The Government of India, as a matter of precaution and lest it should
be said that they were going to interfere unnecessarily in the affairs of the
company and were not allowing the existing provisions of the law to take their
own course, consulted other interests and placed the matter before the Standing
Committee of the Industrial Advisory Council where a large number of leading
industrialists of the country were present, and ultimately it Was realized that
this was a case where the Government could rightly and properly intervene and
there would be no occasion for any criticism coming from any quarter. It
appears from the discussion on the floor of the House that the total number of
weaving and spinning Mills which Were closed down for one reason or other was
about 35 in number. Some of them are said to have closed for want of cotton,
some due to overstocks, some for want of capital and some on account of
mismanagement. The Minister for Industry, who sponsored the Bill, in explaining
what distinguished the case of the Sholapur Mill from the other Mills against
whom there might be charges of mismanagement, made it clear in the course of
the debate that "certain conditions had to be fulfilled before the Government
can and should intervene," and he set out these conditions as follows:—
"(1) The undertaking must relate to an industry
which is of national importance. Not each and every undertaking which may have
to close down can be taken charge of temporarily by Government.
(2) The undertaking must be an economic unit. If it appears that it
is completely uneconomic and cannot be managed at all, there is no sense in
Government taking charge of it. If anything, it will mean the Government will
have to waste money which belongs to the taxpayer on an uneconomic unit.
(3) There must be a technical report as regards the condition of the
plants, machinery, etc., which either as they stand, or after necessary repairs
and reconditioning can be properly utilised.
(4) Lastly,—and this is of considerable importance—there must be a
proper enquiry held before Government take any action. The enquiry should show
that the managing agents have so misbehaved that they are no longer fit and
proper persons to remain in charge of such an important undertaking."
(Pages 2394-5 of Vol. III, No. 14, Parliamentary Debates, 31st March, 1950).
It appears from the same
proceedings that the Sholapur Mill is one of the largest Mills in Asia and
employs 13,000 workers. Per shift, it is capable of producing 25 to 30 thousand
pounds of yarn, and also one lakh yards of cloth. 'It was working two shifts
when it was closed down on the 29th August, 1949. The closure of the Mill meant
a loss of 25 lakhs yards of cloth and one and a half lakhs pounds of yarn per
month. Prior to 1947, the highest dividend paid by the company was Rs. 525 per
share and the lowest Rs. 100, and, in 1948, when the management was taken over
by the managing agents who have been removed by the impugned Act, the accounts
showed a loss of Rs. 30 lakhs, while other textile companies had been able to
show very substantial profits during the same period.
Another fact which is
brought out in the proceedings is that the managing agents had acquired control
over the majority of the shares of the company and a large number of
shareholders who were dissatisfied with the management had been rendered
powerless and they could not make their voice heard. By reason of the
preponderance of their strength, the managing agents made it impossible for a
controller under the Essential Supplies Act to function and they also made it
difficult for the company to run smoothly under the normal law.
It was against this
background that the Act was passed, and it is evident that the facts which were
placed before the Legislature with regard to the Sholapur Mill were of an
extraordinary character, and fully justified the company being treated as a
class by itself. There were undoubtedly other Mills which were open to the
charge of mismanagement, but the criteria adopted by the Government which, in
my opinion, cannot be said to be arbitrary or unreasonable, is not applicable
to any of them. As we have seen, one of the criteria was that a mere allegation
of mismanagement should not be enough and no drastic step such as is envisaged
in the Act should be taken without there being a complete enquiry. In the case
of the Sholapur Mill, a complete enquiry had been made and the revelations
which were made as a result of such enquiry were startling.
We are familiar with the
expression "police power" which is in vogue in the United States of
America. This expression simply denotes that in special cases the State can
step in where its intervention seems necessary and impose special burdens for
general benefit. As one of the judges has pointed out, "the regulations
may press with more or less weight upon one than upon another, but they are
designed not to impose unequal or unnecessary restrictions upon anyone, but to
promote, with as little individual inconvenience as possible, the general
good." (Per Field, J., in Barbier v. Connolly). It need not be emphasized
that the principles underlying what is known as police power in the United
States of America are not peculiar to that country, but are recognized in every
modern civilized State. Professor Willis dealing with the question of
classification in exercise of police power makes the following observations :—
"There is no rule for determining when
classification for the police power is reasonable. It is a matter for judicial
determination, but in determining the question of reasonableness the Courts
must find some economic, political or other social interest to be secured, and
some relation of the classification to the objects sought to be accomplished.
In doing this the Courts may consider matters of common knowledge, matters of
common report, the history of the times, and to sustain it they will assume
every state of facts which can be conceived of as existing at the time of
legislation. The fact that only one person or one object or one business or one
locality is affected is not proof of denial of the equal protection of the laws
For such proof it must be shown that there is no reasonable basis for the
classification." (Page 580 of "Constitutional Law", 1st Edition,
by Professor Willis).
In this particular case,
the Government initially took control of the Sholapur Company by means of an
Ordinance (Ordinance No. II of 1950), of which the preamble runs as follows :—
"Whereas on account of
mismanagement and neglect a situation has arisen in the. affairs of the
Sholapur Spinning and Weaving Company, Limited, which has prejudicially
affected the production of an essential commodity' and has caused serious
unemployment amongst a certain section of the community ;
And whereas an emergency
has arisen which renders it necessary to make special provision for the proper
management and administration of the aforesaid company;
Now,
therefore………………………"
In the course of the
Parliamentary debate, reference was made to the fact that the country was
facing an acute cloth shortage, and one of the reason which apparently
influenced the promulgation of the Ordinance and the passing of the Act was
that the mismanagement of the company had gravely affected the production of an
essential commodity. The facts relating to the mismanagement of this Mill were
carefully collected and the mischief caused by the sudden closing of the Mill
to the shareholders as well as to the general public were fully taken into
consideration. Therefore, it seems to me that to say that one particular Mill
has been arbitrarily and unreasonably selected and subjected to discriminatory
treatment would be an entirely wrong proposition.
Article 14 of the
Constitution, as already stated, lays down an important fundamental right,
which should be closely and vigilantly guarded, but, in construing it, we
should not adopt a doctrinaire approach which might choke all beneficial
legislation.
The facts to which I have
referred are to be found in a public document, and, though some of them may
require further investigation forming as they do part of a one-sided version,
yet they furnish good prima facie grounds for the exercise of the utmost
caution in deciding this case and for not departing from the ordinary rule as
to the burden of proof. In the last resort, this petition can be disposed of on
the simple ground that the petitioner has not discharged the onus which lies
upon him, and I am quite prepared to rest my judgment on this ground alone.
I think that the petitioner
has failed to make out any case for granting the writs or directions asked for,
and the petition should therefore be dismissed with cost.
Patanjali Sastri, J.—This is an application under article 32 of the
Constitution seeking relief against alleged infringement of certain fundamental
rights of the petitioner.
The petitioner is a
shareholder of the Sholapur Spinning and Weaving Co. Ltd., Sholapur, in the
State of Bombay, (hereinafter referred to as "the company"). The
authorised share capital of the company consisted of 1,590 fully paid up
ordinary shares of Rs. 1,000 each, 20 fully paid up ordinary shares of Rs. 500
each and 32,000 partly paid up redeemable cumulative preference shares of Rs.
100 each of which Rs. 50 only was paid up. Of these, the petitioner held one
ordinary share in his own name and 80 preference shares which, however, having
been pledged with the Bank of Baroda Ltd., now stand registered in the Bank's
name.
The company was doing
flourishing business till disputes arose recently between the management and
the employees, and in or about August, 1949, the Mills were temporarily closed
and the company, Which was one of the largest producers of cotton textiles,
ceased production. Thereupon, the Governor-General intervened by promulgating
on the 9th January, 1950, an Ordinance called the Sholapur Spinning and Weaving
Company (Emergency Provisions) Ordinance (II of 1950), which empowered the
Government of India to take over the control and management of the company and
its properties and effects by appointing their own directors and to delegate
all or any of their powers to the Provincial Government. In exercise of the
powers thus delegated, the Government of Bombay appointed respondents 3 to 9 as
directors to take charge of the management and administration of the properties
and affairs of the company. Subsequently, on 10th April, 1950, the Ordinance
was repealed and was replaced by an Act of Parliament containing similar
provisions, namely the Sholapur Spinning and Weaving Company (Emergency
Provisions) Act (XXVIII of 1950) (hereinafter referred to as the “impugned
Act").
The petitioner complains
that the impugned Act and the action of the Government of Bombay pursuant
thereto have infringed the fundamental rights conferred on him by articles 14,
19 and 31 of the Constitution, with the result that the enactment is
unconstitutional and void, and the interference by the Government in the
affairs of the company is unauthorised and illegal. He accordingly seeks relief
by way of injunction and mandamus against the Union of India and the State of
Bombay impleaded as respondents 1 and 2 respectively in these proceedings and
against respondents 3 to 9 who are now in management as already stated. The
company is impleaded pro forma as the 10th respondent.
Before discussing the
issues involved, it is necessary to examine the relevant provisions of the
impugned Act in order to see in what manner and to what extent the petitioner's
rights have been affected thereby. The preamble to the repealed Ordinance
stated that "on account of mismanagement and neglect a situation has
arisen in the affairs of the Sholapur Spinning and Weaving Company, Limited,
which has prejudicially affected the production of an essential commodity and
has caused serious unemployment amongst a certain section of the community and
that an emergency has arisen which renders it necessary to make special
provision for the proper management and administration of the aforesaid
company." This preamble was not reproduced in the impugned Act. Section 3
empowers the Central Government to appoint as many persons as it thinks fit to
be directors of the company "for the purpose of taking over its management
and administration." Section 4 states the effect of the order appointing
directors to be that (1) the old directors shall be deemed to have vacated
their office, (2) the contract with the managing agents shall be deemed to have
been terminated, (3) that the properties and effects of the company shall be
deemed to be in the custody of the new directors who are to be "for all
purposes" the directors of the company and "shall alone be entitled
to exercise all the powers of the directors of the company whether such powers
are derived from the Companies Act or from the memorandum or articles of
association or otherwise." Section 5 defines the powers of the new
directors. They are to manage the business of the company "subject to the
control of the Central Government" and shall have the power to raise funds
offering such security as they think fit, to carry out necessary repairs to the
machinery or other property in their custody and to employ the necessary
persons and define the necessary conditions of their service. Section 12
provides for the restoration of the management to directors nominated by the
shareholders when the purpose of the Government's intervention has been
fulfilled. Section 13 is important and reads thus:
"13.
Application of the Companies
Act.—(1) Notwithstanding anything contained in the Companies Act or in the
memorandum or articles of association of the Company—
(a) it shall not be lawful for the shareholders of the Company or any
other person to nominate or appoint any person to be a Director of the Company;
(b) no resolution passed by any meeting of the shareholders of the
Company shall be given effect to unless approved by the Central Government;
(c) no proceeding for the winding up of the Company or for the
appointment of a receiver in respect thereof shall be in any Court unless by or
with the sanction of the Central Government.
(2) Subject to the provisions contained in
sub-section (1) and to the other provisions of this Act, and subject to such
exceptions, restrictions and limitations as the Central Government may, by
notified order, specify, the Companies Act shall continue to apply to the
Company in the same manner as it applied thereto before the issue of the
notified order under Section 3."
By Section 14 the
provisions of the Act are to have effect "notwithstanding anything
inconsistent therewith contained in any other law or in any instrument having
effect by virtue of any law other than this Act." Section 16 provides for
delegation of powers to the Government of Bombay to be exercised subject to the
directions of the Central Government, and Section 17 bars suits or other
proceedings against the Central Government or the Government of Bombay or any
director “for any damage caused or likely to be caused by anything which is in
good faith done or intended to be done in pursuance of this Act."
As a result of these provisions
all the properties and effects of the company passed into the absolute power
and control of the Central Government or its delegate the Government of Bombay,
and the normal functioning of the company, as a corporate body came to an end.
The shareholders have been reduced to the position of interested, if helpless,
onlookers while the business is carried on against their will and, may be, to
their disadvantage by the Government's nominees. The declared purpose of this
arrangement was, according to the preamble of the repealed Ordinance to keep up
the production of an essential commodity and to avert serious unemployment
amongst a certain section of the community.
The question accordingly
arises whether the impugned Act, which thus affects the petitioner and his
co-shareholders, while leaving untouched the shareholders of all other
companies, including those engaged in the production of essential commodities,
denies to the petitioner the equal protection of the laws under article 14 of
the Constitution, The correct approach to this question is first to see what
rights have been conferred or protection extended to persons similarly
situated. The relevant protection is to be found in the provisions of the
Indian Companies Act which regulates the rights and obligations of the
shareholders of incorporated companies in India. Section 21 of that Act assures
to the shareholders the protection of the stipulations contained in the
memorandum and articles of association by constituting them a binding contract,
so that neither the company nor the shareholders have the power of doing
anything inconsistent therewith. The basic right of the shareholders to have
their undertaking managed and conducted by the directors of their own choice is
ensured by Section 83B. Their right to exercise control and supervision over
the management by the directors by passing resolutions at their general meeting
is regulated by various provisions of the Act. The important safeguard of
winding up the company in certain unfavourable circumstances either through
Court or by the shareholders themselves voluntarily is provided for in Sections
162 and 203. All these rights and safeguards, on the faith of which the
shareholders embark their money in their undertaking, are abrogated by the impugned
Act in the case of the shareholders of this company alone. In fact, the Central
Government is empowered to exclude, restrict or limit the operation of any of
the provisions of the Companies Act in relation to this company. It is thus
plain that the impugned Act denies to the shareholders of this particular
company the protection of the law relating to incorporated joint stock
companies in this country as embodied in the Companies Act and is prima facie
within the inhibition of article 14.
It is argued, however, that
article 14 does not make it incumbent on the Legislature always to make laws
applicable to all persons generally, and that it is open to the Legislature to
classify persons and things and subject them to the operation of a particular
law according to the aims and objects which that law is designed to secure. In
the present case, Parliament, it was said, came to the conclusion on the
materials placed before them, that the affairs of the company were being
grossly mismanaged so as to result in the cessation of production of an
essential commodity and serious unemployment amongst a section of the
community. In view of the detriment thus caused to public economy, it was
competent for Parliament to enact a measure applicable to this company and its
shareholders alone, and Parliament must be the Judge as to whether the evil
which the impugned Act was designed to remedy prevailed to such an extent in
this company as to call for special legislation. Reliance was placed in support
of this argument on certain American decisions dealing with the equal
protection clause of the Fourteenth Amendment of the Federal Constitution. It
is, however, unnecessary to discuss those decisions here, for it is undeniable
that equal protection of the laws cannot mean that all laws must be quite
general in their character and application. A legislature empowered to make
laws on a wide range of subjects must of necessity have the power of making
special laws to attain particular
objects and must, for that purpose, possess large powers of distinguishing and
classifying the persons or things to be brought under the operation of such
laws, provided the basis of such classification has a just and reasonable
relation to the object which the legislature has in view. While, for instance,
a classification in a law regulating labour in mines or factories may be based
on age or sex, it may not be based on the colour of one's skin. It is also true
that the class of persons to whom a law is made applicable may be large or
small, and the degree of harm which has prompted the enactment of a particular
law is a matter within the discretion of the law-makers. It is not the province
of the court to canvass the legislative judgment in such matters. But the issue
here is not whether the impugned Act was ill-advised or not justified by the
facts on which it was based, but whether it transgresses the explicit
constitutional restriction on legislative power imposed by article 14.
It
is obvious that the legislation is directed solely against a particular company
and shareholders and not against any class or category of companies and no
question, therefore, of reasonable legislative classification arises. If a law
is made applicable to a class of persons or things and the classification is
based upon differentia having a rational relation to the object sought to be
attained, it can be no objection to its constitutional validity that its
application is found to affect only one person or thing. For instance, a law
may be passed imposing certain restrictions and burdens on joint stock
companies with a share capital of, say, Rs. 10 crores and upwards, and it may
be found that there is only one such company for the time being to which the
law could be applied. If other such companies are brought into existence in
future, the law would apply to them also, and no discrimination would thus be
involved. But the impugned Act, which selects this particular company and
imposes upon it and its shareholders burdens and disabilities on the ground of
mismanagement and neglect of duty on the part of those charged with the conduct
of its undertaking, is plainly discriminatory in character and is, in my
judgment, within the constitutional inhibition of article 14. Legislation based
upon mismanagement or other misconduct as the differentia and made applicable
to a specified individual or corporate body is not far removed from the
notorious parliamentary procedure formerly employed in Britain of punishing
individual delinquents by passing bills of attainder, and should not, I think,
receive judicial encouragement.
It
was next urged that the burden of proving that the impugned yet is
unconstitutional lay on the petitioner, and that, inasmuch as he has failed to adduce any evidence to show that the
selection of this company and its shareholders for special treatment under the
impugned Act was arbitary, the application must fail. Whilst all reasonable
presumption must undoubtedly be made in support of the constitutional validity
of a law made by a competent legislature, the circumstances of the present case
would seem, to my mind, to exclude such presumption. Hostile discrimination is
writ large over the face of the impugned Act and it discloses no grounds for
such legislative intervention. For all that appears no compelling public interests
were involved. Even the preamble to the original Ordinance was omitted. Nor did
respondents 1 and 2 file any counter-statement in this proceeding explaining
the circumstances which led to the enactment of such an extraordinary measure.
There is thus nothing in the record even by way of allegation which the
petitioner need take steps to rebut. Supposing, however, that the impugned Act
was passed on the same grounds as were mentioned in the preamble to the
repealed Ordinance, namely, mismanagement and neglect prejudicially affecting
the production of an essential commodity and causing serious unemployment
amongst a section of the community, the petitioner could hardly be expected to
assume the burden of showing, not that the company's affairs were properly
managed, for that is not his case, but that there were also other companies
similarly mismanaged, for that is what, according to the respondents, he should
prove in order to rebut the presumption of constitutionality. In other words,
he should be called upon to establish that this company and its shareholders
were arbitrarily singled out for the imposition of the statutory disabilities.
How could the petitioner discharge such a burden? Was he to ask for an
investigation by the Court of the affairs of other industrial concerns in India
where also there were strikes and lockouts resulting in unemployment and
cessation of production of essential commodities ? Would those companies be
willing to submit to such an investigation ? And even so, how is it possible to
prove that the mismanagement and neglect which is said to have prompted the
legislation in regard to this company was prevalent in the same decree in other
companies ? In such circumstances, to cast upon the petitioner a burden of
proof which it is as needless for him to assume as it is impracticable to
discharge is to lose sight of the realities of the case.
Lastly, it was argued that
the constitutionality of a statute could not be impugned under article 32
except by a person whose rights were infringed by the enactment, and that,
inasmuch as there was no infringement of the individual right of a shareholder,
even assuming that there was an injury to the company as a corporate body, the
petitioner was not entitled to apply for relief under that article. Whatever
validity the argument may have in relation to the petitioner's claim based on
the alleged invasion of his right of property under article 31, there can be
little doubt that, so far as his claim based on the contravention of article 14
is concerned, the petitioner is entitled to relief in his own right. As has
been pointed out already, the impugned Act deprives the shareholders of the
company of important rights and safeguards which are enjoyed by the
shareholders of other joint stock companies in India under the Indian Companies
Act. The petitioner is thus denied the equal protection of the laws in his
capacity as a shareholder, and none the less so because the other shareholders
of the company are also similarly affected. The petitioner is therefore
entitled to seek relief under article 32 of the Constitution.
In this view it becomes
unnecessary to consider the questions raised under articles 19 and 31 of the
Constitution.
In the result, I would
allow the application.
Mukherjea, J.—This is application presented by one Chiranjilal
Chowdhuri, a shareholder of the Sholapur Spinning and Weaving Co. Ltd.,
(hereinafter referred to as the company), praying for a writ of mandamus and
certain other reliefs under article 32 of the Constitution. The company, which
has its registered, office within the State of Bombay and is governed by the
provisions of the Indian Companies Act, was incorporated with an authorised
capital of Rs. 48 lakhs divided into 1,590 fully paid up ordinary shares of Rs.
100 each, 20 fully paid up ordinary shares of Rs. 500 each and 32,000 partly
paid up cumulative preference shares of Rs. 100 each. The present paid up
capital of the company is Rs. 32 lakhs, half of which is represented by the
fully paid up ordinary shares and the other half by the partly paid up
cumulative preference shares. The petioner states in his petition that he holds
in his own right three ordinary shares and eighty preference shares in tree
company, though according to his own admission the preference shares do not stand
in his name but have been registered in the name of the Bank of Baroda Ltd.,
with which the shares are pledged. According to the respondents, the petitioner
is the registered holder of one single ordinary share in the company.
It appears that on July 27,
1949, the directors of the company gave a notice to the workers that the Mills
would be closed, and pursuant to that notice, the Mills were in fact closed on
the 27th of August following. On January 9, 1950, the Governor-General of India
promulgated an Ordinance which purported to make special provisions for the
proper management and administration of the company. It was stated in the
preamble to the Ordinance that "on account of mismanagement and neglect, a
situation has arisen in the affairs of the Sholapur Spinning and Weaving
Company Limited which has prejudicially affected the production of an essential
commodity and has caused serious unemployment amongst a certain section of the
community," and it was on account of the emergency arising from this
situation that the promulgation of the Ordinance was necessary. The provisions
of the Ordinance, so far as they are material for our present purpose, may be
summarised as follows :
Under Section 3 of the
Ordinance, the Central Government may, at any time, by notified order, appoint
as many persons as it thinks fit, to be directors of the company for the
purpose of taking over its management and administration and may appoint one of
such directors to be the Chairman. Section 4 provides that on the issue of a
notified order under Section 3 all the directors of the company holding 'office
as such immediately before the issue of the order shall be deemed to have
vacated their offices, and any existing contract of management between the
company and any managing agent thereof shall be deemed to have terminated. The
directors thus appointed shall be for all purposes the directors of the company
duly constituted under the Companies Act and shall alone be entitled to
exercise all the powers of the directors of the company. The powers and the
duties of the directors are specified in Section 5 and this section inter alia
empowers the directors to vary or cancel, with the previous sanction of the
Central Government, any contract or agreement entered into between the company
and any other person if they are satisfied that such contract or agreement is
detrimental to the interests of the company. Section 10 lays down that no
compensation for premature termination of any contract could be claimed by the
managing agent or any other contracting party. It is provided by Section 12
that so long as the management by the statutory directors continues, the
shareholders would be precluded from nominating or appointing any person to be
a director of the company and any resolution passed by them will not be
effective unless it is approved of by the Central Government. This section lays
down further that during this period no proceeding for winding up of the
company, or for appointment of a receiver in respect thereof could be instituted
in any court, unless it is sanctioned by the Central Government, and the
Central Government would be competent to impose any restrictions or limitations
as regards application of the provisions of the Indian Companies Act to the
affairs of the company. The only other material provision is that contained in Section 15, under which the
Central Government may, by notified order,
direct that all or any of the powers exercisable by it under this Ordinance may
be exercised by the. Government of Bombay.
In accordance with the
provisions of Section 15 mentioned above, the Central Government, by
notification issued on the same day that the Ordinance was promulgated,
delegated all its powers exercisable under the Ordinance to the Government of
Bombay. On the next day, the Government of Bombay appointed respondents 3 to 7
as directors of the company in terms of Section 3 of the Ordinance. On the 2nd
of March, 1950, respondent No. 9 was appointed a director and respondent No. 5
having resigned his office in the meantime, respondent No. 8 was appointed in
his place. On the 7th of April, 1950, the Ordinance was repealed and an Act was
passed by the Parliament of India, known as the Sholapur Spinning and Weaving
Company (Emergency Provisions) Act, which re-enacted almost in identical terms
all the provisions of the Ordinance and provided further that all actions taken
and orders made under the Ordinance shall be deemed to have been taken or made
under the corresponding provisions of the Act. The preamble to the Ordinance was
not however reproduced in the Act.
The petitioner in his
petition has challenged the constitutional validity of both the Ordinance and
the Act. As the Ordinance is no longer in force and all its provisions have
been incorporated in the Act, it will not be necessary to deal with or refer to
the enactments separately. Both the Ordinance and the Act have been attacked on
identical grounds and it is only necessary to enumerate briefly what these
grounds are.
The main ground put forward
by the petitioner is that the pith and substance of the enactments is to take
possession of and control over the Mills of the company which are its valuable
assets and such taking of possession of property is entirely beyond the powers
of the Legislature. The provisions of the Act, it is said, amount to
deprivation of property of the shareholders as well as of the company within
the meaning of article 31 of the Constitution and the restrictions imposed on
the rights of the shareholders in respect to the shares held by them constitute
an unjustifiable interference with their rights to hold property and as such
are void under article 19(1)(f). It is urged that there was no public purpose
for which the Legislature could authorise the taking possession or acquisition
of property and such acquisition or taking of possession without payment of
compensation is in violation of the fundamental rights guaranteed by article
31(2) of the Constitution, It is said further that the enactment denies to the
company and its shareholders equality before the law, and equal protection of
laws and thus offends against the provisions of article 14 of the Constitution.
The only other material point raised is that the legislation is beyond the
legislative competency of the Parliament and is not covered by any of the items
in the legislative lists.
On these allegations, the
petitioner prays, in the first instance, that it may be declared that both the
Act and the Ordinance are ultra vires and void and an injunction may be issued
restraining the respondents from exercising any of the powers conferred upon
them by the enactments. The third and the material prayer is for issuing a writ
of mandamus, "restraining the respondents 1 to 9 from exercising or
purporting to exercise any powers under the said Ordinance or Act and from in
any manner interfering with the management or affairs of the company under
colour of or any purported exercise of any powers under the Ordinance or the
Act." The other prayers are not material for our purpose.
Before I address myself to
the merits of this application it will be necessary to clear up two preliminary
matters in respect to which arguments were advanced at some lengths from the
Bar. The first point relates to the scope of our enquiry in the present case
and raises the question as to what precisely are the matters that have to be
investigated and determined on this application of the petitioner. The second
point relates to the form of relief that can be prayed for and granted in a
case of this description.
Article 32(1) of the Constitution
guarantees to everybody the right to move this Court by appropriate proceeding,
for enforcement of the fundamental rights which are enumerated in Part III of
the Constitution. Clause (2) of the article lays down that the Supreme Court
shall have the power to issue directions or orders or writs including writs in
the nature of habeas corpus, mandamus, prohibition, quo waranto and certiorari
which ever may be appropriate for the enforcement of any of the rights
conferred by this Part.
Thus anybody who complains
of infraction of any of the fundamental rights guaranteed by the Constitution,
is at liberty to move the Supreme Court for the enforcement of such rights and
this Court has been given the power to make orders and issue directions or
writs similar in nature to the prerogative writs of English law as might be
considered appropriate in particular cases. The fundamental rights guaranteed
by the Constitution are available not merely to individual citizens but to
corporate bodies as well except where the language of the provision or the
nature of the right compels the inference that they are applicable only to natural persons. An incorporated
company, therefore, can come up to this Court for enforcement of its
fundamental rights and so may the individual shareholders to enforce their own;
but it would not be open to an individual shareholder to complain of an act
which affects the fundamental rights of the company except to the extent that
it constitutes an infraction of his own rights as well. This follows logically
from the rule of law that a corporation has a distinct legal personality of its
own with rights and capacities, duties and obligations separate from those of
its individual members. As the rights are different and inhere in different
legal entities, it is not competent to one person to seek to enforce the rights
of another except where the law permits him to do so. A well known illustration
of such exception is furnished by the procedure that is sanctioned in an
application for a writ of habeas corpus. Not only the man who is imprisoned or
detained in confinement but any person, provided he is not an absolute
stranger, can institute proceedings to obtain a writ of habeas corpus for the
purpose of liberating another from an illegal imprisonment.
The
application before us under article 32 of the Constitution is on behalf of an
individual shareholder of the company. Article 32, as its provisions show, is
not directly concerned with the determination of constitutional validity of
particular legislative enactments. What it aims at, is the enforcing of
fundamental rights guaranteed by the Constitution, no matter whether the
necessity for such enforcement arises out of an action of the executive or of
the legislature. To make out a case under this article, it is incumbent upon
the petitioner to establish not merely that the law complained of is beyond the
competence of the particular legislature as not being covered by any of the
items in the legislative lists, but that it affects or invades his fundamental
rights guaranteed by the Constitution, of which he could seek enforcement by an
appropriate writ or order. The rights that could be enforced under article 32
must ordinarily be the rights of the petitioner himself who complains of
infraction of such rights and approaches the court for relief. This being the
position, the proper subject of our investigation would be what rights, if any,
of the petitioner as a shere holder of the company have been violated by the
impugned legislation. A discussion of the fundamental rights of the company as
such would be outside the purview of our enquiry. It is settled law that in
order to redress a wrong done to the company, the action should prima facie be
brought by the company itself. It cannot be said that this course is not
possible in the circumstances of the present case. As the law is alleged to be
unconstitutional, it is open to the old
directors of the company who have been ousted from their position by reason of
the enactment to maintain that they are directors still in the eye of law, and
on that footing the majority of shareholders can also assert the rights of the
company as such. None of them, however, have come forward to institute any
proceeding on behalf of the company. Neither in form nor in substance does the
present application purport to be one made by the company itself. Indeed, the
company is one of the respondents, and opposes the petition.
As regards the other point,
it would appear from the language of article 32 of the Constitution that the
sole object of the article is the enforcement of fundamental rights guaranteed
by the Constitution. A proceeding under this article cannot really have any
affinity to what is known as a declaratory suit. The first prayer made in the
petition seeks relief in the shape of a declaration that the Act is invalid and
is apparently inappropriate to an application under article 32, while the
second purports to be framed for a relief by way of injunction consequent upon
the first. As regards the third prayer, it has been contended by Mr. Joshi, who
appears for one of the respondents, that having regard to the nature of the
case and the allegations made by the petitioner himself, the prayer for a writ
of mandamus in the form in which it has been made, is not tenable. What is
argued is that a writ of mandamus can be prayed for, for enforcement of
statutory duties or to compel a person holding a public office to do or forbear
from doing something which is incumbent upon him to do or forbear from doing
under the provisions of any law. Assuming that the respondents in the present
case are public servants, it is said that the statutory duties which it is
incumbent upon them to discharge are precisely the duties which are laid down
in the impugned Act itself. There is no legal obligation on their part to
abstain from exercising the powers conferred upon them by the impeached
enactment which the Court can be called upon to enforce. There is really not
much substance in this argument, for according to the petitioner the impugned Act
is not valid at all and consequently the respondents cannot take their stand on
this very Act to defeat the application for a writ in the nature of a mandamus.
Any way, article 32 of the Constitution gives us very wide discretion in the
matter of framing our writs to suit the exigencies of particular cases, and the
application of the petitioner cannot be thrown out simply on the ground that
the proper writ or direction has not been prayed for.
Proceeding now to the
merits of the case, the first contention that has been pressed before us by the
learned counsel for the petitioner is that the effect of the Sholapur Spinning
and Weaving Company Limited (Emergency Provisions) Act, has been to take away
from the company and its shareholders, possession of property and other
interests in commercial undertaking and vest the same in certain persons who
are appointed by the State, and the exercise of whose powers cannot be directed
or controlled in any way by the shareholders. As the taking of possession is
not for any public purpose and no provision for compensation has been made by
the law which authorises it, such law, it is said, violates the fundamental
rights guaranteed under article 31 of the Constitution.
To appreciate the contention,
it would be convenient first of all to advert to the provisions of the first
two clauses of article 31 of the Constitution. The first clause of article 31
lays down that "no person shall be deprived of his property save by
authority of law." The second clause provides: "No property, movable
or immovable, including any interest in, or in any company owning, any
commercial or industrial undertaking, shall be taken possession of or acquired
for public purposes under any law authorising the taking of such possession or
such acquisition, unless the law provides for compensation for the property
taken possession of or acquired and either fixes the amount of the
compensation, or specifies the principles on which, and the manner in which,
the compensation is to be determined and given.
It is a right inherent in
every sovereign to take and appropriate private property belonging to
individual citizens for public use. This right, which is described as eminent
domain in American law, is like the power of taxation, an off-spring of
political necessity, and it is supposed to be based upon an implied reservation
by Government that private property acquired by its citizens under its
protection may be taken or its use controlled for public benefit irrespective
of the wishes of the owner. Article 31(2) of the Constitution prescribes a
two-fold limit within with such superior right of the State should be
exercised. One limitation imposed upon acquisition or taking possession of
private property which is implied in the clause is that such taking must be for
public purpose. The other condition is that no property can be taken, unless
the law which authorises such appropriation contains a provision for payment of
compensation in the manner laid down in the clause. So far as article 31(2) is
concerned, the substantial question for our consideration is whether the
impugned legislation authorises any act amounting to acquisition or taking
possession of private property within the meaning of the clause.
It cannot be disputed that
acquisition means and implies the acquiring of the entire title of the
expropriated owner, whatever the nature or extent be that title might be. The
entire bundle of rights which were vested in the original holder would pass on
acquisition to the acquirer leaving nothing in the former. In taking possession
on the other hand, the title to the property admittedly remains in the original
holder, though he is excluded from possession or enjoyment of the property.
Article 31(2) of the Constitution itself makes a clear distinction between
acquisition of property and taking possession of it for a public purpose,
though it places both of them on the same footing in the sense that a
legislation authorising either of these acts must make provision for payment of
compensation to the displaced or expropriated holder of the property. In the
context in which the word "acquisition" appears in article 31(2), it
can only mean and refer ta acquisition of the entire interest of the previous
holder by transfer of title and I have no hesitation in holding that there is
no such acquisition either as regards the property of the company or of the
shareholders in the present case. The question, therefore, narrows down to this
as to whether the legislation in question has authorised the taking of
possession of any property or interest belonging to the petitioner.
It is argued by the learned
Attorney-General that the taking of possession as contemplated by article 31(2)
means the taking of possession of the entire bundle of rights which the
previous holder had, by excluding him from every part or item thereof. If the
original holder is still left to exercise his possession with regard to some of
the rights which were within the folds of his title, it would not amount to
taking possession of the property for purposes of article 31(2) of the
Constitution. Having laid down this proposition of law, the learned
Attorney-General has taken us through the various provisions of the impugned
Act and the contention advanced by him substantially is, that neither the
company nor the shareholders have been dispossessed from their property by
reason of the enactment. As regards the properties of the company, the
directors, who have been given the custody of the property, effects and
actionable claims of the company, are, it is said, to exercise their powers not
in their own right but as agents of the company, whose beneficial interest in
all its assets has not been touched or taken away at all. No doubt the affairs
of the company are to be managed by a body of directors appointed by the State
and not by the company, but this, it is argued, would not amount to taking
possession of any property or interest within the meaning of article 31(2). Mr.
Chari, on the other hand, has contended on behalf of the petitioner that after
the management is taken over by the statutory directors, it cannot be said that
the company still retains possession or control over its property and assets.
Assuming that this State-management was imposed in the interests of the shareholders
themselves and that the statutory directors are acting as the agents of the
company, the possession of the statutory directors could not, it is argued, be
regarded in law as possession of the company so long as they are bound to act
in obedience to that dictates of the Central Government and not of the company
itself in the administration of its affairs. Possession of an agent, it is
said, cannot juridically be the possession of the principal, if the agent is to
act not according to the commands or dictates of the principal, but under the
direction of an exterior authority.
There can be no doubt that
there is force in this contention, but as I have indicated at the outset, we
are not concerned in this case with the larger question as to how far the inter-position
of this statutory management and control amounts to taking possession of the
property and assets belonging to the company. The point for our consideration
is a short one and that is whether by virtue of the impugned legislation any
property or interest of the petitioner himself, as a shareholder of the
company, has been taken possession of by the State or an authority appointed
under it, as contemplated by article 31(2) of the Constitution.
The petitioner as a
shareholder has undoubtedly an interest in the company. His interest is
represented by the share he holds and the share is a movable property according
to the Indian Companies Act with all the incidents of such property attached to
it. Ordinarily, he is entitled to enjoy the income arising from the shares in
the shape of dividends; the share like any other marketable commodity can be
sold or transferred by way of mortgage or pledge. The holding of the share in
his name gives him the right to vote at the election of directors and thereby take
a part, though indirectly, in the management of the company's affairs. If the
majority of shareholders sides with him, he can have a resolution passed which
would be binding on the company and lastly, he can institute proceedings for
winding up of the company which may result in a distribution of the net assets
among the shareholders.
It cannot be disputed that
the petitioner has not been dispossessed in any sense of the term of the shares
he holds. Nobody has taken the shares away from him. His legal and beneficial
interest in respect to the shares he holds is left intact. If the company
declares dividend he would be entitled to the same. He can sell or otherwise
dispose of the shares at any time at his option. The impugned Act has affected
him in this way that his right of voting at the election of directors has been kept in
abeyance so long as the management by the statutory
directors continues; and as a result of that, his right to participate in the
management of the company has been abridged to that extent. His rights to pass
resolutions or to institute winding up proceedings have also been restricted
though they are not wholly gone; these rights can be exercised only with the
consent or sanction of the Central Government. In my opinion, from the facts
stated above, it cannot be held that the petitioner has been dispossessed from
the property owned by him. I may apply the test which Mr. Chari himself
formulated If somebody had taken possession of the petitioner's shares and was
clothed with the authority to exercise all the powers which could be exercised
by the holder of the shares under law then even if he purported to act as the
petitioner's agent and exercise these powers for his benefit, the possession of
such person would not have been the petitioner's possession if he was bound to
act not under the directions of the petitioner or in obedience to his commands
but under the directions of some other person or authority. There is no doubt
whatsoever that that is not the position in the present case. The State has not
usurped the shareholder's right to vote or vested it in any other authority.
The State appoints directors of its own choice but that it does not in exercise
of the shareholder's right to vote but in exercise of the powers vested in it
by impugned Act. Thus there has been no dispossession of the shareholders from
their right of voting at all. The same reasoning applies to the other rights of
the shareholders spoken of above, namely, their right of passing resolutions
and of presenting winding up petition. These rights have been restricted
undoubtedly and may not be capable of being exercised to the fullest extent as
long as the management by the State continues. Whether the restrictions are
such as would bring the case within the mischief of article 19(1)(f) of the
Constitution, I will examine presently; but I have no hesitation in holding
that they do not amount to dispossession of the shareholders from these rights
in the sense that the rights have been usurped by other people who are
exercising them in place of the displaced shareholders.
In the view that I have
taken it is not necessary to discuss whether we can accept as sound the
contention put forward by the learned Attorney-General that the word
''property" as used in article 31 of the Constitution connotes the entire
property, that is to say the totality of the rights which the ownership of the
object connotes. According to Mr. Setalvad, if a shareholder is not deprived of
the entirety of his rights which he is entitled to exercise by reason of his
being the owner or holder of the share and some rights, however insignificant
they might be, still remain in him, there cannot be any dispossession as
contemplated by article 31(2). It is difficult, in my opinion, to accept the
contention formulated in such broad terms. The test would certainly be as to
whether the owner has been dispossessed substantially from the rights held by
him or the loss is only with regard to some minor ingredients of the
proprietary right. It is relevant to refer in this connection to an observation
made by Rich, J., in a Full Bench decision of the High Court of Australia,
(Minister of State for the Army v. Dalxiel), where the question arose as to
whether the taking of exclusive possession of a property for an indefinite
period of time by the Commonwealth of Australia under Reg. 54 of the National
Security Regulation amounted to acquisition of property within the meaning of
placitum 31, section 51, of Commonwealth Constitution. The majority of the Full
Bench answered the question in the affirmative and the main reason upon which
the majority decision was based is thus expressed in the language of Rich, J.:
"Property, in relation to land, is a bundle of
rights exercisable with respect to the land. The tenant of an unencumbered
estate in fee simple in possession has the largest possible bundle. But there
is nothing in the placitum to suggest that the legislature was intended to be
at liberty to free itself from the restrictive provisions of the placitum by
taking care to seize something short of the whole bundle owned by the person
whom it was expropriating."
It is not, however,
necessary for my purpose to pursue the matter any further, as in my opinion
there has been no dispossession of the rights of a shareholder in the present
case.
Mr. Chari in course of his
opening relied exclusively on clause (2) of article 31 of the Constitution.
During his reply, however, he laid some stress on clause (1) of the article as
well and his contention seems to be that there was deprivation of property in
the present case in contravention of the terms of this clause. It is difficult
to see what exactly is the contention of the learned counsel and in which way
it assists him for purposes of the present case. It has been argued by the
learned Attorney-General that clause (1) of article 31 relates to a power
different from that dealt with under clause (2). According to him, what clause
(1) contemplates is confiscation or distruction of property in exercise of what
are known as police powers in American law, for which no payment of
compensation is necessary. I do not think it proper for purposes of the present
case to enter into a discussion on this somewhat debatable point which has been
raised by the learned Attorney-General. In interpreting the provisions of our
Constitution, we should go by the plain words used by the constitution-makers
and the importing of expressions like "police power", which is a term
of variable and indefinite connotation in American law can only make the task
of interpretation more difficult. It is also not necessary to express any
opinion as to whether clauses (1) and (2) of article 31 relate to exercise of
different kinds of powers or they are to be taken as cumulative provisions in
relation to the same subject-matter, namely, compulsory acquisition of
property. If the word "deprived" as used in clause (1) connotes the
idea of destruction or confiscation of property obviously no such thing has happened
in the present case. Again if clauses (1) and (2) of article 31 have to be read
together and "deprivation" in clause (1) is given the same meaning as
compulsory acquisition in clause (2), clause (1), which speaks neither of
compensation nor of public purpose, would not by itself, and apart from clause
(2), assist the petitioner in any way. If the two clauses are read
disjunctively, the only question that may arise in connection with clause (1)
is whether or not the deprivation of property is authorised by law. Mr. Chari
has raised a question relating to the validity of the legislation on the ground
of its not being covered by any of the items in the legislative list and to
this question I would advert later on; but apart from this, clause (1) of
article 31 of the Constitution seems to me to be altogether irrelevant for
purposes of the petitioner's case.
This leads me to the
consideration of the next point raised by Mr. Chari, namely, whether these
restrictions offend against the provision of the article 19(1)(f) of the
Constitution.
Article 19(1) of the
Constitution enumerates the different forms of individual liberty, the
protection of which is guaranteed by the Constitution. The remaining clauses of
the article prescribe the limits that may be placed upon these liberties by
law, so that they may not conflict with public welfare or general morality.
Article 19(1)(f) guarantees to all citizens "the right to acquire, hold or
dispose of property." Any infringement of this provision would amount to a
violation of the fundamental rights, unless it comes within the exceptions
provided for in clause (5) of the article. That clause permits the imposition
of reasonable restrictions upon the exercise of such right either in the
interests of general public or for the protection of interests of any scheduled
tribe. Two questions, therefore, arise in this connection: first, whether the
restrictions that have been imposed upon the rights of the petitioner as a
shareholder in the company under the Sholapur Act amounts to infringement of
his right to acquire, hold or dispose of property within the meaning of article
19(1)(f) of the Constitution, and secondly, if they do interfere with such
rights, whether they are covered by the exceptions laid down in clause (5) of
the article.
So far as the first point
is concerned, it is quite clear that there is no restriction whatsoever upon
the petitioner's right to acquire and dispose of any property. The shares,
which he holds, do remain his property and his right to dispose of them is not fettered
in any way. If to "hold" a property means to possess it, there is no
infringement of this right either for as I have stated already, the acts
complained of by the petitioner do not amount to dispossession of him from any
property in the eye of law. It is argued that "holding" includes
enjoyment of all benefits that are ordinarily attached to the ownership of the
peoperty. The enjoyment of the fruits of a property is undoubtedly an incident
of ownership. The pecuniary benefit, which a shareholder derives from the
shares he holds, is the dividend and there is no limitation on the petitioner's
right in this respect. The petitioner undoubtedly has been precluded from
exercising his right of voting at the election of directors so long as the
statutory directors continue to manage the affairs of the company. He cannot
pass an effective resolution in concurrence with the majority of shareholders
without the consent or sanction of the Central Government and without such
sanction, there is also a disability on him to institute any winding up
proceedings in a court of law.
In my opinion, these are
rights or privileges which are appurtenant to or flow from the ownership of
property, but by themselves and taken independently they cannot be reckoned as
property capable of being acquired, held or disposed of as is contemplated by
article 19(1)(f) of the Constitution. I do not think that there has been any
restriction on the rights of a shareholder to hold, acquire or dispose of its
share by reason of the impugned enactment and consequently article 19(1)(f) of
the Constitution is of no assistance to the petitioner. In this view, the other
point does not arise for consideration, but I may state here that even if it is
conceded for argument's sake that the disabilities imposed by the impugned
legislation amount to restrictions on proprietary right, they may very well be
supported as reasonable restraints imposed in the interests of general public,
viz., to secure the supply of a commodity essential to the community and to prevent
a serious unemployment amongst a section of the people. They are, therefore,
protected completely by clause (5) of article 19. This disposes of the second
point raised by Mr. Chari.
The next point urged on behalf of the petitioner
raises an important question of constitutional law which turns upon the
construction of article 14 of the Constitution. It is urged by the learned
counsel for the petitioner that the Sholapur Act is a piece of discriminatory
legislation which offends against the provision of article 14 of the
Constitution. Article 14 guarantees to all persons in the territory of India
equality before the law and equal protection of the laws and its entire object,
it is said, is to prevent any person or class of persons from being singled out
as a special subject of discriminatory legislation. It is pointed out that the
law in this case has selected one particular company and its shareholders and
has taken away from them the right to manage their own affairs, but the same
treatment has not been meted out to all other companies or shareholders
situated in an identical manner.
Article 14 of the
Constitution, it may be noted, corresponds to the equal protection clause in
the Fourteenth Amendment of the American Constitution which declares that
"no State shall deny to any person within its jurisdiction the equal
protection of laws." We have been referred in course of the arguments on
this point by the learned counsel on both sides to quite a number of cases
decided by the American Supreme Court, where questions turning upon the
construction of the "equal protection" clause in the American
Constitution came up for consideration. A detailed examination of these reports
is neither necessary nor profitable for our present purpose but we think we can
cull a few general principles from some of the pronouncements of the American
Judges which might appear to us to be consonant with reason and help us in
determining the true meaning and scope of article 14 of our Constitution.
I may state here that so
far as the violation of the equality clause in the Constitution is concerned,
the petitioner, as a shareholder of the company, has as much right to complain
as the company itself, for his complaint is that apart from the discrimination
made against the company, the impugned legislation has discriminated against
him and the other shareholders of the company as a group vis a vis the
shareholders of all other companies governed by the Indian Companies Act who
have not been treated in a similar way. As the discriminatory treatment has
been in respect to the shareholders of this company alone, any one of the
shareholders, whose interests are thus vitally affected, has a right to
complain and it is immaterial that there has been no discrimination inter se
amongst the shareholders themselves.
It must be admitted that
the guarantee against the denial of equal protection of laws does not mean that
identically the same rules of law should be made applicable to all persons
within the territory of India in spite of differences of circumstances and
conditions. As has been said by the Supreme Court of America " equal
pretection of laws is a pledge of the protection of equal laws," (see Yick
Wo v. Hopkins), and
this means "subjection to equal laws applying alike to all in the same situation."
(vide Southern Railway Company v. Greene). In other words, there should be no
discrimination between one person and another if as regards the subject-matter
of the legislation their position is the same. I am unable to accept the
argument of Mr. Chari that a legislation relating to one individual or one
family or one body corporate would per se violate the guarantee of the equal
protection rule. There can certainly be a law applying to one person or to one
group of persons and it cannot be held to be unconstitutional if it is not
discriminatory in its character. (See Willis Constitutional Law, p. 580). It
would be bad law "if it arbitrarily selects one individual or a class of
individuals, one corporation or a class of corporations and visits a penalty
upon them, which is not imposed upon others guilty of like delinquency".
(See Gulf, C. & S.F. Railway Co. v. Ellis), The legislature undoubtedly has
a wide field of choice in determining and classifying the subject of its laws,
and if the law deals alike with all of a certain class, it is normally not
obnoxious to the charge of denial of equal protection; but the classification
should never be arbitrary. It must always rest upon some real and substantial
distinction bearing a reasonable and just relation to the things in respect to
which the classification is made; and classification made without any
substantial basis should be regarded as invalid. (See Southern Railway Co. v.
Greene).
The question is whether
judged by this test the impugned Act can be said to have contravened the
provision embodied in article 14 of the Constitution. Obviously the Act
purports to make provisions which are of a drastic character and against the
general law of the land as laid down in the Indian Companies Act, in regard to
the administration and management of the affairs of one company in Indian
territory. The Act itself gives no reason for the legislation but the
Ordinance, which was a precursor of the Act, expressly stated why the
legislation was necessary. It said that owing to mismanagement and neglect, a
situation had arisen in the affairs of the company which prejudicially affected
the production of an essential commodity and caused serious unemployment
amongst a certain section of the community. Mr. Chari's contention in substance
is that there are various textile companies in India situated in a similar
manner as the Sholapur Company, against which the same charges could be brought
and for the control and regulation of which all the reasons that are mentioned
in the preamble to the Ordinance could be applied. Yet, it is said, the
legislation has been passed with regard to this one company alone. The argument
seems plausible at first sight, but on a closer examination I do not think that
I can accept it as sound. It must be conceded that the Legislature has a wide
discretion in determining the subject matter of its laws. It is an accepted
doctrine of the American Courts and which seems to me to be well founded on
principle, that the presumption is in favour of the constitutionality of an
enactment and the burden is upon him who attacks it to show that there has been
a transgression of constitutional principles. As was said by the Supreme Court
of America in Middleton v. Texas Power and L. Co., "it must be presumed
that a Legislature understands and correctly appreciates the needs of its own
people, that its laws are directed to problems made manifest by experience and
that its discriminations are based upon adequate grounds." This being the
position, it is for the petitioner to establish facts which would prove that
the selection of this particular subject by the Legislature is unreasonable and
based upon arbitrary grounds. No allegations were made in the petition and no
materials were placed before us to show as to whether there are other companies
in India which come precisely under the same category as the Sholapur Spinning
and Weaving Company and the reasons for imposing control upon the latter as
mentioned in the preamble to the Ordinance are applicable to them as well. Mr.
Chari argues that these are matters of common knowledge of which we should take
judicial notice. I do not think that this is the correct line of approach. It
is quite true that the Legislature has, in this instance, proceeded against one
company only and its shareholders ; but even one corporation or a group of
persons can be taken as a class by itself for the purposes of legislation,
provided it exhibits some exceptional features which are not possessed by
others. The courts should prima facie lean in favour of constitutionality and
should support the legislation if it is possible to do so on any reasonable
ground, and it is for the party who attacks the validity of the legislation to
place all materials before the court which would go to show that the selection
is arbitrary and unsupportable. Throwing out of vague hints that there may be
other instances of similar nature is not enough for this purpose. We have not
even before us any statement on oath by the petitioner that what has been
alleged against this particular company may be said against other companies as
well. If there was any such statement, the respondents could have placed before
us the whole string of events that led up to the passing of this legislation.
If we are to take judicial notice of the existence of similar other badly
managed companies, we must take notice also of the facts which appear in the
Parliamentary proceedings in connection with this legislation which have been
referred to by my learned brother Fazl Ali, J., in his judgment and which would
go to establish that the facts connected with this corporation are indeed
exceptional and the discrimination that has been made can be supported on just
and reasonable, grounds. I purposely refrain from alluding to these facts or
basing my decision thereon as we had no opportunity of investigating them
properly during the course of the hearing. As matters stand, no proper
materials have been placed before us by either side and as I am unable to say
that the legislature cannot be supported on any reasonable ground, I think it
to be extremely risky to overthrow it on mere suspicion or vague conjectures.
If it is possible to imagine or think of cases of other companies where similar
or identical conditions might prevail, it is also not impossible to conceive of
something "peculiar1" or "unusual" to this corporation
which led the legislature to intervene in its affairs. As has been laid down by
the Supreme Court of America, " the Legislature is free to recognise degrees
of harm and it may confine its restrictions to those cases where the need is
deemed to be the clearest." (Vide Radice v. New York). We should bear in
mind that a corporation, which is engaged in production of a commodity vitally
essential to the community, as a social character of its own, and it must not
be regarded as the concern primarily or only of those who invest their money in
it. If its possibilities are large and it had a prosperous and useful career
for a long period of time and is about to collapse not for any economic reason
but through sheer perversity of the controlling authority, one cannot say that
the legislature has no authority to treat it as a class by itself and make
special legislation applicable to it alone in the interests of the community at
large. The combination of circumstances which are present here may be of such
unique character as could not be existing in any other institution. But all
these, I must say, are matters which require investigation on proper materials
which we have not got before us in the present case. In these circumstances I
am constrained to hold that the present application must fail on the simple
ground that the petitioner made no attempt to discharge the prima jacie burden
that lay upon him and did not place before us the materials upon which a proper
decision on the point could be arrived at. In my opinion, therefore, the attack
on the legislation on the ground of the denial of equal protection of law
cannot succeed.
The only other thing that
requires to be considered is the argument of Mr. Chari that the law in question
is invalid as it is not covered by any of the items in the legislative list. In
my opinion, this argument has no substance. What the law has attempted to do is
to regulate the affairs of this company by laying down certain special rules
for its management and administration. It is fully covered by item No. 43 of
the Union List which speaks inter alia of “incorporation, regulation and
winding up of trading corporations."
The result is that the
application fails and is dismissed with costs.
Das, J.—As I have arrived at a conclusion different from that
reached by the majority of this Court, I consider it proper, out of my respect
for the opinion of my learned colleagues, to state the reasons for my
conclusions in some detail.
On January 9, 1950, the
Governor-General of India, acting under Section 42 of the Government of India
Act, 1935, promulgated an Ordinance, being Ordinance No. II of 1950, concerning
the Sholapur Spinning and Weaving Co. Ltd., (hereafter referred to as the said
company). The preambles and the provisions of the Ordinace have been referred
to in the judgment just delivered by Mukherjea, J., and need not be
recapitulated by me in detail. Suffice it to say that the net result of the
Ordinance was that the managing agents of the said company were dismissed, the
directors holding office at the time automatically vacated their office, the
Government was authorised to nominate directors, the rights of the shareholders
of this company were curtailed in that it was made unlawful for them to
nominate or appoint any director, no resolution passed by them could be 'given
effect to without the sanction of the Government and no proceeding for winding
up could be taken by them without such sanction, and power was given to the
Government to further modify the provisions of the Indian Companies Act in its
application to the 'said company.
On the very day that the
Ordinance was promulgated the Central Government acting under Section 15
delegated all its powers to the Government of Bombay. On January 10, 1950, the
Government of Bombay appointed respondents Nos. 3 to 7 as the new directors. On
March 2, 1950, respondent No. 5 having resigned, respondent No. 8 was appointed
a director in his place on the same day respondent No. 9 was also appointed as
a director. In the meantime the new Constitution had come into force on January
26, 1950. On February 7, 1950, the new directors passed a resolution
sanctioning a call for Rs. 50 on the preference shares. Thereupon a suit, being
Suit No. 438 of 1950, was filed in the High Court of Bombay by one Dwarkadas
Shrinivas against the new directors challenging the validity of the Ordinance
and the right of the new directors to make the call. Bhagwati, J., who tried
the suit held that the Ordinance was valid and dismissed the suit. An appeal
(Appeal No. 48 of 1950) was taken from that decision which was dismissed by a
Division Bench (Chagla, C.J, and Gajendragadkar, J.) on August 29, 1950. In the
meantime, on April 7, 1950, the Ordinance was replaced by Act No. XXVIII of
1950. The Act substantially reproduced the provisions of the Ordinance except
that the preambles to the Ordinance were omitted. On May 29, 1950, the present
petition was filed by one Chiranjilal Chaudhari.
The petitioner claims to be
a shareholder of the said company holding 80 preference shares and 3 ordinary
shares. The preference shares, according to him, stand in the name of the Bank
of Baroda to whom they are said to have been pledged. As those preference
shares are not registered in the name of the petitioner he cannot assert any
right as holder of those shares. According to the respondents, the petitioner
appears on the register as holder of only one fully paid up ordinary share. For
the purposes of this application, then, the petitioner's interest in the said
company must be taken as limited to only one fully paid up ordinary share. The
respondents are the Union of India, the State of Bombay and the new directors
besides the company itself. The respondent No. 5 having resigned, he is no
longer a director and has been wrongly impleaded as respondent. The reliefs
prayed for are that the Ordinance and the Act are ultra vires and void, that
the Central Government and the State Government and the directors be restrained
from exercising any powers under the Ordinance or the Act, that a writ of
mandamus be issued restraining the new directors from exercising any powers
under the Ordinance or the Act or from in any manner interfering with the
management of affairs of the company under colour of or in purported exercise
of any powers under the said Ordinance or Act.
The validity of the
Ordinance and the Act has been challenged before us on the following
grounds:—(i) that it was not within the legislative competence (a) of the
Governor-General to promulgate the Ordinance, or (b) of the Parliament to enact
the Act, and (ii) that the Ordinance and the Act infringe the fundamental
rights of the shareholders as well as those of the said company and are,
therefore, void and inoperative under article 13.
Re. (i)—The present
application has been made by the petitioner under article 32 of the
Constitution. Sub-section (1) of that article guarantees the right to move this
Court by appropriate proceedings for the enforcement of the rights conferred by
Part III of the Constitution. Sub-section (2) empowers this Court to issue
directions or orders or writs, including certain specified writs, whichever may
be appropriate, for
the enforcement of any of the rights conferred by that Part, It is clear, therefore,
that article 32 can only be invoked for the
purpose of the enforcement of the fundamental rights. Article 32 does not
permit an application merely for the purpose of agitating the competence of the
appropriate legislature in passing any particular enactment unless the
enactment also infringes any of the fundamental rights. In this case the claim
is that the fundamental rights have been infringed and, therefore, the question
of legislative competence may also be incidentally raised on this application.
It does not appear to me, however, that there is any substance in this point
for, in my opinion, entry 33 of List I of the Seventh Schedule to the
Government of India Act, 1935, and the corresponding entry 43 of the Union List
set out in the Seventh Schedule to the Constitution clearly support these
pieces of legislation as far as the question of legislative competency is
concerned. Sections 83A and 83B of the Indian Campanies Act can only be
supported as valid on the ground that they regulate the management of companies
and are, therefore, within the said entry. Likewise, the provisions of the
Ordinance and the Act relating to the appointment of directors by the
Government and the curtailment of the shareholders' rights as regards the
election of directors, passing of resolutions, giving directions with respect
to the management of the company and to present a winding up petition are
matters touching the management of the company and, as such, within the
legislative competence of the appropriate legislative authority. In my
judgment, the Ordinance and the Act cannot be held to be invalid on the ground
of legislative incompetency of the authority promulgating or passing the same.
Re. (ii)—The fundamental
rights said to have been infringed are the right to acquire, hold and dispose
of property guaranteed to every citizen by article 19(1)(f) and the right to
property secured by article 31. In Gopalan's case I pointed out that the rights
conferred by article 19(1)(a) to (e) and (g) would be available to the citizen
until he was, under article 21, deprived of his life or personal liberty
according to procedure established by law and that the right to property
guaranteed by article 19(1)(f) would likewise continue until the owner was,
under article 31, deprived of such property by authority of law. Therefore, it
will be necessary to consider first whether the shareholder of the company has
been deprived of his or its property by authority of law tinder article 31 for,
if lie or it has been so deprived, then the question of his or its fundamental
right under article 19(1)(f) will not arise.
The relevant clauses of
article 31 run as follows :—
"(1) No
person shall be deprived of his property save by authority of law.
(2) No property, movable or immovable including any
interest in, or in any company owning, any commercial or industrial
undertaking, shall be taken possession of or acquired for public purposes under
any law authorising the taking of such possession or such acquisition, unless
the law provides for compensation for the property taken possession of or
acquired and either fixes the amount of the compensation, or specifies the
principles on which, and the manner in which, the compensation is to be
determined and given."
Article 31 protects every
person, whether such person is a citizen or not, and it is wide enough to cover
a natural person as well as an artificial person. Whether or not, having regard
to the language used in article 5, a corporation can be called a citizen and as
such entitled to the rights guaranteed under article 19, it is quite clear that
the corporation is protected by article 31, for that article protects every
"person" which expression certainly includes an artificial person.
The contention of the
petitioner is that the Ordinance and the' Act have infringed his fundamental
right to property as a shareholder in the said company. Article 31, like
article 19(1)(f), is concerned with "property." Both the articles are
in the same chapter and deal with fundamental rights. Therefore, it is
reasonable to say that the word "property" must be given the same
meaning in construing those two articles. What, then, is the meaning of the
word "property"? It may mean either the bundle of rights which the
owner has over or in respect of a thing, tangible or intangible, or it may mean
the thing itself over or in respect of which the owner may exercise those
rights. It is quite clear that the Ordinance or the Act has not deprived the
shareholder of his share itself. The share still belongs to the shareholder. He
is still entitled to the dividend that may be declared. He can deal with or
dispose of the share as he pleases. The learned Attorney-General contends that
even if the other meaning of the word "property" is adopted, the
shareholder has not been deprived of his "property" understood in
that sense, that is to say he has not been deprived of the entire bundle of
rights which put together constitute his "property." According to him
the "property" of the shareholder, besides and apart from his right
to elect directors, to pass resolutions giving directions to the directors and
to present a winding up petition, consists in his right to participate in the
dividends declared on the profits made by the working of the company and, in
case of winding up, to participate in the surplus that may be left after
meeting the winding up expenses and paying the creditors. Those last mentioned
rights he points out, have not been touched at all and the shareholder can yet
deal with or dispose of his shares as he pleases and is still entitled to
dividends if and when declared Therefore, concludes the learned
Attorney-General, the shareholder cannot complain that he has been deprived of
his "property", for the totality of his rights have not been taken
away. The argument thus formulated appears to me to be somewhat too wide, for
it will then permit the legislature to authorise the State to aquire or take
possession, without any compensation, of almost the entire rights of the owner
leaving to him only a few subsidiary rights. This result could not, in my
opinion, have been intended by our Constitution. As said by Rich, J., in
Minister for State for the Army v. Dalziel while dealing with Section 31(XXXI)
of the Australian Constitution:—
"Property, in relation
to land, is a bundle of rights exercisable with respect to the land. The tenant
of an unencumbered estate in fee simple in possession has the largest possible
bundle. But there is nothing in the placitum to suggest that the legislature
was intended to be at liberty to free itself from the restrictive provisions of
the placitum by taking care to seize something short of the whole bundle owned
by the person whom it is expropriating."
The learned Judge then
concluded as follows at page 286 :—
“It would, in my opinion,
be wholly inconsistent with the language of the placitum to hold that whilst
preventing the legislature from authorising the acquisition of a citizen's full
title except upon just terms, it leaves it open to the legislature to seize
possession and enjoy the full fruits of possession indefinitely, on any terms
it chooses or upon no terms at all."
In my judgment the question
whether the Ordinance or the Act has deprived the shareholder of his "
property " must depend, for its answer, on whether it has taken away the
substantial bulk of the rights constituting his "property". In other
words, if the rights taken away by the Ordinance or the Act are such as would
render the rights left untouched illusory and practically valuless; then there
can be no question that in effect and substance the "property" of the
shareholder has been taken away by the Ordinance or the Act. Judged by this
test can it be said that the right to dispose of the share and the right to
receive dividend, if any, or to participate in the surplus in the case of
winding up that have been left to the shareholder are illusory or practically
valueless, because the right to control the management by directors elected by
him, the right to pass resolutions giving directions to the directors and the
right to present a winding up petition have, for the time being, been suspended
? , I think not. The right still possessed by the shareholder are the most
important of the rights constituting his "property", although certain
privileges incidental to the ownership have been put in abeyance for the time
being. It is, in my opinion, impossible to say that the Ordinance or the Act
has deprived the shareholder of his "property" in the sense in which
that word is used in article 19(1)(f) and article 31. The curtailment of the
incidental privileges, namely, the right to elect directors, to pass
resolutions and to apply for winding up may well be supported as a reasonable
restraint on the exercise and enjoyment of the shareholder's right of property
imposed in the interests of the general public under article 19(5), namely, to
secure the supply of an essential commodity and to prevent unemployment.
Learned counsel for the
petitioner, however, urges that the Ordinance and the Act have infringed the
shareholder's right to property in that he has been deprived of his valuable
right to elect directors, to give directions by passing resolutions and, in
case of apprehension of loss, to present a petition for the winding up of the
company. These rights, it is urged, are by themselves "property" and
it is of this "property" that the shareholder is said to have been
deprived by the State under a law which does not provide for payment of
compensation and "which is, as such, an infraction of the shareholder's
fundamental right to property under article 31(2). Two questions arise on this
argument. Are these rights "property" within the meaning of the two
articles I have mentioned ? These rights, as already stated, are, no doubt,
privileges incidental to the ownership of the share which itself is property,
but it cannot, in my opinion, be said that these rights, by themselves, and
apart from the share are, "property" within the meaning of those
articles, for those articles only regard that as "property" which can
by itself be acquired, disposed of or taken possession of. The right to vote
for the election of directors, the right to pass resolutions and the right to
present a petition for winding up are personal rights flowing from the
ownership of the share and cannot by themselves and apart from the share be
acquired or disposed of or taken possession of as contemplated by those
articles. The second question is assuming that these rights are by themselves
"property", what is the effect of the Ordinance and the Act on such
"property". It is nobody's case that the Ordinance or the Act has
authorised any acquisition by the State of this "property" of the
shareholder of that there has in fact been any such acquisition. The only
question then is whether this "property" of the shareholder, meaning
thereby only the rights mentioned above, has been taken possession of by the
State. It will be noticed that by the Ordinance or the Act these particular
rights of the shareholder have not been entirely taken away for he can still
exercise these rights subject of course, to the sanction of the Government.
Assuming, however, that the fetters placed on these rights are tantamount to
the taking away of the rights altogether, there is nothing to indicate that the
Ordinance or the Act has, after taking away the rights from the shareholder,
vested them in the State or in any other person named by it so as to enable the
State or any other person to exercise those rights of the shareholder. The
Government undoubtedly appoints directors under the Act, but such appointment
is made in exercise of the powers vested in the Government by the Ordinance or
the Act and not in exercise of the shareholder's right. As already indicated,
entry 43 in the Union List authorises Parliament to make laws with respect,
amongst other things, to the regulation of trading corporations. There was,
therefore, nothing to prevent Parliament from amending the Companies Act or
from passing a new law regulating the management of the company by providing
that the directors, instead of being elected by the shareholders, should be
appointed by the Government. The new law has undoubtedly cut down the existing
rights of the shareholder and thereby deprived the shareholder of his
unfettered right to appoint directors or to pass resolutions giving directions
or to present a winding up petition. Such deprivation, however, has not vested
the rights in the Government or its nominee. What has happened to the rights of
the shareholder is that such rights have been temporarily destroyed or kept in
abeyance. The result, therefore, has been that although the shareholder has
been for the time being deprived of his "property", assuming these
rights to be "property", such "property" has not been
acquired or taken possession of by the Government. If this be the result
brought about by the Ordinance and the Act, do they offend against the
fundamental rights guaranteed by article 31 ? Article 31(1) formulates the
fundamental right in a negative form prohibiting the deprivation of property except
by authority of law. It implies that a person may be deprived of his property
by authority of law. Article 31(2) prohibits the acquisition or taking
possession of property for a public purpose under any law, unless such law
provides for payment of compensation. It is suggested that clauses (1) and (2)
of article 31 deal with the same topic namely, compulsory acquisition or taking
possession of property, clause (2) being only an elaboration of clause (1).
There appear to me to be two objections to this suggestion. If that were the
correct view, then clause (1) must be held to be wholly redundant and clause
(2), by itself, would have been sufficient. In the next place, such a view
would exclude deprivation of property otherwise than by acquisition or taking
of possession. One can conceive of circumstance where the State may have to deprive a person
of his property without acquiring or taking possession of the same. For example, in any emergency,
in order to prevent a fire spreading, the authorities may have to demolish an
intervening building. This deprivation of property is supported in the United
States of America as an exercise of police power. This deprivation of property
is different from acquisition or taking of possession of property which goes by
the name of eminent domain in the American law. The construction suggested
implies that our Constitution has dealt with only the law of eminent domain,
but has not provided for deprivation of property in exercise of police powers.
I am not prepared to adopt such construction, for I do not feel pressed to do
so by the language used in article 31. On the contrary the language of clause
(1) of article 31 is wider than that of clause (2), for deprivation of property
may well be brought about otherwise than by acquiring or taking possession of
it. I think clause (1) enunciates the general principle that no person shall be
deprived of his property except by authority of law, which, put in a positive
form, implies that a person may be deprived of his property, provided he is so
deprived by authority of law. No question of compensation arises under clause
(1). The effect of clause (2) is that only certain kinds of deprivation of
property, namely, those brought about by acquisition or taking possession of it
will not be permissible under any law, unless such law provides for payment of
compensation. If the deprivation of property is brought about by means other
than acquisition or taking possession of it, no compensation is required,
provided that such deprivation is by authority of law. In this case, as already
stated, although the shareholder has been deprived of certain rights, such
deprivation has been by authority of law passed by a competent legislative
authority. This deprivation having been brought about otherwise than by
acquisition or taking possession of such rights, no question of compenstion can
arise and, therefore, there can be no question of the infraction of
fundamenatal rights under article 31(2). It is clear, therefore, that so far as
the shareholder is concerned there has been no infringement of his fundamental
rights under article 19(1)(f) or Article 31, and the shareholder cannot
question the constitutionality of the Ordinance or the Act on this ground.
As
regards the company it is contended that the Ordinance and the Act by
empowering the State to dismiss the managing agent, to discharge the directors
elected by the shareholders and to appoint new directors have in effect
authorised the State to take possession of the undertaking and assets of the
company through the new directors appointed by it without paying any
compensation and, therefore, such law is repugnant to article 31(2) of our
Constitution. It is, however, urged by the
learned Attorney-General that the Mills and all other assets now in the
possession and custody of the new directors who are only servants or agents of
the said company are, in the eye of the law, in the possession and custody of
the company and have not really been taken possession of by the State. This
argument, however, overlooks the fact that in order that the possession of the
servant or agent may be juridically regarded as the possession of the master or
principal, the servant or agent must be obedient to, and amenable to the directions
of, the master or principal. If the master or principal has no hand in the
appointment of the servant or agent or has no control over him or has no power
to dismiss or discharge him, as in this case, the possession of such servant or
agent can hardly, in law, be regarded as the possession of the company. (See
Elements of. Law by Mark by, 6th Edition, para. 371, page 192). In this view of
the matter there is great force in the argument that the property of the
company has been taken possession of by the State through directors who have
been appointed by the State in exercise of the powers conferred by the
Ordinance and the Act and who are under the direction and control of the State
and this has been done without payment of any compensation. The appropriate
legislative authority was no doubt induced to enact this law, because, as the
preamble to the Ordinance stated, on account of mismanagement and neglect, a
situation had arisen in the affairs of the company which had prejudicially
affected the production of an essential commodity and had caused serious
unemployment amongst a certain section of the community but, as stated by
Holmes, J., in Pennsylvania Coal Co. v. Mahon, "A strong public desire to
improve the public condition is not enough to warrant achieving the desire by a
shorter cut than the constitutional way of paying for the change." Here,
therefore, it may well be argued that the property of the company having been
taken possession of by the State in exercise of powers conferred by a law which
does not provide for payment of any compensation, the fundamental right of the
company has, in the eye of the law, been infringed.
If the fundamental right of
the company has been infringed, at all, who can complain about such
infringement ? Prima facie the company would be the proper person to come
forward in vindication of its own rights. It is said that the directors having
been dismissed, the company cannot act. This, however, is a misapprehension,
for if the Act be void on account of its being unconstitutional, the directors
appointed by the shareholders have never in law been discharged and are still
in the eye of the law the directors of the company, and there was nothing to
prevent them from taking proceedings in the name of the company at their own
risk as to costs. Seeing chat the directors have not come forward to make the
application on behalf of the company and in its name the question arises
whether an individual Shareholder can complain. It is well settled in the
United States that no one but those whose rights are directly affected by a law
can raise the question of the constitutionality of that law. Thus in McCabe v.
Atchison which arose out of a suit filed by five Negros against five railway
companies to restrain them from making any distinction in service on account of
race pursuant to an Oklahama Act known as "The Separate Coach Law,"
in upholding the dismissal of the suit.
Hughes, J., observed :—
"It is an elementary
principle that in order to justify the granting of this extraordinary relief,
the complainants' need of it and the absence of an adequate remedy at law must
clearly appear. The complainant cannot succeed because someone else may be
hurt. Nor does it make any difference that other persons who may be injured are
persons of the same race or occupation. It is the fact, clearly established, of
injury to the complainant—not to others—which justifies judicial
interference."
In that case there was no
allegation that anyone of the plaintiffs had ever traöelled on any one of the
rail roads or had ever requested any accommodation in any of the sleeping cars
or that such request was refused. The same principle was laid down in Jeffrey
Manufacturing Co. v. Blagg, Hendrick v. Maryland and Newark Natural Gas and
Fuel Co. v. The City of Newark. In each of these cases the Court declined to
permit the person raising the question of constitutionality to do so on the
ground that his rights were not directly affected by the law or Ordinance in
question. On the other hand, in Truax v. Raich and in Buchanan v. Warley, the.
Court allowed the plea because in both the cases the person raising it was
directly affected. In the first of the two last mentioned cases an Arizona Act
of 1914 requiring employers employing more than five workers to employ not less
than eighty per cent, native born citizens was challenged by an alien who had
been employed as a cook in a restaurant. That statute made a violation of the
Act by an employer punishable. The fact that the employment was at will or that
the employer and not the employee was subject to prosecution did not prevent
the employee from raising the question of constitutionality because the
statute, if enforced, would compel the employer to discharge the employee and,
therefore, the employee was directly affected by the statute. In the second of
the two last mentioned cases a city Ordinance prevented the occupation of a
plot by a coloured person in a block where a majority of the residences were
occupied by white persons. A white man sold his property in such a block to a
Negro under a contract which provided that the .purchaser should not be
required to accept a deed unless he would have a right, under the laws of the
city, to occupy the same as a residence. The vendor sued for specific
performance and contended that the Ordinance was unconstitutional. Although the
alleged denial of constitutional rights involved only the rights of coloured
persons and the vendor was a white person yet it was held that the vendor was
directly affected, because the Courts below, in view of the Ordinance, declined
to enforce his contract and thereby directly affected his right to sell his
property. It is, therefore, clear that the constitutional validity of a law can
be challenged only by a person whose interest is directly affected by the law.
The question then arises whether the infringement of the company's rights so
directly affects its shareholders as to entitle any of its shareholders to
question the constitutional validity of the law infringing the company's
rights. The question has been answered in the negative by the Supreme Court of
the United States in Darnell v. Indiana. In that case the owner of a share in a
Tennessee Corporation was not allowed to complain that an Indiana law
discriminated against Tennessee Corporations in that it did not make any
allowance, as it did in the case of Indiana Corporations, where the Corporation
had property taxed within the State. This is in accord with the well
established legal principle that a corporation is a legal entity capable of
holding property and of suing or being sued and the corporators are not, in
contemplation of law, the owners of the assets of the corporation. In all the
cases referred to above the question of constitutionality was raised in
connection with the equal protection clause in the Fourteenth Amendment of the
American Federal Constitution. If such be the requirements of law in connection
with the equal protection clause which corresponds to our article 14, it
appears to me to follow that only a person who is the owner of the property can
raise the question of constitutionality, under article 31, of a law by which he
is so deprived of his property. If direct interest is necessary to permit a
person to raise the question of constitutionality under article 14, a direct interest
in the property will, I apprehend, be necessary to entitle a person to
challenge a law which is said to infringe the right to that property under
article 31. In my opinion, although a shareholder may, in a sense, be
interested to see that the company of which he is a shareholder is not deprived
of its property he cannot, as held in Darnell v. Indiana, be heard to complain,
in his own name and on his own behalf, of the infringement of the fundamental
right to property of the company, for, in law, his own right to property has
not been infringed as he is not the owner of the company's properties. An
interest in the company owning an undertaking is not an interest in the
undertaking itself. The interest in the company which owns an undertaking is
the "property" of the shareholder under article 31(2), but the
undertaking is the property of the company and not that of the shareholder and
the latter cannot be said to have a direct interest in the property of the
company. This is the inevitable result of attributing a legal personality to a
corporation. The proceedings for a writ in the nature of a writ of habeas
corpus appear to be somewhat different for the rules governing those
proceedings permit, besides the person imprisoned, any person, provided he is
not an utter stranger, but is at least a friend or relation of the imprisoned
person, to apply, for that particular writ. But that special rule does not
appear to be applicable to the other writs which require a direct and tangible
interest in the applicant to support his application. This must also be the
case where the applicant seeks to raise the question of the constitutionality
of a law under articles 14, 19 and 31.
For the reasons set out
above the present petitioner cannot raise the question of constitutionality of
the impugned law under article 31. He cannot complain of any infringement of
his own rights as a shareholder, because his "property" has not been
acquired or taken possession of by the State although he has been deprived of
his right to vote and to present a winding up petition by authority of law. Nor
can he complain of an infringement of the company's right to property because
he is not, in the eye of law, the owner of the property in question and
accordingly not directly interested in it. In certain exceptional cases where
the company's property is injured by outsiders, a shareholder may, under the
English law, after making all endeavours to induce the persons in charge of the
affairs of the company to take steps, file a suit on behalf of himself and
other shareholders for redressing the wrong done to the company, but that
principle does not apply here, for this is not a suit, nor has it been shown
that any attempt was made by the petitioner to induce the old directors to take
steps, nor do these proceedings purport to have been taken by the petitioner on
behalf of himself and the other shareholders of the company.
The only other ground on
which the Ordinance and the Act have been challenged is that they infringe the
fundamental rights guaranteed by article 14 of the Constitution. "Equal
protection of the laws," as observed by Day, J., in Southern Railway Co.
v. Greane "means subjection to equal laws, applying alike to all in the
same situation."
The inhibition of the article that the State shall not deny to any person equality before the law or the equal
protection of the laws was designed to protect all persons against legislative
discrimination amongst equals and to prevent any person or class of persons
from being singled out as a special subject for discriminating and hostile
legislation. It does not, however, mean that every law must have universal
application for all persons are not, by nature, attainment or circumstances, in
the same position. The varying needs of different classes of persons often
require separate treatment and it is, therefore, established by judicial
decisions that the equal protection clause of the Fourteenth Amendment of the
American Constitution does not take away from the State the power to classify
persons for legislative purposes. This classification may be on different
bases. It may be geographical or according to objects or occupations or the
like. If law deals equally with all of a certain well-defined class it is not
obnoxious and it is not open to the charge of a denial of equal protection on
the ground that it has no application to other persons, for the class for whom
the law has been made is different from other persons and, therefore, there is
no discrimination amongst equals. It is plain that every classification is in
some degree likely to produce some inequality, but mere production of
inequality is not by itself enough. The inequality produced, in order to
encounter the challenge of the Constitution, must be "actually and
palpably unreasonable and arbitrary." Said Day, J., in Southern Railway
Co. v. Greane: "While reasonable classification is permitted, without
doing violence to the equal protection of the laws, such classification must be
based upon some real and substantial distinction, bearing a reasonable and just
relation to the things in respect to which such classification is imposed ; and
the classification cannot be arbitrarily made without any substantial basis.
Arbitrary selection, it has been said, cannot be justified by calling it
classification." Quite conceivably there may be a law relating to a single
individual if it is made apparent that, on account of some special reasons
applicable only to him and inapplicable to anyone else, that single individual
is a class by himself. In Middleton v. Texas Power and Light Co. it was pointed
out that there was a strong presumption that a legislature understood and
correctly appreciated the needs of its own people, that its laws were directed
to problems made manifest by experience and that the discriminations were based
upon adequate grounds. It was also pointed out in that case that the burden was
upon him who attacked a law for unconstitutionality. In Lindsley v. Natural
Carbonic Gas Co. it was also said that one who assailed the classification made
in a law must carry the burden of showing that it did not rest upon any
reasonable basis but was essentially arbitrary. If there is a classification,
the Court will not hold it invalid merely because the law might have been
extended to other persons who in some respects might resemble the class for
which the law was made, for the legislature is the best judge of the needs of
the particular classes and to estimate the degree of evil so as to adjust its
legislation according to the exigency found to exist. If, however, there is, on
the face of the statute, no classification at all or none on the basis of any
apparent difference specially peculiar to any particular individual or class
and not applicable to any other person or class of persons and yet the law hits
only the particular individual or class it is nothing but an attempt to
arbitrarily single out an individual or class for discriminating and hostile
legislation. The presumption in favour of the legislature cannot in such a case
be legitimately stretched so as to throw the impossible onus on the complainant
to prove affirmatively that there are other individuals or class of individuals
who also possess the precise amount of the identical qualities which are
attributed to him so as to form a class with him. As pointed out by Brewer, J.,
in Gulf C. & S.F. Railway Co. v. Ellis, while good faith and a knowledge of
existing conditions on the part of a legislature was to be presumed, yet to
carry that presumption to the extent of always holding that there must be some
undisclosed and unknown reason for subjecting certain individuals or
corporations to hostile and discriminating legislation was to make the
protecting clause a mere rope of sand, in no manner restraining State action.
The complaint of the
petitioner on this head is formulated in paragraph 8(iii) of the petition as
follows :—"The Ordinance denied to the company and its shareholders
equality before the law and equal protection of laws and was thus a violation
of article 14 of the Constitution. The power to make regulations relating to
trading corporations or the control of production or industries was a power
which consistently with article 14 could be exercised only generally or with
reference to a class and not with reference to a single company or to shareholders
of a single company". The Act is also challenged on the same ground in
paragraph 9 of the petition. The learned Attorney-General contends that the
petitioner as an individual shareholder cannot complain of discrimination
against the company. It will be noticed that it is not a case of a shareholder
complaining only about discrimination against the compay or fighting the battle
of the company but it is a case of a shareholder complaining of discrimination
against himself and other shareholders of this company. It is true that there
is no complaint of discrimination inter se the shareholders of this company but
the complaint is that the shareholders of this company, taken as a unit, have
been discriminated vis a vis the shareholders of other companies. Therefore,
the question as to the right of the shareholder to question the validity of a
law infringing the right of the company does not arise. Here the shareholder is
complaining of the infringement of his own rights and if such infringement can
be established I see no reason why the shareholder cannot come within article
32 to vindicate his own rights. The fact that these proceedings have been taken
by one single shareholder holding only one single fully paid-up sthare does not
appear to me to make any the least difference in principle. If this petitioner
has, by the Ordinance or the Act, been discriminated against and denied equal
protection of the law, his fundamental right has been infringed and his right
to approach this Court for redress cannot be made dependent on the readiness or
willingness of other shareholders whose rights have also been infringed to join
him in these proceedings or of the company to take substantive proceedings. To
take an example, if any law discriminates against a class, say the Punjabis,
any Punjabi may question the constitutionality of the law, without joining the
whole Punjabi community or without acting on behalf of all the Punjabis. To
insist on his doing so will be to put a fetter on his fundamental right under
article 32 which the Constitution has not imposed on him. Similarly, if any law
deprives a particular shareholder or the shareholders of a particular company
of the ordinary rights of shareholders under the general law for reasons not
particularly and specially applicable to him or them but also applicable to
other shareholders of other companies, such law surely offends against article
14 and any one so denied the equal protection of law may legitimately complain
of the infringement of his fundamental right and is entitled as of right to
approach this Court under article 32 to enforce his own fundamental right under
article 14, irrespective of whether any other person joins him or not.
To the charge of denial of
equal protection of the laws the respondents in the affidavit of Sri Vithal N.
Chandavarkar filed in opposition to the petition make the following reply
:—"With reference to paragraph 6 of the petition, I deny the soundness of
the submissions that on or from the 26th January, 1950, when the Constitution
of India came into force the said Ordinance became void under article 13(1) of
the Constitution or that the provisions thereof were inconsistent with the
provisions of Part III of the said Constitution or for any of the other grounds
mentioned in paragraph 8 of the said petition." In the whole of the
affidavit in opposition there is no suggestion as to why the promulgation of
the Ordinance or the passing of the Act was considered necessary at all or on
what principle or basis either of them was founded. No attempt has been made in
the affidavit to show that the Ordinance or the Act was based upon any
principle of classification at all or even that the particular company and its
shareholders possess any special qualities which are not to be found in other
companies and their shareholders and which, therefore, render this particular
company and its shareholders a class by themselves. Neither the affidavit in
opposition nor the learned Attorney-General in course of his arguments referred
to the statements of the objects and reasons for introducing the bill which was
eventually enacted or the Parliamentary debates as showing the reason why and
under what circumstances this law was made and, therefore, apart from the
question of their admissibility in evidence, the petitioner has had no
opportunity to deal with or rebut them and the same cannot be used against him.
The learned
Attorney-General takes his stand on the presumption that the law was founded on
a valid basis of classification, that its discriminations were based upon
adequate grounds and that the law was passed for safeguarding the needs of the
people and that, therefore, the onus was upon the petitioner to allege and
prove that the classification which he challenged did not rest upon any
reasonable basis but was essentially arbitrary. I have already said that if on
the face of the law there is no classification at all or, at 'any rate, none on
the basis of any apparent difference specially peculiar to the individual or
class affected by the law, it is only an instance of an arbitrary selection of
an individual or class for discriminating and hostile legislation and,
therefore, no presumption can, in such circumstances, arise at all. Assuming,
however, that even in such a case the onus is thrown on the complainant, there
can be nothing to prevent him from proving, if he can, from the text of the law
itself, that it is "actually and palpably unreasonable and arbitrary
" and thereby discharging the initial onus.
The Act is intituled as
" an Act to make special provision for the proper management and
administration of the Sholapur Spinning and Weaving Company, Limited."
There is not even a single preamble alleging that the Company was being
mismanaged at all or that any special reason existed which made it expedient to
enact this law. The Act, on its face, does not purport to make any
classification at all or to specify any special vice to which this particular
company and its shareholders are subject and which is not to be found in other
companies and their shareholders so as to justify any special treatment.
Therefore, this act, ex facie, is nothing but an arbitrary selection of this
particular company and its shareholders for discriminating and hostile
treatment and read by itself is palpably an infringement of Article 14 of the
Constitution.
The learned
Attorney-General promptly takes us to the preambles to the Ordinance which has
been replaced by the Act and suggests that the Act is based on the same
considerations on which the Ordinance was promulgated. Assuming that it is
right and permissible to refer to and utilise the preambles, do they alter the
situation ? The preambles were as follows :—
"Whereas on account of
mismanagement and neglect a situation has arisen in the affairs of the Sholapur
Spinning and Weaving Company, Limited, which has prejudicially affected the
production of an essential commodity and has caused serious unemployment
amongst a certain section of the community;
And whereas an emergency
has arisen which renders it necessary to make special provision for the proper
management and administration of the aforesaid Company :—"
The above preambles quite
clearly indicate that the justification of the Ordinance rested on
mismanagement and neglect producing certain results therein specified. It will
be noticed that apart from these preambles there is no material whatever before
us establishing or even suggesting that this Company and its shareholders have
in fact been guilty of any mismanagement or neglect. Be that as it may, the only
reason put forward for the promulgation of the Ordinance was mismanagement
resulting in falling off of production and in producing unemployment. I do not
find it necessary to say that mismanagement and neglect in conducting the
affairs of companies can never be a criterion or basis of classification for
legislative purposes. I shall assume that it is permissible to make a law
whereby all delinquent companies and their shareholders may be brought to book
and all companies mismanaging their affairs and the shareholders of such
companies may, in the interest of the general public, be deprived of their
right to manage the affairs of their companies. Such a classification made by a
law would bear a reasonable relation to the conduct of all delinquent companies
and shareholders and may, therefore, create no inequality, for the delinquent
companies and their share, holders form a separate class and cannot claim
equality of treatment with good companies and their shareholders who are their
betters. But a distinction cannot be made between the delinquent companies
inter se or between shareholders of equally delinquent companies and one set
cannot be punished for its delinquency while another set is permitted to
continue, or become, in like manner, delinquent without any punishment unless
there be some other apparent difference in their respective obligations and
unless there be some cogent reason why prevention of mismanagement is more
imperative in one instance than in the other. To do so will be nothing but an
arbitrary selection which can never be justified as a permissible
classification. I am not saying that this particular company and its
shareholders may not be guilty of mismanagement and negligence which has
brought about serious fall in production of an essential commodity and also
considerable unemployment. But if mismanagement affecting production and
resulting in unemployment is to be the basis of a classification for making a
law for preventing mismanagement and securing production and employment, the
law must embrace within its ambit all companies which now are or may hereafter
become subject to the vice. This basis of classification, by its very nature,
cannot be exclusively applicable to any particular company and its shareholders
but is capable of wider application and, therefore, the law founded on that
basis must also be wide enough so as to be capable of being applicable to
whoever may happen at any time to fall within that classification.
Mismanagement affecting protection can never be reserved as a special attribute
peculiar to a particular company or the shareholders of a particular company.
If it were permissible for the legislature to single out an individual or class
and to punish him or it for some delinquency which may equally be found in
other individuals or classes and to leave out the other individuals or classes
from the ambit of the law the prohibition of the denial of equal protection of
the laws would only be a meaning less and barren form of words. The argument
that the presumption being in favour of the legislature, the onus is on the
petitioner to show that there are other individuals or companies equally guilty
of mismanagement prejudicially affecting the production of an essential
commodity and causing serious unemployment amongst a certain section of the
community does not. in such circumstances, arise, for the simple reason that
here there has been no classification at all and, in any case, the basis of
classification by its very nature is much wider and cannot, in its application,
be limited only to this company and its shareholders and, that being so, there
is no reason to throw on the petitioner the almost impossible burden of proving
that there are other companies which are in fact precisely and in all
particulars similarly situated. In any event, the petitioner, in my opinion,
may well claim to have discharged the onus of showing that this company and its
shareholders have been singled out for discriminating treatment by showing that
the Act, on the face of it, has adopted a basis of classification which, by its
very nature, cannot be exclusively applicable to this company and its
shareholders but which may be equally applicable to other companies, and their
shareholders and has penalised this particular company and its shareholders, leaving
out other companies and their shareholders who may be equally guilty of the
alleged vice of mismanagement and neglect of the type referred to in the
preambles. In my opinion the legislation in question infringes the fundamental
rights of the petitioner and offends against article 14 of our Constitution.
The result, therefore, is
that this petition ought to succeed and the petitioner should have an order in
terms of prayer 3 of the petition with costs.
[1949] 19 COMP CAS 298 (ALL.)
HIGH COURT OF
v.
Chawla Bank Ltd.
MALIK, C.J.,
AND BHARGAVA,
J.
MAY
12, 1949
Gopi Nath Kunzru and B.L.
Chandra, for the Appellant.
S.S. Dhavan and P.L. Banerji, for
the Respondent.
Bhargava, J.—This is an appeal by Mohan Lal Huja and some
other creditors of the Chawla Bank, Ltd., which will hereafter be referred to
as the bank, against an order, dated 17th January, 1949, made by a learned
Judge of this Court, in exercise of the original company jurisdiction of the
Court, under Section 153 of the Companies Act (VII of
1913).
The Chawla Bank Ltd.
was incorporated in British India as a joint stock company, under the Indian
Companies Act in the year 1932, with its registered office at Bannu in the
As a result of the
partition the North-West Frontier Province and the western portion of the
Punjab, which formed part of British India, became part of
Some of the branches of the bank
were closed before 15th August, 1947, and the remaining branch and pay offices,
with the exception of
Then the proceedings, which have
given rise to this appeal, were commenced. On 11th May, 1948, an application
under Section 153 of the Companies Act was filed in this Court on behalf of the
bank by its managing director, Mr. L.D. Kapoor, stating that it was necessary
to take immediate steps to enable the bank to restart its normal business and for the speedy realization of the amount due to the
creditors of the bank and that with that object a scheme of arrangement had
been drawn up, which the directors considered feasible and which had the
sanction of the majority of the creditors behind it. In the application it was
pointed out that although the registered office of the bank was at Bannu, the
central office, the principal place of business where the administrative
business of the bank was being carried on, was at Dehra Dun; that the governing
body and about 95 per cent. of the depositors and creditors of the bank had
shifted to Dehra Dun and that for all intents and purposes the domicile of the bank was at Dehra Dun within the jurisdiction of this
Court. The prayer in the application was that the Court might
"direct meetings of creditors and members of the bank to be called, held
and conducted in such manner as the Court directs " and to sanction the
proposed scheme after it had been adopted by the
requisite majority of depositors and shareholders.
This salient features
of the proposed scheme were these; The amount due to each creditor as on 26th January, 1948, the day upon which the
bank suspended payment, will be reduced by 17½ per cent. and the balance of 82½
per cent. will be satisfied by (a) paying to the creditors 50 per cent. of the
amount due to them in two installments within one year; (b) by paying a further
25 per cent. in three installments spread over the
ensuing three years; (c) by allotting to each creditor fully paid up
shares equal to 7½ per cent. of the amount due to the
creditor on 26th January, 1948. There are certain special provisions made for
the benefit of creditors for small sums. It is provided that the assets
of the bank shall be divided into two funds to be called respectively, the
"old fund" and the "new fund," the latter consisting of the
sum of Rs. 2,25,000 which is to be utilized for the
purpose of the business of the bank which is to be restarted. The
remaining assets of the bank which constitutes the "old fund" are to be set aside for the purpose of meeting the
liabilities of the bank to its creditors in accordance with the provisions of
the scheme. No dividends are to be paid to shareholders until the final
installment has been paid to the creditors and no
interest is to be paid on the amounts due to creditors after 26th January,
1948; but creditors are to be entitled to elect from their number two persons
to be directors of the bank.
When the application along with
the proposed scheme was presented before the learned Judge he considered the
question whether this Court had jurisdiction to entertain the application and
recorded his opinion that the Court had the
jurisdiction. An order was made directing that separate meetings of creditors
and shareholders be held on 18th and 25th July, 1948, respectively, at
the time and place specified in it; that Mr. S.S. Dhavan should preside over
the meeting of the creditors and Mr. Manohar Lal Bagai to preside over the
meeting of the shareholders and that notices of the meetings together with a
printed copy of the scheme be issued, served and published in the manner laid down in the order. The notices, which were
accompanied by proxy forms, were duly issued, served and published.
The meetings were held and the
proposed scheme was amended. The amended scheme was
filed in this Court along with the application dated 2nd September, 1948, and a
prayer was made on behalf of the bank that the scheme as amended be approved.
Notices were again issued to all concerned.
On 21st October, 1948, Mohan Lal
Huja, the appellant, who is a creditor as well as a shareholder of the bank,
filed an affidavit in this Court, wherein he raised the following objections:
This Court had on jurisdiction to sanction the proposed scheme as the
registered office of the bank was at Bannu, and at Dehra Dun there was only a branch office of the bank. The proposed
scheme was unsatisfactory and impracticable and had not the support of
the majority of the creditors and shareholders of the
bank. The procedure adopted at the meetings was irregular and the whole thing
was rushed through.
An affidavit on more or less similar lines was also filed by
the appellant, Jagannath Sharma, on the same date. He raised further objections
that the proposed scheme would not be enforceable in
Pakistan; that under the scheme the creditors would not get their entire
amount, and that there was no chance of the bank working successfully under the
management of the present directors, who had no experience, and the managing
director had made advances to his relations and friends, and thereby they had
lost the confidence of the creditors.
The allegations contained in these
affidavits were refuted by the counter-affidavits filed by the managing
director and another creditor named Parmanand Chikkar.
It appears that an objection was raised on behalf of Mohan Lal Huja that
the assets of the bank set apart to constitute " old fund " were
insufficient. Thereupon the learned Judge appointed Messrs. Basant Ram and
Sons, Registered Accountants, to prepare a statement of assets and liabilities
of the bank and to report upon the main features of the proposed scheme. The
auditors' report, which is dated 7th January, 1949, is on the record and
appears to have been filed in this Court a few days before the arguments were
heard by the learned Judge.
On a consideration of
the materials placed before him, the learned Judge found that the objections
raised by Mohan Lal Huja and Jagannath Sharma to the proposed scheme had no
substance and that the scheme was fair and reasonable. Accordingly, he
sanctioned the scheme and incorporated therein certain safeguards to which the
managing director, acting on behalf of the bank, assented.
This appeal purports
to have been filed on behalf of 66 persons who are said to be the creditors of
the bank. The memorandum of appeal is signed by Mr. Gopi Nath Kunzru. The vakalatnama
of Mr. Kunzru apparently contains the names of all the 66 persons; but it has
been signed by Mohan Lal Huja and Jagannath
Sharma, who had filed objections before the learned Judge, and five other
persons. Consequently, this appeal must be treated as having been filed on behalf of the seven creditors (assuming all
of them to be creditors) only.
In this appeal the
order made by the learned Judge has been challenged on three grounds. In the
first place, it has been contended that this Court had no jurisdiction to entertain the application and to make the
order under Section 153 of the Companies Act. It appears that the plea of want
of jurisdiction was raised in the affidavits filed by Mohan Lal and Jagannath,
but it does not seem to have been pressed at the time
of arguments before the learned Judge as it is not mentioned in the various
objections which were pressed before him. However, as the point has been raised
before us by learned counsel, we may briefly express our opinion.
The circumstances in which the
application was filed in this Court are mentioned in para. 9 of the application
dated 11th May, 1948. It is stated therein:—
"Though the registered office
of the bank is in Bannu (N.W.F.P.) yet the central office, the principal place
of business, i.e., the place where the administrative business of the
corporation is carried since last 8 months, is at Dehra Dun. The brain which
controls its operations, the governing body which meets in bodily presence for
exercising the powers conferred on it, and the payment to all its migrated
depositors and creditors, who number more than 95 per cent. in amount, was made
at Dehra Dun which is within the jurisdiction of this Honourable Court and,
therefore, this Honourable Court can also entertain this application. The bank,
in anticipation of the troubles resulting from partition of the country,
applied to the Judicial Commissioner's Court at Peshawar for change of
registered office and actually notices were issued but due to subsequent
unfortunate happenings it was impossible to attend Courts in Pakistan and the
application was dismissed in default. To all intents and purposes Dehra Dun is
the domicile of the corporation. It is extremely difficult and injurious to the
depositors and others if proceedings are taken in Pakistan since circumstances
do not allow for the smooth working of the scheme of arrangement."
Dr. Farnsworth in his book 'The
Residence and Domicil of Corporations (1939 Edn.)" has deduced the
following principles from the decisions of the Courts and dicta of the Judges
in cases where the topic was only indirectly material and to the views of
English writers on Private International Law—
"By reference to
first principles it has been enunciated that, at that moment of its being
brought into existence, a corporation acquires a domicile of origin in the country to whose law it owes its being;
since the status or personality of a corporation is
always dependent upon its recognition by these laws and since, upon any
proper analogy with an . individual, lex domicilii determines for a
corporation, as for a natural person, its status and, in general, its
capacities or incapacities, this domicil of origin remains fixed and
unalterable as long as the juristic person is recognized as such in the country
of its establishment. Though, in given
circumstances, the necessary factum of residence and animus of indefinite
continuance of such residence in another country may exist, which, in the case
of an individual, would suffice to enable a domicil of choice to be acquired in
such country, yet in taw this acquisition is not possible since it would attach
to a corporation a status and a personality dependent upon the laws of the
country of its new domicil and this we have seen cannot be." (p. 273).
The learned author has
pointed out that "………the
unanimous opinion of the leading English textbook writers that the domicil of
corporation is the place where central control and management is exercised, or
alternatively where its administrative centre is situate, has been shown to be
fallacious for two reasons. Firstly, and more important, because this
definition has been enunciated without reference to the legal consequences flowing from the attribution to a corporation of a domicil in
a country other than that of its incorporation; such an attribution would give
a corporation a status or personality dependent upon the laws of a country
other than that to which it owes its being and this has been
demonstrated to be impossible. In the second place those writers who consider
that the same criteria determine both the residence and the domicil of a
corporation err even more, since such a principle could well result in a
corporation being at the same time domiciled—as it could admittedly be
resident—in two countries; this we have seen is not possible since the domicil
of a corporation must be determined, as was its residence, by way of analogy to
the individual. and its domicil must therefore be unique—moreover, such a view
would give a corporation a status dependent simultaneously on the laws of more
than one country, a quite impossible conception."
Therefore, the domicile of a
corporation is one but it may have its "residence" at more than one
place. The same author has stated at page 151
—
"The principle that has been
evolved in English law—and as we shall see also in American law, though to a
somewhat different degree and upon other lines—has been that if a foreign
corporation is carrying on business in this country at a fixed place, either
through its own officers or through agents who have authority to make binding
contracts here for it, then such a corporation is "resident,"
"present" or "found" here in such a way as to be able to be
served with a writ and thereby to become amenable to the jurisdiction of the
Courts of this country."
As we have seen above, after 15th
August, 1947, the position of the bank was that of a
company established outside India and the bank got itself registered under
Section 277 of the Companies Act. In his affidavit filed on the 11th May, 1948,
the managing director had slated that the principal place of business
from where the administration of the bank was being carried on was located at
Dehra Dun. Therefore, the bank must have got itself registered with the
Registrar of the joint Stock Companies in the United
Provinces. Consequently, although the registered office of the bank remains in
Bannu (N. W. F. P.), the principal place of business registered with the
Registrar of Joint Stock Companies of these provinces is Dehra Dun.
It has been argued by the
learned counsel for the appellants
that an application under Section 153 of the Companies Act has to be made to
the "Court" which term according to Section 2 (3) of the Act
"means the Court having jurisdiction under this Act" and that
subsection (I) of Section 3 lays down that:—
"The Court having
jurisdiction under this Act shall be the High Court having jurisdiction in the
place at which the registered office of the company is situate." This
obviously refers to a case where jurisdiction of Courts have to be determined
with reference to the domicile of a corporation. Hence, the application could
have been filed in the Court of the Judicial Commissioner of the North-West
Frontier Province and not in this Court.
The word used in
Section 3 (1) of the Companies Act is "company," which term has been defined in Section 2 (2) of the Act to
mean: "A company formed and registered under this Act or an existing
company." It has to be seen whether a company
established outside India, that is to say, a foreign company, is covered by the
definition.
After the separation
of Burma and Aden from British India a new Section 2A was inserted in the
Indian Companies Act by the Government of India (Adaptation of Indian Laws)
Order, 1937, making provisions about the companies registered in Burma and Aden
before the separation. The section is in these terms:—
"Notwithstanding anything in
the last preceding section, a company which was immediately before the
separation of Burma and Aden from India a company as defined by the said section,
being a company the registered office whereof is in Burma or Aden—
(a) shall be deemed for the purposes of this
Act to be a company registered and incorporated outside British India, and
(b) shall not, unless the subject matter or
context so requires, be included
in the expressions "company", "existing company",
"public company" and "private company".
Provided that (i) for the purposes
of Section 277 of this Act such a company shall, for a period of six months from the separation, be deemed to be a company
incorporated and registered in British India."
Now, after the partition the situation is
governed by the India (Adaptation of Existing Indian Laws) Order, 1947, and the
consequences similar to those indicated in Section 2A
quoted above would follow.
The bank will be considered a
company registered and incorporated outside India and shall not, unless the
subject matter or context so requires, be included in the expressions
"company", "existing company",
"public company" and "private company" as defined in
Section 2 of the Act.
The position of the bank, after its registration in
these provinces under Section 277 of the Companies Act would be that of an
"unregistered company." Section 270 of the Act defines an
"unregistered company " thus:—
"For the purposes of this
part, the expression "unregistered company' shall not include a railway
company incorporated by Act of Parliament or by an Indian law, nor a company
registered under the Indian Companies Act, 1866 (X of 1866), or under any Act
repealed thereby, or under the Indian Companies Act, 1882 (VI of 1882), or
under this Act, but save as aforesaid shall include any partnership,
association or company consisting of more than seven members."
The bank is not a
company incorporated or registered in the manner referred to in the said
section. True the bank was registered in British India under the Indian
Companies Act in its application to the whole of British India, but now, after
the partition, the bank cannot be considered as a company registered under the
Act in its applicability to India. The fact that the bank has now been
registered with the Registrar of Joint Stock Companies of the United Provinces
under Section 277 of the Act points to the same conclusion.
In In re Strauss and Co. Ltd., it was observed:—
"A foreign
company, though registered outside British India, but which is not registered
under this Act, will then be an unregistered company under the Act…….'company' in this part (part IX) of the section
can only mean and must mean a body which has
no corporate existence, not being registered under the Act. But a foreign
company is a corporate body and a legal entity, and
under the law it can sue and be sued here as such……scheme of the section (Section
270) is this: that all bodies having corporate existence under the Acts in
force in India do not come within the meaning of unregistered company;
but all bodies having no corporate existence under those Acts are included
within the expression 'unregistered company' ".
Therefore, as a
company consisting of more than
seven members the bank must be considered as an "unregistered
company" and as such it is not covered by the definition of "company" given in Section 2 (2) of the Companies Act.
It may be pointed out
in passing that the expression "company" in sub-sections (1) and (2) of Section 153 of the
Companies Act cannot be confined to companies formed and registered under the
Act, or an existing company but it includes an unregistered company
also. In subsection (6) of Section 153 it is provided that in the said section
the expression "company" means any company liable to be wound up
under this Act, and an unregistered company is liable
to be wound up under Section 271 of the Act.
Now, we have to
determine in what Court an application under Section 153 of the Companies Act relating to an "unregistered
company" can be filed. Under the general law it must be filed in the High
Court to whose jurisdiction the company has submitted
or made itself amenable or within whose jurisdiction the principal place of
business of such a company is situate. Admittedly, after the orderly progress
of the bank was jeopardized by the communal disturbances which preceded
and followed the partition of the country, the head office and all the branch
and pay offices of the bank, with the exception of Dehra Dun office, had to be
closed and that for some time before it suspended payment in January, 1948, the
entire business of the bank was centralized at and
was being controlled from Dehra Dun. In connection with its business, the bank
could sue and be sued in Dehra Dun. When the bank established its
"residence" at Dehra Dun and made it the
principal place of business, it submitted to the jurisdiction of the
Courts in these provinces.
In In re Travancore National and
Quilon Bank Ltd., the Travancore National and
Quilon Bank Ltd., was incorporated in the Travancore State. The
registered office of that bank was within the jurisdiction of the said State;
and it was there even at the time when the application under Section 153 of the
Companies Act was made and the said bank had established its central office in
Madras, after having complied with the requirements of Section 277 of the Act.
In that case also the question arose whether the High Court of Madras had
jurisdiction to entertain the application under
Section 153 of the Act and it was held that the High Court had jurisdiction to
entertain the application. There it was pointed out:—
"But when the
Legislature has intended that Section 153 can be availed of even by a foreign company, we must so construe
the expression 'Court' as to make the right conferred on a foreign company and
its creditors and members available to them. Further the definition of the word
'Court' in clauses 2 and 3 is to prevail only in the absence of anything
repugnant to the subject or context. When the
Legislature itself has sought to give the company a wide signification,
it must also have meant to give the 'Court' a wide signification. The expression 'Court'…..in the case of an
unregistered company including a foreign company would mean ' the Court
in which the said company is liable to be wound up and that is fixed by
reference to Section 271 and under Section 271 this High Court will be the
Court in which a foreign company is liable to be wound
up."
In the Bombay case, cited above, the question arose
whether the High Court of Bombay had jurisdiction to make an order for the
winding-up of a company which was registered in England but which had its
branches within the jurisdiction of that Court. In that case within the
jurisdiction of the High Court certain secured creditors whose claims ran into
several lacs of rupees and who were in
possession of a very large part of the goods and assets of the company as
secured creditors were residing; the relevant documents had been executed and
the transactions had taken place in Bombay; the company had assets in several
parts of the country and in the Native States; and the claims of the unsecured
creditors were also to be disposed of by that Court.
After the migration of
95 per cent. of the creditors of the bank from Pakistan and the principal place of business of the bank being at
Dehra Dun, this Court had the jurisdiction to entertain the application and
make an order under Section 153 of the Companies Act; and we find accordingly.
In the next place, it has been
argued by the learned counsel for the appellants that the proposed scheme is
neither practicable, fair or reasonable nor has it
been approved by a majority of the creditors and shareholders of the bank. We
may dispose of the latter part of the objection first. It is based on the
allegation that the creditors' meeting held on 18th and 19th July last was not
a representative one and was not properly conducted. In this connection it has
been pointed out that most of the creditors resided in Pakistan and their views
were not represented at the meeting. In view of the fact that 95 per cent. or
at least the majority of the creditors have migrated to India and the notices
were issued individually to such of the creditors
whose addresses were known to the bank and were also published in
several newspapers, this objection has no force. The creditors' meeting was
notified to be held on 18th July, 1948. It was held on that date and as the
creditors were unable to reach any decision the meeting was adjourned to the following day. Under the ordinary rules of
procedure governing such meetings, the meeting could be adjourned to the next
day. The fact that a sub-committee was constituted on 18th July to examine the
details of the scheme cannot be considered an irregularity. The recommendations
of the sub-committee were put before the meeting of the creditors, which approved those recommendations. We are,
therefore, not prepared to hold that the meetings were not conducted properly,
or that any irregular procedure was adopted therein.
The main objection to the proposed
scheme put forward before us was that the sum of Rs. 2,50,000 was insufficient
for the restarting of the bank. In this connection we have to bear in mind that
when the bank was originally started the working capital was only Rs. 1,00,000
and in course of time it was doing flourishing business. In the circumstances
in which the bank finds itself at the present moment, it is necessary that the
management should proceed cautiously and take as little risk as possible. If
the bank flourishes in future it may be possible for the bank to make further
calls on the shareholders. Therefore, we see no force in this objection.
Another objection raised in this
connection was that the creditors were being deprived
of 17½ per cent. of their dues and no interest would be payable to them after
26th January, 1948. Under the proposed scheme the creditors will be paid 75
per cent. of their deposits in the manner provided therein and in lieu of 7½
per cent. they would get fully paid up shares in the bank. Therefore, if the
bank starts functioning again and is able to earn profits the creditors will be able to share in the profits earned by the bank.
Therefore, this objection is also without any force.
The last objection in this
connection was that it the amount available is distributed today the creditors
would get about 60 or 75 per cent. of the amount due
to them. This would be possible if the bank goes into liquidation and if that
course be adopted the creditors will have to wait for a number of years. If, on
the other hand, the bank is allowed to function, the creditors would be able to
get back 82½ per cent. of their dues and in future to share the profits and
thereby make up their loss. This objection also must, therefore, be overruled.
Lastly, it had been
urged by the appellants' learned counsel that the present directors of the bank
are both incompetent and dishonest and whatever may be the merits of the scheme
it is bound not to succeed under the bank's present management. In this
connection it was alleged that the managing director had advanced a sum of over
Rs. 4,00,000 to his brother-in-law, Chunnilal Khanna, on inadequate security.
It, however, appears that the board of directors had sanctioned advance to this
gentleman to the extent of Rs. 4,00,000 against the security of stock-in-trade.
It has not been suggested or
proved that the stock-in-trade was not sufficient to cover the advance. It is,
therefore, not possible to say that the managing director had acted dishonestly
in making the advance in question.
It was further alleged
that, according to the report of the auditors, the managing director failed to
cash promptly two cheques for Rs. 50,000 which had been issued in favour of the
bank by Messrs. Jhandumal and Sons of Dehra Dun and failed to make entry in the
account books of the bank about jewellery worth more than Rs. 50,000, which he
had obtained from the said firm. The payment of the cheques was refused by the
bank on which they were drawn and the managing director had no opportunity to
explain the circumstances in which the cheques could not be cashed or about the
jewellery obtained by him. As the jewellery is said to have been obtained after
the bank had suspended payment it could not have been shown in the account
books. In any case, the bank does not stand to lose anything because the
liability, if any, of Messrs. Jhandumal and Sons stands. It was also alleged that the managing
director had committed certain irregularity in
connection with the deposits in the name of Bannu, Wholesale Cloth Association,
Dehra Dun. It appears from the auditor's report that the amount at the credit
of the Association at Bannu was transferred from time to time to Dehra Dun and
the last installment so transferred was on 26th January, 1948, and that the
total amount at the credit of the association was Rs. 3,90,001-5-0. What
happened on 26th January, 1948, was that the said amount was transferred to the
credit of 30 individuals, who formed the Association. This was done in
pursuance of a resolution passed by the Association and a copy of which must
have been received by the bank. The directors of the bank had sanctioned that
all the members of the association may be given 10,000 each as an overdraft
in anticipation of the remittance of Rs. 90,000 and some of the members of the
association at Dehra Dun had availed themselves of
this facility. We find nothing irregular in this.
We, therefore, find no
reason to hold that the present management cannot be trusted with the future
management of the bank. It may be noted here that when the trouble arose the
bank under the same management was carrying on flourishing business.
The finding of the
learned Judge that the proposed scheme was fair and reasonable is, therefore,
correct and must be upheld. The safeguards incorporated in the scheme at the
instance of the Court and with the consent of the bank do not in any manner
affect the scheme placed before the Court.
We, therefore, find no force in
this appeal and dismiss it with costs. The bank has filed cross-objections in
regard to costs but they have not been pressed before us and we find no force
in them. They are also dismissed; but we make no order as to costs.