[1984]
55 COMP. CAS. 737
(
HIGH COURT OF
v.
Bank of India
Ltd.
SABYASACHI MUKHARJI AND SUHAS
CHANDRA SEN JJ.
Appeal No. 271 of 1981.
JUNE 2, 1982
R.C. Deb, Ahin Chaudhury and
Dipankar Gupta with S. Pal and P. Choudhury for the Bank of
R.C. Deb with S.B. Mukharji and Mrs. U. Mukharji for Andhra
Steel Corporation.
P.C.
Sen with Hirak Mitra for Grant Steel & Alloys Ltd.
Anindya
Mitra led by Somenath Chatterjee and with Pratap Chatterjee and Singhani for
Mohonlal Mittal.
Sabyasachi Mukharji J.—In
the other appeal, which was filed by Purna Investment Co. Ltd., in which it was
not a party to the suit or to the s. 397-application, but was only a
shareholder in the company concerned, the learned trial judge had not given
them leave to intervene in the suit. It may incidentally be mentioned that
Purna Investment Co. Ltd. is a company in which Mohonlal Mittal and his group
are closely associated and they have the controlling interest. Being aggrieved
by the said order of the learned trial judge, this appeal has been filed before
this court praying, inter alia, for leave to intervene and oppose the terms of
settlement. Various questions have arisen on this aspect, but the main question
is, whether a shareholder, as such, has such interest in a company which
entitles him to intervene in respect of a suit pending against the company in
respect of some of its assets. It is well settled that a shareholder has
certain interest. It has been said very clearly that the shareholder's right is
to participate, firstly, in the winding up in case a winding up order is made
and, secondly, a shareholder has a right of payment of dividend where dividends
are declared. In aid of the submission that the shareholder has sufficient
interest in the company, the learned advocate for Purna Investment Co. Ltd.
seeking to intervene in the appeal, drew our attention to certain observations
in Modern Corporate Law by Oleck, vol. 3, article 1595, at page 668. Our
attention was also drawn to O. 1, r. 10. It was submitted that under O. 1, r.
10, sub-rule (2), as the plaintiff had a share in the assets of the company, he
was interested when question of bona fide of the settlement has been raised.
Our attention was also drawn to certain observations in the decision of the
American Supreme Court in McCabe v.
Mr. Nag appearing for the
appellant also drew our attention to the decision of the Court of Session
(Scotland), Second Division, in the case of IRC v. Forrest [1924] 8 TC 704. In
that case, on the 25th of November, 1919, the respondent purchased certain
shares in an industrial company for a sum exceeding their par value by £50, the
excess being expressed in the contract to be paid "to cover the portion of
the dividend accrued to date". On the 13th May, 1920, a dividend of 10 per
cent. free of income-tax was declared and paid by the
company for the year ending 28th February, 1920. The respondent-assessee
contended that of the dividend so receivable on his shares £50 plus income-tax,
altogether £71, should be treated as capital in view of the terms of the
contract of purchase and should not be included in the computation of the
income for the year 1920-21 for the purposes of super-tax for the following
year and his contention was accepted by the Special Commissioners on appeal. It
was held that the transaction was in essence an ordinary one of purchase of
shares and the sum of £71 in question could not be deducted from the full
amount of the dividend receivable by the respondent on 13th May, 1920, which,
under s. 5, sub-ss. (1) and(3)(c) of the I.T. Act,
1918, was required to be included in the computation of income for the purposes
of super-tax for the year 1921-22. Our attention was drawn to the observations
of Lord Anderson at page 710 of the report, where it was observed as follows :
"Now when an investor enters into a
transaction of that sort he does two things with his money. He buys two things
with his money. He buys, in the first place, a share of the assets of the
industrial concern proportionate to the number of shares which he has
purchased; and he also buys the right to participate in any profits which the
company may make in the future. Now, when a transaction of this nature is
entered into during the currency of the financial year of the industrial
concern, it is obvious that what happens is this, that not only is a part of
the assets purchased outright but that a chance is bought as well—a chance of
sharing in any profits which may be made during the currency of that financial
year; and that is just what the respondent bought on this particular occasion.
And it matters not in my judgment whether it is expressly stated that a part of
the purchase price is in respect of the chance which I have alluded to, or
whether that is not expressed, because if it is not expressed it is ordinarily
implied, and there is no doubt that that is the nature of the transaction. Now,
at the end of the financial year when the chance which had just been purchased
had materialised and a dividend was declared and paid, what the respondent
maintains, as I understand his position, is this, that a part of the purchase
price which was given for that totality should be deducted or set off against
the sum which he received as dividend. Now, it seems to me that if we assent to
an argument of that sort we will not only be revolutionising stock exchange practice,
but I think we will be upsetting the established precedent of the Inland
Revenue authorities and deciding against the general terms of the Act of
Parliament. Not only that, but we shall be offending, as Mr. Fenton plainly
pointed out, against the well settled practice of Inland Revenue law, which is
to the effect that capital expenditure which, as Mr. Fenton put it, has not
earned profits, may not be deducted from profits in estimating the amount of
tax which is due. Accordingly, it seems to me that this case is quite clear and
that we ought to sustain the appeal and answer the question of law as contended
for by the Crown".
This decision was relied on
by Mr. Nag in aid of the proposition that as a shareholder his client had an interest
in one of the assets of the company, namely, Dunkuni plant, and as such was
entitled to say that he was a necessary and proper party in the settlement. Mr.
Nag also submitted that the learned judge did not appreciate the true effect of
the aforesaid decision. In our opinion, the aforesaid observations of Lord
Anderson were made in an entirely different context. It is well settled that
the shareholder has a right to participate on the distribution of the assets in
case of winding up and also a right to dividend declared by the company out of
the profits made by the company by the user of the assets. In that context
perhaps, he has an interest in the assets of the company, but that kind of
interest cannot, in our opinion, be said to be an interest in a particular
property in respect of which asset a shareholder has such an interest that
would entitle him to intervene and object to dealing with this property
independently of the company as such.
In this connection, the
Supreme Court reiterated the observations in the decision in the case of
Charanjit Lal Chaudhari [1951] 21 Comp Cas 33, and the observations in the case
of IRC v. Forrest [1924] 8 TC 704. Our attention was also drawn to the decision
in the case of Turner Morrison & Co. Ltd. v. Hungerford Investment Trust
Ltd. [1972] 42 Comp Cas 512; 85 ITR 607 (SC), and reliance was placed on the
observations at pages 528-29. It was contended further that the terms of
settlement pursuant to which the decree was passed against the company was
beyond the authority of the company. Therefore, it was submitted that it was
bad. The observations which were relied on in aid of this submission in the
aforesaid case, in our opinion, is not of any
relevance. In aid of the proposition about the locus standi to make this
application, our attention was drawn to the decision of the learned single
judge of the Madras High Court in the case of G.M.V. Krishnamachari v. Dhanalakshmi, AIR 1968 Mad 142,
and reliance was placed on the observations at
page 143. It was submitted relying on the said decision, that even if the
present appellant were not necessary parties they were proper parties. Having
regard to the clear pronouncements of the Supreme Court on the position of a
shareholder of a company in the case of Charanjit Lal Chaudhari v. Union of
India [1951] 21 Comp Cas 33 (SC), and in the case of Mrs. Bacha F. Guzdar v.
CIT [1955] 25 Comp Cas 1; 27 ITR 1 (SC), and the framing of the suit in the
present case we are of the opinion that the present appellant was neither a
necessary nor a proper party and, as such, dismissal of its application to be
joined as party by the learned trial judge was not irregular or invalid. The
other contentions impeaching the validity of the settlement, assuming that the
present appellant was entitled to intervene, have been discussed by us in the
other appeal. More or less same contentions were urged before us. It is not
necessary to discuss these in any detail. In the premises, we dismiss this
appeal and uphold the finding and order of the learned trial judge on this
aspect of the matter. In the facts and circumstances of this case, however,
there will be no order as to costs.
Suhas
Chandra Sen J.—I agree.
[1960]
30 COMP. CAS. 555 (BOM.)
V.
MUDHOLKAR,
J
CIVIL REVISION APPLICATION NO. 1252 OF 1959
JANUARY
14, 1960
MUDHOLKAR, J. - This is an application for revision under
section 115 of the Code of Civil Procedure of the order of the court below
holding that the official liquidators of a limited liability company have no
right to institute a suit in forma pauperis for obtaining possession of the
property belonging to the company.
As has been
pointed out by the court below there is a conflict of judicial opinion on this
question there is a group of cases in which it has been held that a corporation
cannot be allowed to sue in forma pauperis, while there is another group or
cases in which it is said that it can be so allowed. The learned judge of the
court below accepted the view of the High Courts of Calcutta. Rangoon and
Punjab which is to the effect that a corporation cannot be allowed to institute
a suit as as pauper and dismissed the application made before it by the
official liquidators for being permitted to institute a suit on behalf of the
petitioners, the Gendalal Cotton Mills Ltd.
Mr. H.R.
Gokhale, who appears for the petitioners, relied strongly upon the view taken
by the High Court of Madras in swaminathan v. Official Receiver, Ramnad [(1) I.L.R.
{1937} Mad. 784 (F.B.)], and Perumal Goundan v. Thirumalarayapuram Jananukoola
Dhanasekhara sangha Nidhi [(2) {1918} I.L.R. 41 Mad. 624.], as well as the view
taken by the Hyderabad High Court in syed Ali v.Decan Commercial Bank [(3)
{A.I.R. 1951 Hyd. 124.] and contended that a corporation being a person in the
eye of the law is entitled to the benefit of th provisions of Order XXXIII,
rule I, of the Civil Procedure Code, and to institute a suit in forma pauperis.
He also referred to three other decisions which support the aforesaid
contetion. Two of those cases are Sripal Singh v. U.P. Cinetone Ltd. [(4)
A.I.R. 1944
In B.A. Cotton
Mills Ltd. v. Kameshwar Singh [(1) A.I.R. 1938
“In order to
decide whether in a particular instance the word `person’ includes an
artificial person or a corporation or a company, regard must be had to the
setting in which the word `person’ is placed, to the circumstances in which it
is used, and above all to the context in which it stands. The scope and meaning
of the word depends essentially on the connection and circumstances in which it
is used. If there in any presumption that the word `person’ includes a
corporation, the presumption is no more than of a slight nature and therefore,
easily displaced. One has to consider the subject matter of the particular
enactment in which the word `person’ appears and especially the immediate
context in which it is used in order to decide whether that presumption will
apply or whether it will apply or whether it will not.”
‘The ultimate
decision reached by the learned judges was that:
“The
word`person’ in Order 33, rule I and so the word `person’ in Order 44, rule I
does not include a limited company incorporated under the Companies Act and it
is not possible for and competent to such a company to sue as pauper or to
prefer an appeals as paper under the provisions of Order 44,rule I.
In coming to
this conclusion the learned judges relied upon two English o decisions,
Pharmaceutical Society v. London and Provincial Supply Association [{1880} 5
App. Cas. 857,869.] and Charles P. Kinnell & Co. v.
Harding Wace & Co. [{1918} 1 K.B. 405.]. the
learned judges also relied upon the decision of the
“I do not
think that the presumption that it (the word `person’) does include an
artificial person, a corporation, if that is the presumption,is
at all a strong one.”
This view of
Lord Blackburn found favour with the learned judges of the Calcutta High
Court.The learned judges,however,pointed out that the
definition of “person “ contained in clause 39 of section 3 of the General
Clause Act, I897, is much wider than that of the same word contained in section
2, sub-section(I), of the Interpretation Act, I889, which is the English law on
the subject. That being the position it seems to me that Lord Blackburn”s
observations about the flimsiness of the presumption cannot be imported for
considering how the word “person”occurring in the Indian statute is be interpreted. According to the definition contained in the
General Clauses Act,, the word “person” wherever occurring in an Indian
statute, shell, subject to the context, include any company or association or
body of individuals whether incorporated or not. According to the English
definition contained in the Interpretation Act that word shall, unless the
contrary intention appears, include a body corporate. It will thus be seen that
the inclusion of a body corporate within the expression “person” is to be
presumed under the General Clauses Act the expression shall include any company
or association or body of individuals whether incorporate or not. The language
used in the general clauses Act is much stronger than that used in the
Interpretation Act is the English statute, unless a contary intention appears
where as under the and, therefore, a strong case has to be made out for not
according to the word”person” the full meaning which is given to it in the
definition.
In the other English decision, Charles P. Kinnell & Co. v.
Harding,, Wace & Co. [I9I8] I K.B.405. on which reliance was placed by the learned judges of the Calcutta
High Court, it was pointed out that from its nature a company cannot appear in
person, not having as a ;legal; entity any visible person. Relying upon this
observation the learned judges held that this circumstance is also material for
considering whether a corporation can be allowed to sue as a pauper under Order
XXXIII,rule I, because under that Order XXXIII, rule
I, a person who wants to sue as a pauper has to present his application for
leave to sue as a pauper in person. This obviously is not possible where the
corporation dose not have a legal entity as that of a visible person. This
aspect of the matter was considered in Perumal Goundan V. Thirumalarayapuram
Jananukoola Dhanasekhara Sangha Nidhi (I9I8)I.L.R.4I
Mad.624. The learned judges have observed as follows:
“As regards
rule 3 which requires personal presentation of the application to sue in forma
pauperis, it seems to us that where the law, in consequence of personal
appearance in courts being impossible either by reason of the party being a
company or an infant or lunatic, allows appearance by somebody else appearance
by such person would be sufficient. For example, Order of the Civil Procedure
Code which relates to minors and persons of unsound mind authorizes appearance
by the next friend and guardian ad litem and it cannot be said that where the
minor or lunatic is a pauper, the presentation of a petition to sue in forma
pauperis by the next friend would be invalid or contravening the provision of
Order XXXIII, rule 3. So far as companies are concerned, the Companies Act
provides for the mode in which the company is be represented. Under section I79
of the Indian Companies Act the liquidator may institute any suit or other
legal proceedings in the name and on behalf of the company and under Order XXIX
of the Civil Procedure Code the principal officer of the company may act in
legal proceedings on behalf of the company and may be required to appear when
personal appearance is necessary. The liquidator can therefore fulfil all the
obligations required of a pauper petitioner under Order XXXIII. Rule 3 of Order
XXXIII of the Civil Procedure Code, in our opinion, only prohibits a pauper who
is competent in law to appear in person from taking advantage of Order III of
the Civil Procedure Code and appearing by a pleader of recognized agent instead
of being present personally. It does not cover cases where from the nature of
the case physical presence is impossible or where the law, owing to any
disability, directs that all acts required by the Code should be performed by a
next friend. We are of opinion that there is nothing in rule 3 to prevent an
official liquidator from appearing and presenting the petition.”
Though this
decision was cited before the learned judges of the Calcutta High Court they
have not considered the aforesaid observations of the Madras High Court. In my
opinion these observations of the Madras High court are a good and sufficient
answer to the argument which was advanced both before that High Court and the
Calcutta High Court to the effect that the impossibility of a corporation
presenting an application before the court in person is not a circumstance to
justify the inference that the Legislature did not intend to extend the
provisions of Order XXXIII, rule 1, to corporations.
As already
stated the learned judges of the Calcutta High Court have relied upon the
decision in Mitra v. Corporation of Royal Exchange Assurance A.I.R. 1930 Rang. 259, 262. In that case it was held by HEALD AG. C.J. that
the word “person” as used in Order XXXIII, rule 3, was intended to mean nothing
but a natural person and was not intend to include a juridical or an artificial
person. He further held that the provisions of rules 4 and 7 regarding the
examination of the applicant and the reference to “wearing apparel” in the
explanation to rule 1 tend in the same direction and that consequently the word
“person” wherever it occurs in Order XXXIII means a natural person, that is, a
human being, and does not include a juridical person such as a “receiver”. I
may mention that the learned Acting Chief Justice had based his decision on the
observations of LORD BLACKBURN to which I have already referred. OITER J., who
delivered the concurring judgment in the
“We agree that
the word `person’ in the provision under review must be considered in its
ordinary and plain meaning, and we see nothing in the context in which it
stands to indicate that the Legislature meant that the word `person’ should or
might have the meaning of a juridical person.”
It will thus
be seen that apart from the observations of LORD BLACKBURN, the Rangoon
decision is based upon the circumstance that there would be a difficulty in
complying with rules 3, 4 and 7 of Order XXXIII if the word “person’ occurring
in Order XXXIII were deemed to include a juridical person such as a receiver or
an official receiver or a corporation. The observations of the Madras High
Court, which I have already quoted, partly answer the points raised by the
learned judges of the Rangoon High Court. In addition I may quote the further
observations of the Madras High Court at pages 625 and 626 (1918) I.L.R. 41
“The
explanation to rule (1) no doubt states that where no court-fee is prescribed
the petitioner should not be entitled to property more than Rs.100 `other than
his necessary wearing apparel’. The explanation simply allows deduction of the
value of wearing apparel and can only mean that if the applicant has necessary
wearing apparel he can deduct its value. We do not think it can be constructed
to mean that only persons who is law can possess
wearing apparel can sue as paupers... Where the applicant is a company which,
ex-hypothesi, can have no wearing apparel, then it will not be entitled to
deduct anything on account of wearing apparel and will not be pauper it it has
property worth Rs.100 and the suit is one for which no fee is prescribed.”
The third and
last decision upon which the court below relies is that of Associated Pictures
Ltd. v. National Studios Ltd. A.I.R. 1951 Punj. 447. This decision is based
upon the two decisions referred to above and does not contain anything new on
the point.
It seems to me
that the view taken by the Madras High Court in Perumal Goundan v.
Thirumalarayapuram Jananukoola Dhanasekhara Sangha Nidhi (1918) I.L.R. 41 Mad.
624 which also was a case where an application under Order XXXIII, rule 1, was
made on behalf of an incorporated company by an official liquidator is the
correct one. This decision as well as the decision in Mitra v. Corporation of
Royal Exchange Assurance A.I.R. 1930 Rang. 259 and several the decisions were
considered by the Full Bench of the Madras High Court in Swaminathan v.
Official Receiver, Ramnad I.L.R. (1937) Mad. 784 and it was held that the word
“person” occurring in the Explanation to Order XXXIII, rule 1, would include
both natural and legal persons, and, therefore, an official receiver is a
person within the meaning of the above Explanation. I may point out that the
view taken in Perumal Goundan v. Thirumalarayapuram Jananukoola Dhanasekhara
Sangha Nidhi (1918) I.L.R. 41 Mad. 624 was not only fully endorsed by the Full
Bench but the reasons given in the earlier decision were also endorsed fully by
the Full Bench. In Syed Ali v. Deccan Commercial Bank I.L.R. [1951] Hyd. 575,
the learned judges have taken the same view as that taken in the two Madras
cases and, after quoting at considerable length from Salmond’s Jurisprudence,
they came to the conclusion that the word “person” includes not only a natural person
but also a juristic person and there is nothing in the Code to prevent a
juristic person from filing a suit. They further held that if such a person has
no sufficient means to pay the court fee, Order XXXIII will apply as its object
is to facilitate the filing of a pauper suit and on principle that facility
should be given to all litigations entitled to it. The learned judges further
pointed that even if it is assumed that there was no provision in the Code
laying down a procedure for a corporation to file a suit in forma pauperis, on
general principles of justice, equity and good conscience, the provisions of
the Code applicable the natural persons suing as paupers will apply to such
corporations or juristic persons subject to the circumstances of the case.
I entirely
concur with this view. As pointed out in Hukum Chand Boid v. Kamalanand Singh
(1905) I.L.R. 33 Cal. 927, the Civil Procedure Code is not exhaustive and,
therefore, where there is no specific provision in the Code it is the duty of
the courts to act according to justice, equity and good conscience and that
purpose is served by applying analogous provisions as far as circumstances
permit. While dealing with the case the learned judges further observed :
“In
interpreting a statute the principle has to be borne in mind that the
Legislature is not capricious but that when it confers a right, it should be
presumed that the right is conferred not only on a few persons entitled to that
right, but that the right is conferred on all persons entitled to it. The right
to sue in forma pauperis is a privilege given to a litigant provided certain
conditions are fulfilled. Hence it should be presumed that every litigant
coming within those conditions is entitled to the benefit of the privilege and
the Legislature does not make any distinction between one litigant and another
provided those conditions are fulfilled.”
These
observations have my respectful concurrence.
Two more cases
referred to by Mr. H. R. Gokhale, that is, Sripal Singh v. U. P. Cinetone Ltd. AIR
1944 AND 4, 248, 927 and Cassim & Sons v. Abdul Rahman A.I.R. 1930 Rang.
272 proceed more or less on the same reasoning as the other
The learned
judge of the court has referred to a decision of this court in Manaji Rajuji
(Rao Saheb) v. Khandoo Baloo (1911) I.L.R. 36 Bom. 279. That was a decision of
a single judge of this court on the original side. In that case the learned
judge has expressed the view that :
“The privilege
of maintaining a pauper suit is personal privilege granted to people who have
no means of carrying on or continuing litigation, and there seems to be no
authority whatever for holding that the representative of a pauper is entitled
to continue the suit of his testator or testatrix in forma pauperis, even
though admittedly he is not a pauper, simply because his testator or testatrix
was a pauper.”
This case is
distinguishable on the simple ground that here the real applicant before the
court is the corporation, that is, the Gendalal Cotton Mills Ltd., and the
official liquidators have made the application merely on behalf of the
corporation because the corporation must of necessity act through someone.
In the above
case a reference is made to In the matter of the Will of Dawubai (1893) I.L.R.
18 Bom. 237. In that case STARLING J. has taken the view that where as executor
is not in possession of the property of his testator and cannot get possession
of it, and where he has not himself the means of paying the necessary fees, he
may be allowed to petition for, and, if entitled thereto, to obtain probate in
forma pauperis. That decision was distinguished by DAVAR J. upon the ground
that the petitioner before STARLING J. was himself a pauper. However, as
pointed out, the decision of DAVAR J. is not quite in point here and,
therefore, it is not necessary to consider the decision of STARLING J.either.
I omitted to
mention that Mr. Gokhale placed reliance upon the decision in Nemichand v.
Kevalchand (1924) 26 Bom. L.R. 380, which supports him to
some extent. In that case it was held that under the provisions of the
Civil Procedure Code, it is sufficient to show that the party who applies to
sue in forma pauperis is a pauper. In the case of a minor applicant who is a
pauper, his pauperism is not affected by the resources of his best friend in
the suit. Though the decision does help Mr. Gokhale to this extent that what
has to be ascertained is the financial capacity of the actual applicant, it
does not touch the main point which has been raised before me and, that is,
whether a corporation is entitled to make an application under Order XXXIII,
rule 1.
Having
considered all the authorities I have no doubt that the rule taken by the court
below is wrong.
Mr. Chattrapati,
who appears for the opponents, however, says that rule 292 of the Rules framed
under the Companies Act would indicate that the intention of the Legislature
was not to allow a corporation to institute a suit as a pauper. That rule is as
follows :
“292. Where
the company has no available assets.-Where a company against which a winding-up
order has been made has no available assets, the official liquidator may, with
the leave of the court, incur any necessary expenses is connection with the
winding-up out of any permanent advance or other fund provided by the Central
Government, and the expenses so incurred shall be recouped out of the assets of
the company in priority to the debts of the company.” (Proviso is omitted as it
is not material).
It is
sufficient to say that this is merely an enabling rule and it does not in any
way affect the rights which the corporation may have under the Code of Civil
Procedure to institute a suit.
Then Mr.
Chattrapati contended that under section 280 of the old Companies Act a
defendant is entitled to move the court for requiring a limited liability
company to furnish security for costs and that it will not be possible to
secure compliance with such a rule if the company were allowed to sue as a
pauper. All that I need say about this argument is that the provisions of
section 280 do not either expressly or by implication take away the right
conferred by Order XXXIII, rule 1, Civil Procedure Code. It may be that a party
may not be able to obtain security for costs under section 280 from a company
which had been permitted to sue as a pauper but those provisions merely confer
a power upon a court to require security to be given in appropriate cases and
do not make it obligatory upon it to order security to be given in very case.
For the
reasons which I have stated above I make the rule absolute and allow the
application for revision. The matter will now go back to the lower court for
being determined on merits. At that stage it will be open to the opponents to
raise such contentions on merits as are open to them under Order XXXIII of the
Code of Civil Procedure.
As regards
costs of this court they will abide the result of the application by the
petitioner for leave to sue as pauper.
Application
allowed.
[1951] 21
COMP. CAS. 379 (PUNJ.)
HIGH COURT OF
v.
National
Studios Ltd.
FALSHAW, J.
JUNE 21, 1951
S.L. Puri, for
the Petitioner.
I.D. Dua, for the Respondent.
A company known as the National Cine Studios Limited (in
voluntary liquidation) presented a petition through its voluntary liquidator,
Mr. Ram Partap Garg, in the Court of the Commercial Subordinate Judge at Delhi
under Order XXXIII, Rule 1, of the Civil Procedure Code, for permission to
bring a suit in forma pauperis for the recovery of Rs. 21,000 against the
present petitioner, a company known as Associated Pictures Limited of Calcutta.
Apart from the question whether the applicant company has sufficient means to
pay the requisite court-fee, the question also arose whether a limited company
could be regarded as a "person" within the meaning of Order XXXIII,
Rule 1, of the Civil Procedure Code. It does not appear that there has been any
decision on this point by the High Court of Lahore or by this Court by which
the learned Subordinate Judge could consider himself bound, and there are
decisions of other High Courts in support of either side. From the judgment it
seems that two decisions in favour of the view that a company is not a
"person" within the meaning of Order XXXIII, Rule 1, of the Civil
Procedure Code, were cited, whereas four decisions were cited to the contrary.
In the circumstances the learned Subordinate Judge followed the view of what he
considered to be the majority and held, it having been proved that the company
in liquidation had not sufficient assets to pay the requisite court-fee, that
the company was entitled to bring the suit in forma pauperis. The defendant
company has come in revision against this order.
There is no doubt that in clause (39) of Section 3 of the
General Clauses Act of 1897 it is provided that the word "person"
shall include any company or association or body of individuals, whether
incorporated or not, but at the same time it is clear that this meaning is not
intended to be of universal application wherever the word "person"
appears in a statute since the opening words of Section 3 read: "In this
Act, and in all Central Acts and Regulations made after the commencement of this
Act, unless there is anything repugnant in the
subject or context…………"
From this it is clear that where the word
"person" appears in a statute, some regard must be had to the nature
of the subject dealt with and to the context in deciding whether the word has
the wider meaning mentioned in clause (39) or is restricted to its ordinary
sense of an individual person. On a bare perusal of the relevant provisions of
Order XXXIII of the Civil Procedure Code, I do not think there is any doubt
that the word "person" is used in this Order, in the sense of an
individual person. Rule 1 reads.—
"1. Subject to the following provisions, any suit may
be instituted by a pauper.
Explanation.—A person is a 'pauper' when he is not
possessed of sufficient means to enable him to pay the fee prescribed by law
for the plaint in such suit, or, where no such fee is prescribed, when he is
not entitled to property worth one hundred rupees other than his necessary
wearing apparel and the subject-matter of the suit."
The latter part of the explanation could not be applied to
a company by any stretch of imagination and I can hardly believe that any part
of the explanation could be intended to be inapplicable to any
"person" referred to in the rule. Rule 2 merely prescribes that every
application to sue as a pauper shall contain the particulars required in regard
to a plaint in a suit and shall be verified in the same manner as a plaint.
Rule 3, however, is more relevant to the present question as it reads :—
"3. Notwithstanding anything contained in these rules, the application
shall be presented to the Court by the applicant in person, unless he is
exempted from appearing in Court, in which case the application may be
presented by an authorized agent who can answer all material questions relating
to the application, and who may be examined in the same manner as the party
represented by him might have been examined had such party attended in
person."
It is difficult to interpret the word "person" as
used in Rule 3 other than its ordinary sense of an individual, and this
interpretation is confirmed by the words of Rule 4 which read:—
"4. (1) Where the application is in proper form and duly presented
the Court may, if it thinks fit, examine the applicant, or his agent when the
applicant is allowed to appear by agent, regarding the merits of the claim and
the property of the applicant;
(2) Where the application is presented by an
agent, the Court may, if it thinks fit, order that the applicant be examined by
a commission in the manner in which the examination of an absent witness may be
taken."
There is, however, no doubt that this, to my mind, obvious
interpretation of the meaning of the word "person" in this Order has
not been accepted by a number of learned Judges of various High Courts. In
Perumal Koundan v. Venkatasami Bakewell and Kumaraswami Sastri, JJ., held that
the word "person" in Order XXXIII has the same meaning as in the
General Clauses Act, and that the explanation to Rule I simply allows deduction
of the value of wearing apparel where the applicant has such apparel and cannot
be construed to mean that only persons who, in law, can possess wearing
apparel, can sue as paupers.
The ruling in Sivagami Ammal v. Gopala Swami Odayar is not so much in point, as the facts were that after a suit
had been instituted in forma pauperis the plaintiff who had been allowed to sue
as a pauper died, and the question was whether his executor was liable to be
dispaupered because personally he was not a pauper, and it was held that he was
not liable to be dispaupered and made to pay the court fee. In Mabia Khatun v.
Satkari it was held that when a plaintiff sues in a representative character,
such as a mutwalli, trustee, or a shebait, unless it is shown that the
plaintiff has in his possession property belonging to the wakf estate or trust
or the idol for whom he sues, sufficient to enable him to pay the requisite
court fee prescribed by law, he may be allowed to sue as a pauper even if it is
shown that he has sufficient personal property of his own. It was also observed
that the capacity of a person suing in a representative character must be kept
distinct from his personal capacity, and this was really the main question
decided, the question whether the idol or trust on behalf of which the suit was
being brought was a "person" or not within the meaning of Order
XXXIII not being discussed at all. In Sripal Singh v. U.P. Cinetone Ltd.
Thomas, C.J., and Misra, J., held that a limited company was a person within
the meaning of Order XXXIII, Rule 1, and that the word "person" in
this Order means a juristic person. Similarly in D.K. Cassim & Sons v. Abdul Rahman Das and
Brown, JJ., held that
a firm can be considered to be a "person" under Order XXXIII, Rule 1.
The authoritativeness of this decision, however, appears to me to be rather
undermined by the fact that in S.M. Milra v. Corporation of Royal Exchange
Assurance, the same volume only a few pages away at page 259 there is a
decision by Heald, A.C.J., and Otter, J., to the contrary, these learned Judges
coming to the conclusion after full discussion of the matter that the word
"person" in Order XXXIII means a natural person, that is a human
being, and does not include a juridical person such as a receiver under the
Insolvency Act. There is also a carefully considered decision of the Calcutta
High Court reported
as Bharat Abhyuday Cotton Mills Ltd. v. Kameshwar Singh, in which Costello and Biswas, JJ., after considering in
separate judgments the provisions of Order XXXIII and previous decisions on the
point, held that the word "person" in Order XXXIII, Rule 1, and also
in Order XLIV, Rule 1, does not include a limited company incorporated under
the Companies Act and such a company can neither sue in forma pauperis, nor
prefer an appeal under Order XLIV, rule 1, in forma pauperis. With due respect
to the learned Judges who delivered the decisions cited above on behalf of the
respondent to the contrary, I do not think that there is any doubt that the
view taken in the second of the Rangoon decisions and in the Calcutta decision
was correct. The wording of Section 3 of the General Clauses Act clearly
indicates that the definitions and explanations which form the rest of the
section are not universally applicable, and that in spite of these definitions
and explanations the meaning of the words has to be construed in the light of
the subject of the statute and the context in which the words or used, and to
my mind the provisions of Order XXXIII leave no doubt that the word "
person " in this part of the Civil Procedure Code means only an indivual
person.
I accordingly accept the revision petition with costs and
set aside the order of the lower court permitting the respondent company to sue
in forma pauperis. The parties have been directed to appear in the lower court
on the 16th of July, 1951. I assess the costs at fifty rupees.
[2003] 115 COMP CAS 127 (KER)
HIGH COURT OF KERALA
v.
Lona Chackola
J.B. KOSHY AND K.
PADMANABHAN NAIR, JJ.
march 20, 2002
K.G. Sarath
Kumar for the Petitioner.
C.K. Arvindaksha Menon, A. Balagopalan, Varghese Parambil, Prakash P.
George, M.N. Manmadan, V.N. Gopinathan and Basil Mathrew for the Respondent.
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 rent
control court dismissed the application in all respects. The matter came in
appeal. The appellate court held that the claim is maintainable under section
11(3) of the Act and dismissal of the case on that ground was not correct and
the matter was remanded. Section 11(3) of the Act reads as follows:
"(3) A landlord may apply to the Rent Control Court for an order directing the tenant to put the landlord in possession of the building if he bona fide needs the building for his own occupation or for the occupation by any member of his family dependent on him: . . ."
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. If 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 Chakolas Habitat. At present
the office of the company is being conducted in a building belonging to Kerala
Traders,
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
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."
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 and 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."
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."
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 v.
Chimanlal, 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.
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.
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 Prasad, AIR 1963 Orissa 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 Ann Saloman v. A. Salomon and 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 used 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.
A similar case as
claimed by the landlord herein was considered in
In the above
circumstances, the application is not maintainable and we agree with the
All the C.R.Ps. are
allowed to the above extent.
[1995] 83 COMP. CAS. 530 (KER.)
HIGH COURT OF KERALA
V.
Khaders International
Constructions Ltd.
K
C.R.P.
No. 139 of 1992-B
JULY
20, 1992
JUDGMENT
K. S.
PARIPOORNAN, J. - Respondents
Nos. 1 to 3 in P. O. P. No. 1 of 1990 Sub-court,
I heard
counsel, Mr. P. Balagangadhara Menon, senior counsel who appeared for the
revision-petitioners, argued that the Bench decision of this court in Mathew's
case [1961] KLT 45; AIR 1961 Ker 180, requires reconsideration. Counsel
submitted that in the above Bench decision, the court was swayed by English
decisions which have only a persuasive value, as stated by the Supreme Court in
American Home Products Corporation v. Mac Laboratories Pvt. Ltd., AIR 1986 SC
137. It was further submitted that the decisions of the contrary in Mitra (S.
M.) v. Corporation of the Royal Exchange Assurance, AIR 1930 Rang 259;
Associated Pictures Ltd. v. National Studios Ltd., AIR 1951 Punj 447 and Bharat
Abhyudoy Cotton Mills Ltd. v. Kameswar Singh, AIR 1938 Cal 745, were not
properly understood and given effect to in the aforesaid Bench decision.
Counsel pleaded that the above decision requires reconsideration.
I am unable to
accept the plea of the revision-petitioners. In Mathew's case [1961] KLT 45;
AIR 1961 Ker 180, the Division Bench held that the word "person" in
Order 33, rule 1 of the Civil Procedure Code, includes juridical person also.
In coming to the said conclusion, the Bench relied on the decisions of the
Rangoon, Madras, Hyderabad and Nagpur High Courts, besides the English decision
in Pharmaceutical Society v. London and Provincial Supply Association Ltd.
[1980] 5 AC 857 at page 861. One of the decisions relied on for interpreting
the word "person", occurring in Order 33, rule 1 of the Civil
Procedure Code, was the decision of the Madras High Court in Perumal Goundan v.
Tirumalrayapuram Jananukoola Dhanasekhara Sanka Nidhi Ltd., AIR 1918 Mad 362.
The above Madras decision was cited with approval by the Constitution Bench of
the Supreme Court in Nagpur Electric Light and Power Co. Ltd. v. K.
Shreepathirao, AIR 1958 SC 658 at page 663, para 14. The subsequent decisions
of the Bombay, Gujarat, Allahabad and Calcutta High Courts are also in accord
with the Bench decision of this court in Mathew's case, [1961] KLT 45; AIR 1961
Ker 180 - See Gendalal Cotton Mills Ltd. v. Basant Kumaribai, AIR 1961 Bom 1;
Chimanlal v. Chandanben, AIR 1965 Guj 207; Kundon Sugar Mills v. Indian Sugar
Syndicate, AIR 1959 All 540; Rajendra Prasad Oil Mills v. Chunni Devi, AIR 1969
All 1 [FB] and Jogesh Chandra Bera v. Sri Iswar Braja Raj Jew Thakur, AIR 1981
Cal 259.
In the light
of the Bench decision of this court in Mathew's case, [1961] KLT 45 and the preponderance
of judicial opinion and the approval of the Madras decision in Perumal
Goundan's case, AIR 1918 Mad 362 by the Constitution Bench of the Supreme Court
in Nagpur Electric Light and Power Co. Ltd.'s case, AIR 1958 SC 658, I do not
think that the earlier Bench decision of this court in Mathew's case, [1961]
KLT 45; AIR 1961 Ker 180, requires reconsideration. In the light of the above
Bench decision, the court below was justified in holding that the word
"person", occurring in Order 33, rule 1 of the Civil Procedure Code,
is not limited to a natural person. The order of the court below dated November
21, 1991, does not suffer from any jurisdictional error or illegality to merit
interference under section 115 of the Civil Procedure Code, I hold so. The
revision is without merit. It is dismissed.
The
observations of the court below in paragraph 15 of its order, that the
plaintiff can claim estimated profit by way of damages and the suit laid for
this purpose is maintainable, did not arise for consideration at that stage and
the decision on that aspect of the matter should have been postponed to be
decided after evidence in the case. The observations contained in paragraph 15
of the order of the court below are not germane to the enquiry, at the present
stage. The said observations shall not deter the parties from raising the plea
at a later stage or prevent the court from considering the matter in detail.
The revision
is dismissed with the above observations.
[1952] 22 Comp Cas 338 (PUNJ.)
v.
Jagatjit Sugar Mills Co. Ltd.
KAPUR, J.
SEPTEMBER 21, 1951
A.R. Kapur, for the petitioner.
Manohar
Lal Bagai, for the respondents.
Kapur J.—This is a rule directed against
an order passed by Mr. Chandar Gupt Suri, Subordinate Judge of the 1st Class,
On the 1st of September 1947, the Jagjit Sugar Mills Company, Limited, insured some goods for one month against riot risk. These goods were at Jaijon. On the 6th September, 1947, 113 bags of shakkar are alleged to have been looted by a riotous mob and on the 19th October, 1949, a suit was brought by the insured for recovery of Rs. 5,913-11-6 being the loss suffered by them due to the looting. In regard to jurisdiction there was a warranty clause in the policy in the following words:
"It is hereby warranted that in case of any claims arising in respect of the property hereby insured, the same shall be paid and settled in Lahore and the entire cause of action shall also be deemed to arise in Lahore and further that all legal proceedings in respect of any such claim shall be instituted in a competent court in the city of Lahore only."
The defendants
took a preliminary objection that the courts at
The suit has
been brought at
It has been held
that the domicil of a company is fixed by the statute by the situation of its
principal place of business. The mere fact that in accordance with some of the
letters which have been produced, and Exhibit P8 is a principal one of them,
the former office has now been shifted to
Counsel for the plaintiff has stressed the point that the insurers
have been writing to them that the case would now be looked into by the
[1950] 20 COMP CAS 233 (
HIGH COURT OF
v.
Corporation of
SEN, J.
CRIMINAL APPEAL NO. 104 OF 1949
AUGUST 10, 1949
B. Das and Surathi Mohan Sanyal, for the Appellant.
Prafulla Coomar Banerjee, for the Crown.
Debabrata Mukherjee and Sunil Kumar Basu, for the Respondent.
This
is an appeal by the Express Dairy Limited against an order of conviction passed
by Sri N.K. Ghose, Municipal Magistrate, Calcutta, convicting the company of
having committed an offence punishable under Section 407 read with Section 488
of the Calcutta Municipal Act. In short, the company was charged with storing
for sale adulterated milk. The company has been sentenced to pay a fine of Rs.
500. Various defences were taken in the Court below. On the merits the defence
was that the milk was not adulterated and in support of that, various points
were raised regarding the method of examination of the milk.
Having regard to the decision at which I have arrived, it would not be proper for me to consider the merits of the case. Mr. Das appearing on behalf of the company points out to me that there was no examination of the company in accordance with the provision of Section 342 of the Criminal Procedure Code. He further points out that the provisions of Section 242 of the Criminal Procedure Code were not also observed. On these grounds he says that the whole trial has been vitiated. His argument is that by virtue of the provisions of Section 5 of the Criminal Procedure Code the offence with which the company has been charged should have been tried in accordance with the provisions of the Code of Criminal Procedure. On behalf of the Corporation Mr. Mukherjee contends that there has been substantial compliance with the provisions of the Code of Criminal Procedure and that the accused has not been prejudiced by anything done by the learned Magistrate. On behalf of the Crown Mr. Banerjee adopts the contentions raised by Mr. Mukherjee. A further argument placed by them is that it is not possible to follow the provisions of Sections 242 and 342 of the Criminal Procedure Code inasmuch as the accused was merely a juridical person and not an actual person. That being so, they contended that there could be no personal examination of the company under Section 342 of the Criminal Procedure Code, nor could there be any explanation given regarding the offence charged to the company personally in accordance with the provisions of Section 242 of the Criminal Procedure Code.
There can be no doubt
that as the company is merely a juridical person, the charge could not be
explained to the company itself nor could the company personally make a plea.
It is also obvious for the reasons stated above that the company could not be
personally examined in accordance with the provisions of Section 342 of the
Criminal Procedure Code. The question which arises is whether by reason of
these circumstances the Court was absolved from following the provisions of
Sections 242 and 342 of the Criminal Procedure Code. In my opinion the Court
was not so absolved. The Code provides in Section 205 for the appearance of an
accused by his pleader. The word 'pleader' does not necessarily mean a lawyer
engaged to argue the case but it includes an agent duly empowered to answer all
questions on behalf of the accused. Now, in this case it was possible for the
company to be represented by somebody and indeed no other means of appearance
were possible. If the company was represented by what I may term its agent,
then it was the duty of the Court to follow the provisions of Sections 242 and
342 of the Criminal Procedure Code, as if such agent were the accused. In the
present case the company authorised a lawyer to defend the case, but it is not
at all clear that the lawyer was an agent of the company for all purposes; that
is to say, it is not quite clear that the lawyer was given the right to do all
such things as the company could have done if it were a physical being. From
the record it appears that one Mr. Calloden, the Manager of the Shop in
Nothing of the kind was done by the learned Magistrate. What he has stated is as follows :—
"Mr. N.B. Guha appears with Mr. Calloden, Sales Manager of Express Dairy Co. Ltd., and denies the charge and says R.N. Sharma does morning duty and looks after sales at the time, etc."
It is very difficult to understand what the learned Magistrate means. Was he reproducing the statement of Mr. Guha or of Mr. Calloden ? I am unable to decide this question. I find that the learned Magistrate has made no attempt to follow the Code of Criminal Procedure. He seems to be oblivious of the provisions of Section 5 of the Criminal Procedure Code. There is nothing in the record to show that the offence was ever explained either to Mr. N.B. Guha or to Mr. Calloden, nor is it possible to find out who denied the charge. It is clear, therefore, that the provisions of Section 242 of the Criminal Procedure Code have not been followed.
I now turn to the consideration of the question whether the provisions of Section 342 of the Criminal Procedure Code have been followed. It is admitted on behalf of the respondent and the Crown that there has been no examination of anybody in accordance with the provisions of Section 342 of the Criminal Procedure Code.
The next question for decision is whether the failure to observe these provisions of the Code would vitiate the trial, or whether these errors were of such a nature that they are curable with the help of the provisions of Section 537 of the Criminal Procedure Code on the ground that the accused has not been prejudiced by these errors of procedure. It has been held by this Court that the failure to observe the provisions of Section 242 of the Criminal Procedure Code vitiates the entire trial: see the case of Gopal Krishna v. Motilal Singh. It has also been held in a long series of decisions that failure to observe the provisions of Section 342 of the Criminal Procedure Code also vitiates a trial. It has been contended by learned Advocate appearing on behalf of the Corporation that the recent decision of the Judicial Committee in the case of Pulukuri Kottaya v. King-Emperor has really done away with these decisions and he contends that having regard to this decision it should be held that these errors are curable by invoking the aid of Section 537 of the Criminal Procedure Code. In my opinion the decision of the Privy Council has not decided that these decisions of the Indian Courts are incorrect. In the case before the Judicial Committee the question involved was whether the denial of the right given to an accused person by the proviso to Section 162 of the Criminal Procedure Code amounted to an illegality which vitiated the entire trial. The Judicial Committee held that failure to give the accused the benefit of the proviso to Section 162 of the Code was a serious matter, but that in the particular circumstances of that case the error was curable by Section 537 of the Criminal Procedure Code, inasmuch as the accused had not been prejudiced. It did not deal directly with the provisions of Sections 242 and 342 of the Criminal Procedure Code. In passing, however, their Lordships made certain observations which are to be found at page 479 of the aforesaid report. I may mention in this connection that Mr. Pritt appeared on behalf of the accused and contended that the error committed by the Crown was incurable. He argued that a breach of a direct and important provision of the Code of Criminal Procedure could not be cured and that it must lead to the quashing of the conviction. Their Lordships remarked that this argument found some support in two cases namely in the case of Trikha v. Nanak, and In re Madura Muthu Vannian, in which the view was expressed that any failure to examine the accused under Section 342 of the Criminal Procedure Code was fatal to the validity of the trial and could not be cured under Section 537 of the Code. Their Lordships then expressed the opinion that the argument of Mr. Pritt was based on too narrow a view of the operation of Section 537 of the Criminal Procedure Code. They did not say that the failure to observe the provisions of Section 342 of the Criminal Procedure Code was curable under Section 537 of the Code if it could be shown that it did not prejudice the accused; nor did they anywhere say that failure to observe the provisions of Section 242 of the Criminal Procedure Code was curable under Section 537 of the Code if the error did not cause prejudice to the accused. I do not think therefore that this case is of much help to the respondent. The decisions regarding the effect of the non-observance of the provisions of Sections 242 and 342 of the Criminal Procedure Code therefore remain unshaken.
I would further add
that I am quite unable to appreciate how Section 547 of the Criminal Procedure
Code can ever apply to a case where the provisions of Section 342 of the Code
have not been observed. If an accused person is convicted without the
observance of the provisions of Section 342 of the Code it would amount to a
conviction of a person without properly hearing his defence. In
As regards the failure to observe the provisions of Section 242 of the Criminal Procedure Code I have already said that this Court has decided that the failure vitiates the entire trial and nothing has been said against this decision by the Judicial Committee. As it is a decision of a Division Bench of this Court I am bound to follow it and no other reason is necessary to be given for holding that the trial is vitiated by reason of the non-observance of the provisions of Section 242 of the Criminal Procedure Code.
Having regard to what has been said above I hold that the entire trial has been vitiated. The order of conviction and sentence are set aside and the case is sent back for retrial denovo by Sri S.P.Chatterjee Municipal Magistrate, in the light of the observations made above.
Mr. Das on behalf of the company undertakes that the company shall appoint a person to represent it at the trial for all purposes as if he were the company itself.
[1946]
16 Comp Cas 1 (CA)
In
the Court of Appeal
D. & L. Caterers,
Ltd., and Jackson
v.
D'ajou
Lord
Goddard, MacKinnon, L.J., Du Parcq, L.J.
March 23, 1945
T.F. Davis, for the appellant.
Macaskie. K.C., and Fortune, for the respondents,
the company and its managing director.
judgment
Lord
Godpard. —Except
on one point, on which there is something to be said, I confess that I think
this is rather an idle appeal. It is an appeal in an action brought by a
limited company which owns a very well-known
In those
circumstances, the Judge having found that those words were used, it seems to
me that it is impossible to ask this Court to say either that those words were
not capable of a defamatory meaning or that they were, not defamatory. Of
course they were defamatory; they were meant to be defamatory, and they are saying,
as I read them, that the company and Mr. Jackson arc carrying on the Bagatelle
Restaurant in a questionable manner, calling for the specific attention of the
Ministry of Food, and obviously implying that the Rationing Orders make under
the Defence of the Realm Regulations have been broken, and I think also
indicating that Mr. Jackson is buying food in the black market, as it is
commonly called. I do not think that anybody wish a modicum of common sense
could have any doubt that that is so. Therefore, that is clearly and obviously
defamatory and actionable with regard to Mr. Jackson. So too is it defamatory
and actionable with regards to the company, although it seems curious that this
precise point does not ever seem to have been decided. But in the well-known
case of South Hetton Coal Co. v. North-Eastern News Association it was argued
that a limited company could not bring an action for defamation. It is true
that in that case it was written defamation. The Court held that a
company or a corporation could sue for defamation, not for all defamation, but
for defamation which related to its business. For instance, if you said of a
company, "It is a murderer", or if you said of a company, ''It is a
forger", I have no doubt the company could not
bring an action, because a company cannot forge and a company cannot murder. It
is true that a company has been convicted of manslaughter under curious
circumstances, namely, fencing its collieries or premises of some sort with an
electric cable and not giving notice, as a result of which somebody was killed.
But in the ordinary way it would not be actionable to write something of a
company which might be actionable in the case of individuals, unless what is
written reflects upon the company in the way of its business. With regard to
oral defamation, as a general proposition oral defamation is not actionable
without proof of special damage. But there are certain cases in which the law
implies damage, and one of those is oral defamation uttered in respect of a
man's business. Therefore, I can see no reason at all why, if you orally defame
a company in the way of its business, the company should not have an action
just as much as a private individual, because undoubtedly it could have an
action for any defamation if it could prove damage—I will not say that, because
I think the same limitation and the same principles must apply to slander as to
libel in respect of a limited company, that is to say, the slander must relate
to the company's business. If it does, I see no principle upon which any
distinction can be drawn between written defamation and oral defamation.
Therefore, it seems to me that an action lies at the suit of a company. I do
not think, therefore, that it is necessary to discuss the question as to
whether or not the company could maintain an action on the ground that it has
been charged with a criminal offence. Mr. Jackson obviously could, if the words
bear that meaning, as I think they do, but I do not propose to discuss it in
the case of the company, because it is not necessary. These two matters seem to
me as clear as daylight, and I think, therefore, that the judgment so far was
perfectly right.
But now there is raised another point. There was no
plea of justification in this case. In substance what was pleaded was that the
words were not defamatory and were not actionable. But at the trial leading
counsel for the defendant sought to cross-examine in respect of matters of
which notice had been given that the defendant intended to call evidence in
mitigation of damages, and the learned Judge stopped him. The notice, which was
served under the provisions of Order 36, rule 37, stated that the defendant
intended to give evidence that the plaintiff company was convicted at Bow
Street Police Court on March 30, 1944,
and fined £220 and ordered to pay costs for failing to make entries in the
stock book of purchases of spirits and for buying spirits from the plaintiff
Jackson, who had no authority to sell or licence to deal in spirits, and that
the plaintiff Jackson was on the same date fined £15 and ordered to pay costs
for dealing wholesale in spirits without a licence. Then it stated that certain
other servants of the company were also prosecuted on the same day, and that in
the following week, on April 5, 1944, the plaintiff company was at Bow Street
Police Court fined a total of £523 and ordered to pay costs for selling lager
beer at prices exceeding the maximum price. That was as statement that after
the uttering of the slander the plaintiff company was twice convicted and the
individual plaintiff was once convicted—that the plaintiff company was
convicted of a customs offence, failing to make entries in the stock book for
the purchase of spirits and also for selling lager beer at over the maximum
price. It is said that the learned Judge was wrong in stopping the
cross-examination when those matters were being put to the plaintiff, Mr.
Jackson, and I also gather that, in view of the learned Judge's ruling, counsel
for the defendant in the Court below did not tender the evidence in support of
the matters which were set out in the notice. I think it is said that the
learned Judge had clearly indicated that the evidence could not be given, and
therefore I daresay there was no necessity for counsel actually to tender the
evidence. Had I thought that the evidence was admissible, speaking for myself,
after the learned Judge's very clear intimation when objection was taken to the
cross-examination, I should not have thought it was necessary for counsel
formally to tender the evidence, and I should not decide the question on the
ground that he had not formally tendered it.
The law with
regard to cross-examination on such matters as this in libel actions is, I
think, established, and also the law as to the right to give evidence in
mitigation in actions of defamation is also clear-Whether the law is wholly
satisfactory it is not for me to say; we have to take the law as we find it,
and certainly for a great many years it appears that the law has been this. You
can cross-examine a plaintiff in a libel or slander action in exactly the same
way that you can cross-examine a plaintiff in any other action; therefore, if
you want to put questions to him, including questions as to whether he has been
convicted of offences, for the purpose of destroying his credit, you can do
so-If a plaintiff goes into the witness-box and poses, for instance, as a man
of unblemished reputation, and not only a man of unblemished reputation but a
man who ought to be believed, you can put to him any questions you like to show
that he is in fact a rascal whom the Court or the jury ought not to
believe—that is to say, to use a common expression, you can
cross-examine to credit. But you are bound by his answers, and if he denies
some matter you cannot call evidence to contradict it. It has always been said
that you cannot use the fact that you have given notice to call evidence in
mitigation of damages in order to cross-examine a person, in effect, to set up
a justification. Now, says appellant's counsel, "I do not seek to do that
because I could not justify, but I do say that I could use this to destroy the
plaintiff's reputation."
It has been laid down both in Scott v. Sampson and Hobbs v.
Tinling & Co.,
that you can only give evidence of general bad reputation, that you cannot give
evidence of specific instances to show that in certain specific matters the
plaintiff has been convicted of or has done that which is dishonest or wrong,
although you may give evidence to show that he is a man who is generally known
as a person of bad reputation. Again I say I am not concerned with whether that
is satisfactory law or whether it is not, but that it is the law and that it
was laid down in this Court as recently as 1929, in very long judgments which
reviewed the whole of the law, in the case of Hobbs v. Tinling &-Co, is, I
think, well known. That case is now well known to all practitioners who have to
deal with this class of case.
It seems to me (and it was not contended otherwise)
that the object of attempting in this case to put the conviction to the
plaintiff was not on a matter of credit, that it was not to test his
credibility or to endeavour to destroy his credibility; it was to get in these
facts by cross-examination in mitigation of damages. Before the war started, I
think, a committee was set up to consider generally the question of the law of
libel and the practice relating thereto, and it may very well be that that
committee will take this matter into account and consider whether in many cases
it may not be just that a man who complains of being libelled and says,
therefore, that his character is damaged should, subject to proper safeguards,
be open to be cross-examined and to have evidence called against him to show
that in certain specific matters he is a person who had not an unspotted past.
But that has nothing to do with this case. The law has been settled once and
for all, so far as this Court is concerned, in
I think the learned Judge applied the right rules here.
I think it is equally clear that the counsel for the successful plaintiff in
The learned Judge gave the plaintiff Jackson £2 and
the plaintiff company £4 in respect of breaches of the undertaking to which I
have referred, which had been given when it was alleged that there had been
previous slanders. In my judgment, that was wrong, because this action was not
brought for breach of contract and there is no allegation of breach of
contract. However, we dismiss the appeal, and we direct that the order be
amended by substituting £ 50 in each case for £ 52 and £ 54. I do not know how
it came to be done below, but there seems to have been no protest about it, as
the matter was not raised. It is quite clear that neither on the writ nor in
the statement of claim is there any allegation that
the action was brought for breach of contract. I think the learned Judge acted
perfectly properly in awarding that small sum. It makes no difference to the
merits of the appeal.
MacKinnon, L.J. —I agree, and I do not think it
necessary to add anything.
du Parcq, L.J.—I agree. It
is not necessary to decide whether the learned Judge was right in the view that
"a limited company"—I am reading his words—"without proof of
actual damage can sue for a defamatory spoken word imputing the commission of a
criminal offence for which, if it were a natural person, it could be sentenced
to a term of imprisonment." I wish to say nothing one way or the other
about that but to reserve my opinion upon it. I have no doubt, however, that a
slander of a company in the way of its business is actionable without proof of
special damage. I think that that follows logically from the earlier decisions.
The question whether a corporation could bring an action for libel in any
circumstances was dealt with as early as 1859, and it was then held, in
Metropolitan Saloon Omnibus Co. v. Hawkins, that it
could maintain an action for libel by which its property was injured. At that
time in that case it was not necessary to decide whether or not proof of
special damage was necessary, because special damage there was alleged. Then,
as we have seen, later it was established—one instance is the South Heltcn Coal
Co. case —
that in the case of a libel it is not necessary for the company to prove
special damage. A company cannot sue either for libel or for slander unless it
is defamed in the way of its business. In the case of a libel
it. is not necessary to prove special damage,
and there can be no reason in principle why in the case of a slander it should
have to prove special damage. It is quite true that the learned Judges in the
South Hetton Coal Co. case do not
specifically say that the rule is the same for slander as for libel. That was
because it was unnecessary to decide that point as they were dealing with an
action for libel. As I say, it occurs to me that for this particular purpose
libel and slander in the case of a company are indistinguishable.
I entirely agree with all that my Lord has said on
the other points.
[1931]
1 Comp Cas 186 (
High
Court of
v.
The Anglo-Indian and Domiciled European
Federation
Heald and Mya Bu, J.
First appeal No. 125
of 1929
January 17, 1930
Leach, for the appellant.
Hay, for the respondents.
Heald, J. —Appellant's learned Advocate says
that an unincorporated association, such as the "Federation" admittedly
was at the time when the alleged libels were published, cannot be libelled as
an association, since it is not a legal person, and that the remedy of the
members of such an association, if they are libelled is to sue personally. He
alleges further that one member of such an association cannot be allowed to sue
on behalf of the other members, and that the incorporation of the association
after the publication of the libels does not enable the President of the
incorporated association to sue on behalf of the association or of the other
members of the association.
No direct authority for the first of these
propositions has been cited, but it was suggested on high authority in the case
of the London Association for the
Protection of Trade v. Greenlands, Ltd. that an unincorporated association as such cannot be guilty
of libel because "as an entity it could neither publish nor authorise the
publication of a libel," and it would seem to follow that as an entity it
could not suffer damage by reason of a libel. I would, therefore, hold that the
"Federation" as an unincorporated association, which it was at the
time of the publication of the alleged libels, could not suffer damage and,
therefore, could not sue.
The question whether the Federation's subsequent
incorporation makes any difference to its right to sue, that is, in effect,
whether an incorporated association, as such, can sue for an injury done to its
members before it was incorporated, seems to me to admit of only one answer,
namely, that in such circumstances the incorporated body as such cannot sue.
It seems to me to follow that the only action which
can be taken in respect of a libel on an unincorporated association is a suit
brought either by the individual members or on behalf of the individual
members. No question arises in this case of an action brought by individual
members and strictly speaking no
question of an action brought by one member on behalf of other members arises,
since the suit does not purport to be a suit brought under the provisions of r.
8 of O. I, and the permission of the Court which is
necessary under that rule was not, in fact sought, in this suit. We have,
however, been asked to consider the question whether or not the second
respondent could be allowed to sue on behalf of those members of the Federation
who were members of the unincorporated association at the time of the
publication of the alleged libels. Appellant relics on the dictum of Fletcher
Moulton, L.J., in the case of Jenkins v. John Bull, Ltd., where
the learned Judge said: "To my mind no representative action can lie where the sole relief sought is damages, because they
have to be proved separately in the case of each plaintiff." Respondents
on the other hand, rely on the wording of O.I, r. 8 which says that "
Where there are numerous persons having the same interest in one suit, one or
more of such persons may, with the permission of the Court, sue in such suit on
behalf of, or for the benefit of, all persons so interested."
The wording
of this rule, if it applies to the case, raises the question whether or not all
the persons who were members of the unincorporated "Federation" at
the time of the publication of the alleged libels have "the same " in the suit. No Indian case where the suit has
been based on libel has been cited before us and we have been unable to find
any. There are cases such as Geereeballa v. Chunder Kunt where
one legatee under a will has been allowed to sue on behalf of himself and other
legatees for recovery of the estate, or Oriental Bank Corporation v. Gobind
Lall
where one creditor was allowed to sue on behalf of himself and the other
creditors for a declaration that certain properties belonged to the estate of
their debtor, who had died intestate, or Ahmedbhoy v. Bal-krishna where
one rayat was allowed to sue on behalf of himself and the other rayats
for declaration of their general rights, or Chidatnbaranatha v. Nallasiva where
one disciple of a mutt was allowed to sue on his own behalf and on behalf of
other disciples for a declaration that certain alienations of property, in
which as such disciples they had the same interest, were invalid» but we know
of no case in which one of a number of persons who are alleged each to have
suffered damage by the publication of the same libel has been allowed to sue on
his own behalf and on behalf of other such persons. The words "the same
interest" are used in the English r. 9 of O. XVI to which our r. 8 of O.I.
corresponds, and in the absence of any material difference in the wording of
the two rules and of any authority to the contrary in India, I am satisfied
that we ought to accept the view taken in Jenkins v. John Bull, Ltd. (supra p.
188) and hold that the second respondent was not entitled to sue either on
behalf of the incorporated "Federation" as in fact he did, or on
behalf of those members of the unincorporated "Federation" who were
members at the time when the alleged libels were published.
On these findings it is unnecessary to consider
whether or not the "Federation" as such or the members of the
"Federation," who were members at the time of publication of the
alleged libels, suffered damage, and all that we need consider is whether the
publication constituted a libel on the second respondent, and if so, what
measure of damages should be awarded. We shall be bound to consider whether or
not the publication involved a separate libel on the second respondent
personally, as well as a libel on him as a member and as Chairman of the
"Federation" and in assessing the measure of damages we shall be
entitled to take into consideration the fact that the second respondent was the
Chairman of the "Federation" and so possibly more likely to be
affected by a libel on the "Federation" than an ordinary member.
Appellant's learned Advocate says that he does not
dispute the evidence that at the meeting of the Provincial Committee which
appellant attended there were present in addition to the male members of the
Committee only two ladies, who were members of the Committee and only one child
and two young people, that is to say, he admits that appellant's statement that
there were "about six ladies, two or three with babies in their laps,
about ten girls from five to fifteen years of age and about ten boys of similar
ages" was false, but he denies that the falsehood was malicious. In matters
of libel the law imputes malice from falsehood, and we have no difficulty in
finding that in so far as the statements were false they were malicious.
What we have, therefore, is that appellant said
falsely that the "Federation" had in its membership a preponderance
of women and children and suggested that, for that reason, it would be
extremely hazardous to allow matters of vital importance to the Anglo-Indian
and Domiciled European Community to be left to its judgment, and that he also
said falsely that about six ladies, two or three with babies in their laps, and
about ten girls and ten boys attended a meeting of its Committee.
I see no reason to doubt that those statements
constituted a libel on the persons who were members of the Federation or of its
Committee and on the second respondent as a member of the
"Federation" and as Chairman of the Committee at the time when the
statements were published, but I fail to see how they constituted a separate
libel on the second respondent in his personal capacity as distinct from his
capacity as a member of the Federation and Chairman of its Committee.
What remains is for us to assess the damages which
should be awarded to the second respondent as by reason of the libel on him as
a member of the Federation and Chairman of its Committee.
The libels were, in my opinion, not serious. I doubt
if the second respondent's reputation, which is admittedly high and well
established in Rangoon, could possibly, in the opinion of right thinking men,
suffer any material damage because it was said of a representative association
such as the "Federation" of which he was Chairman that it had a
preponderance of women and children among its members or that a number of women
and children attended a meeting of its committee. Such libel as there was
consists in the fact that appellant's opinion that the Federation was not fit
to be entrusted with the judgment and decision in matters of vital importance
to the Anglo-Indian and Domiciled European Community, was supported by a false statement
of facts and was, therefore, not fair comment. The libels were little more than
technical, and in my opinion "nominal," as distinct from
"contemptuous" damages, coupled with an award of costs, will suffice
to indicate that in our view there was in fact a libel, that the imputations
made therein were false, and that the second respondent has cleared his
character of any cloud that may have been cast on it by the libels.
I would, therefore, set aside the judgment and decree
of the learned Judge on the Original Side of this Court and would dismiss the
suit without order for costs so far as the first respondent is concerned and I
would award to the second respondent nominal damages of ten rupees with costs
on that amount together with the special Advocate's fee of Rs. 660 in the Trial
Court.
I would direct respondents to bear appellant's costs
in the appeal, Advocate's fee to be 20 gold mohurs.
Mya Bu, J.—I concur.
[1995] 83 COMP. CAS. 888 (PUNJ. & HAR.)
HIGH COURT OF PUNJAB AND HARYANA
V.
Pan India Plastic P.
Ltd.
A.
L. BAHRI, J.
Company
Appeal No. 59 of 1986
NOVEMBER
20, 1992
JUDGMENT
A.L. BAHRI,
J. - On March 2, 1984, a
decree for recovery of Rs. 1,29,562.40 with interest and costs was passed in
favour of the decree-holders, Maruti Ltd. and Maruti Udyog Ltd., against the
judgment-debtor, Pan India Plastic Pvt. Ltd., through Rabindra Grewal, managing
director and Shri Rabindra Grewal, managing director, Pan India Plastic Pvt.
Ltd. Execution of the decree was taken in this court for recovery of the
decretal amount which included interest and costs, was stated to be Rs.
2,00,364.50, by attachment and sale of movable property described as
air-conditioner, car, scooter, electric fans, radio, transistors, television,
refrigerator, machinery, office furniture, cash, all other
goods and every other movable and immovable property found at the spot. Thus
warrant of attachment was issued. The attachment could not be effected as per
report on the warrant of attachment which is exhibit A-4. The report is dated
May 7, 1985.
Contempt
proceedings were initiated by the court in view of the report exhibit A-4,
against two persons, namely, Rabindra S. Grewal and Dhan Raj. Ultimately, both these
persons submitted affidavit copies which are annexures A-2 and A-3. They
tendered unqualified apologies for causing directly or indirectly hindrance in
the execution of warrant of attachment issued against the judgment-debtor. They
sought forgiveness from this court. Thus, in view thereof no further action was
taken against the aforesaid two persons by the court.
The
decree-holders moved the present application Company Appeal No. 59 of 1986 in
Execution Petition No. 5/L of 1984 under Order 21, rule 11A read with section
55, read with section 151 of the Code of Civil Procedure for arrest and
detention of the managing director of judgment-debtor No. 1, Pan India Plastic
(P) Ltd., which is for disposal. The aforesaid facts have been mentioned in the
application. In para 2 of the application it is mentioned that the
judgment-debtor did not permit the execution of the warrant of attachment
issued by this court. The process server and the nominee of the decree-holder
were not allowed to enter the premises to effect the attachment. Resistance was
offered to the extent that the entrance gate was locked and was not opened in
spite of the fact that the civil Nazir accompanied the representative of the
decree holder. In para 3 reference has been made to
issuing of notices to Shri Rabindra Singh Grewal and Dhan Raj Chowkidar and
affidavits filed by them. It is not considered necessary to refer in detail to
the matters mentioned in the affidavits. Suffice it to say that they stated
that the property of the company had already been sold under orders of the
Delhi High Court and the remaining land and property was being auctioned by the
Haryana Financial Corporation. Along with the execution application an
affidavit of Mohinder Singh, assistant secretary, Maruti Udyog was filed. A
reply to the application was filed by way of affidavit of Rabindra S. Grewal
wherein he stated that he had no assets left of his own and the assets sought
to be attached at 14/3, Palam, Gurgaon Road, did not belong to him but were in
fact totally owned by Mr. B.S. Grewal, I.C.S. (retired) (his father). In the
affidavit filed by Shri Dhan Raj, he stated that he was the chowkidar of Shri
B.S.Grewal at the farm-house and had nothing to do with the company against
whom a warrant of attachment was issued and that he never obstructed attachment
of the property.
The present
application remained pending for six years without any progress in the
proceedings. When the matter was taken up on November 19, 1992, statements of
counsel for the parties were recorded. Counsel for the decree-holder in his
statement produced in evidence affidavits of Mohinder Singh, assistant
secretary of Maruti Udyog Limited, Rabindra Grewal, Dhan Raj, report of Nazir,
Gurgaon, and a letter of Shri G.S., Grewal, dated August 19, 1985. He further
stated that he was not to produce any other evidence in support of his
application. Counsel for the judgment-debtor raised no objection to the
admitting in evidence of the aforesaid documents and he stated that he will not
produce any evidence in this application. Thus, the aforesaid documents were
admitted in evidence as exhibits A-1 to A-5. Their photocopies as such were
placed on the file of this application. I have heard counsel for the parties.
Order 21, rule
11A of the Code of Civil Procedure, 1908, and section 51 of the Civil Procedure
Code, read as under:
"11.A. Application for arrest to state grounds. - Where an application is made for the
arrest and detention in prison of the judgment-debtor, it shall state, or be
accompanied by an affidavit stating, the grounds on which arrest is applied
for."
"51. Powers of court to enforce execution. - Subject to such conditions and limitations
as may be prescribed, the court may, on the application of the decree-holder,
order execution of the decree:
(a) by delivery of any property specifically decreed;
(b) by attachment and sale or by sale without attachment of any
property;
(c) by arrest and detention in prison (for such period not exceeding
the period specified in section 58, where arrest and detention is permissible
under that section);
(d) by appointing a receiver; or
(e) in such other manner as the nature of the relief granted may
require :
Provided that,
where the decree is for the payment of money, execution by detention in prison
shall not be ordered unless, after giving the judgment-debtor an opportunity of
showing cause why he should not be committed to prison, the court, for reasons
record in writing, is satisfied, -
(a) that the judgment-debtor, with the object
or effect of obstructing or delaying the execution of the decree, -
(i) is likely to
abscond or leave the local limits of the jurisdiction of the court, or
(ii) has, after the institution of the suit in which the decree was
passed, dishonestly transferred, concealed, or removed any part of his
property, or committed any other act of bad faith in relation to his property,
or
(b) that
the judgment-debtor has, or has and since the date of the decree, the means to
pay the amount of the decree or some substantial part thereof and refuses or
neglects or has refused or neglected to pay the same, or
(c) that
the decree is for a sum for which the judgment-debtor was bound in a fiduciary
capacity to account."
Article 21 of
the Constitution of India provides protection of life and personal liberty to
the citizens. As per this provision no person is to be deprived of his life or
personal liberty except according to procedure established by law. When the
courts are required to deprive a person of his personal liberty while ordering
his detention in the prison, such like provisions are to be strictly complied
with before such orders are passed. Order 21, rule 11A
of the Civil Procedure Code, as reproduced above is a provisions in the statute
which affects the personal liberty of a citizen. If such an application is
filed it has to be accompanied by an affidavit stating the grounds on which
arrest is applied for. Simply on doing so, the order of arrest is not required
to be passed. As provided under section 51 of the Civil Procedure Code, in the
case of a decree for the payment of money, execution by detention in prison is
not to be ordered unless the judgment-debtor is afforded an opportunity of
showing cause why he should not be committed to prison and the court is
required to record reasons in writing for its satisfaction on the grounds
mentioned therein. On failure to establish one of such grounds on which
reliance is placed, an order detaining the judgment-debtor in prison cannot be
passed. These provisions have been the subject-matter of consideration by the
judicial courts. A brief reference is considered appropriate at this stage. The
Supreme Court in Jolly George Varghese v. Bank of Cochin, AIR 1980 SC 470;
[1982] 52 Comp Cas 70, laid down that as long as there is no dishonesty and
mala fides on the part of the judgment-debtor to discharge his obligation,
committing him to civil prison would amount to violation of article 11 of the
International Covenant on Civil and Political Rights and article 21 of the
Constitution of India. The aforesaid decision was referred to and relied upon
by the Karnataka High Court in Karunakar Shetty (K.) v. Syndicate Bank [1990]
68 Comp Cas 413, 414; AIR 1990 Kar 1, 2 and it was observed as under:
"Therefore,
it is the decree-holder who has to demonstrate that the judgment-debtor
wilfully with the mala fide intention to deprive the benefit of the decree, is
refusing (refused) to pay the decretal amount in spite of having sufficient
means to pay. The decree-holder has not discharged that obligation by any
cogent evidence."
The Madras
High Court in Muthu Pathar (K.V) v. R.S. Mani Rao, AIR 1956 Mad 580, while
referring to the provisions of section 51 of the Code of Civil Procedure
observed that the court is required to give opportunity to the judgment-debtor
showing cause why he should not be committed to prison. The Calcutta High Court
in I.K. Merchants Ltd. v. Indra Prakash Karnani, AIR 1973 Cal 306, observed
that the onus is very heavy on the decree-holder who must satisfy the court
that the proviso to section 51(c) is attracted before a judgment-debtor is sent
to prison. The Madras High Court in Kunhiraman (T.) v. Pootheri Illath Madhavan
Nair, AIR 1957 Mad 761, held that the provisions of section 51 of the Civil
Procedure Code are mandatory. This court also had occasion to consider the
scope of section 51 of the Civil Procedure Code, in Pritam Singh v. S.B. Saini
Brothers [1987] 1 PLR 405, and it was observed as under:
"It is
thus clear that unless one of the conditions specified in the proviso to section
51 of the Code of Civil Procedure is present, arrest and detention of the
judgment-debtor cannot be ordered. It is not the case of the respondent that
the petitioner is likely to abscond or leave the local limits of the
jurisdiction of the executing court with the object or effect of obstructing or
delaying the execution of the decree nor any material has been brought on the
record that after institution of the suit in which the decree has been passed,
he has dishonestly transferred, concealed or removed any part of his property
or committed any other act of bad faith in relation to it."
In Bhoop Singh
Jakhar alias Ram Sarup v. Gauri Shankar Roshan Lal [1986] PLJ 655, this court
held that notice to the judgment-debtor to show cause must be given before
directing his detention in prison.
Reverting to
the merits of the case, the question for consideration would be as to whether
any of the grounds mentioned in section 51, proviso (a), (b) or (c), is made
out to order detention of the judgment-debtor in prison. The facts as narrated
above show that none of the grounds can apparently be attracted as provided in
clauses (a) to (c) of section 51 except one which is required to be considered
that by locking the outer gate of the house the judgment-debtor concealed his
property with the object of obstructing or delaying the execution of the
decree. In the application in para 2 there is no specific allegation that
Rabindra Grewal locked the outer gate of the house and concealed the property
in order to delay the execution of the decree or avoid it. What is mentioned is
that the judgment-debtor did not permit the execution of the warrant of
attachment issued by the court. Reference has been made to the two affidavits;
one filed by Rabindra Grewal and the other by Dhan Raj, exhibits A-2 and A-3
which are almost in the same terms wherein they had stated that they tender
unqualified apology for causing directly or indirectly hindrance in the
execution of the warrant of attachment issued against the judgment-debtor. They
sought forgiveness from this court. These affidavits were submitted when suo
motu action was taken by this court to punish them. The contents of the
affidavits as mentioned above do not prove any concealment of property by
Rabindra Grewal or that he had locked the gate knowingly that attachment was to
take effect. Exhibit A-4 is the report of the bailiff made on the warrant of
attachment. A perusal of the same would show that when the bailiff along with
the representative of the decree-holder went to the house, he found that the
outer gate was locked. Rabindra Grewal was not available and was reported to
have gone out. Whoever was present there, did not allow entry in spite of the
fact that the attachment warrant was shown or read over. The report further shows
that since the outer gate was locked, orders were sought for breaking open the
lock. He further reported that a separate warrant should be issued against the
company and property. From this report no finding can be arrived at that
Rabindra Grewal had locked the outer gate of the house or that he caused
hindrance on the spot in the attachment of the property lying in the house. The
decree-holder has thus utterly failed to prove that Rabindra Grewal, the
judgment-debtor, in order to delay or defeat the execution of the decree, had
concealed his property. That being the position, the grounds on which detention
of the judgment-debtor could be ordered, stand unproved.
Exhibit A-5 is
another document which has been brought on the record in evidence. However, the
same is not at all helpful in holding that the articles lying in the house
which were to be attached belonged to Rabindra Grewal. This letter is by Shri
B.S. Grewal claiming ownership of such articles. As to whether factually the
articles sought to be attached belonged to the judgment-debtor or his father
B.S. Grewal need not be decided in this application as the appropriate time
would be when some articles are in fact attached and somebody comes forward
with objections claiming the same to be his own in execution proceedings. Since
that stage has not so far reached, no observation is made at this stage which
may affect any body's rights.
The decree was
passed against the company through the managing director as well as Rabindra
Grewal, managing director of the company aforesaid, as is clear from the
certified copy of the decree sheet. The decree against Rabindra Grewal is not
in his individual capacity. In the application under disposal it is also so
mentioned that Rabindra Grewal, managing director of the company aforesaid be
sent to prison. Thus Rabindra Grewal is not the judgment-debtor in his personal
capacity that any action to detain him in prison could be taken. Learned
counsel for the judgment-debtor has relied upon the decision of this court in
Tikam Chand Jain v. State Government of Haryana [1987] 62 Comp Cas 601; [1987]
2 PLR 151, wherein it was observed that there was no provision in the Companies
Act making the managing director personally liable for recovery of dues against
a limited company. That was a case of recovery of sales tax under the Central
Sales Tax Act. The ratio of the aforesaid decision can well be applied to the
case on hand. It is not the case of the decree-holder that the articles
mentioned in the house belonged to the company. A general allegation was
mentioned that such articles belonged to the judgment-debtor. Further comment
is not being made at this stage as such a question may arise after any articles
are attached as to whether the articles belonged to the judgment-debtor company
or to the other judgment-debtor individually.
Learned
counsel for the judgment-debtor also referred to the decision of this court in
Sikander Singh (S.) v. S.A. Builders P. Ltd. [1989] 2 PLR 585, wherein it was
held that the managing director of the judgment-debtor company could not be
arrested under section 55 of the Code of Civil Procedure. The ratio of the
decision aforesaid can also be applied to the case on hand. Though in that case
the managing director was not shown as the judgment-debtor but in the present
case as already stated above Rabindra Grewal was shown as judgment-debtor but
as managing director. However, the grounds mentioned under section 51 of the
Civil Procedure Code, have not been proved to take any action against the
judgment-debtor, Rabindra Grewal, for his detention in prison.
In the
affidavit submitted by Rabindra Grewal which is on the execution file it was
stated that he was not possessing any property or
means to pay the decretal amount. At this stage no evidence to the contrary has
been produced by the decree-holder. Even otherwise no evidence has been
produced by the decree-holder that Rabindra Grewal was in possession of means
to pay the decretal amount. On that account also Rabindra Grewal cannot be
detained in prison in the proceedings initiated in the application aforesaid.
For the
reasons recorded above, the application is dismissed. However, there will be no
order as to costs.
[2003] 115 COMP. CAS. 310 (HP)
v.
Shivalik
Castings (P.) Ltd.
R.L. KHURANA, J.
CIVIL SUIT NO. 21 OF 1996
OCTOBER 19, 2000
K.D. Sood for
the Plaintiff.
Ramakant Sharma for the Respondent.
R.L.
Khurana, J. —The plaintiff, M.P.
State Electricity Board, has filed the present suit against the defendants for
the recovery of Rs. 44,18,842 towards electricity consumption charges.
Defendant No.
1, Shivalik Castings Private Limited is a private limited company duly
registered and incorporated under the Companies Act, 1956. It has its
registered office at
Defendant No.
1 was irregular in the payments of electricity charges. A sum of Rs. 18,39,000 was outstanding against defendant No. 1 by the end
of April, 1989. This outstanding amount also included the sum of Rs. 5,89,050 towards electricity consumption charges for the
period June, 1988, to August, 1988, and for the month of February, 1989. On the
default of defendant No. 1 to pay the outstanding amount, the electricity
connection to defendant No. 1 was temporarily disconnected with effect from
January 17, 1989.
Defendant No.
1 on May 19, 1989, was allowed to pay the outstanding amount in six
instalments. One instalment of Rs. 3,39,000 was paid
by defendant No. 1. On the request of defendant No. 1, it was allowed to pay
the balance amount of Rs. 15,00,000 in twelve equal
monthly instalments. However, no payment was made by defendant No. 1 in spite
of repeated opportunities having been granted. The arrears as in November,
1989, rose to Rs. 22,10,896. As a result, the
electricity connection was again temporarily disconnected on November 3, 1989.
On the request of defendant No. 1, the plaintiff on December 5, 1989, allowed
it to pay the outstanding amount in twelve instalments. The amount due was
cleared by defendant No. 1 by the end of December, 1990. From December, 1990,
to March, 1991, the electricity charges were regularly paid by defendant No. 1.
It again became a defaulter and the following amounts became due:
|
|
|
Rs. |
|
(i) |
Amount
outstanding as on 31-2-1991 |
18,89,403 |
|
(ii) |
Amount due
as MMC with effect from 6/91 to 12/91 |
7,87,500 |
|
(iii) |
Amount due on
account of slow running of the meter |
4,87,691 |
|
(iv) |
Amount due
on account of surcharge |
37,580 |
|
(v) |
Collection
charges of outstation cheque |
15,980 |
|
|
Total |
32,18,154 |
|
Less;
Security advance adjusted |
2,32,450 |
|
|
Net due |
29,85,704 |
Since the
above amount was not paid, the electricity connection was again temporarily
disconnected on May 31, 1991. Again on the request of defendant No. 1, a sum of
Rs. 17,45,449 was allowed to be paid in six
instalments. No amount was paid and the electricity connection was permanently
disconnected on June 30, 1991. According to the plaintiff, it is entitled to
interest on the outstanding amount of Rs. 29,85,704 at
the rate of 12 per cent. per annum, which amount of
interest comes to Rs. 14,33,135. Hence the present suit for recovery of Rs. 44,18,842 against defendant No. 1 as principal debtor and
against defendants Nos. 2 and 3 as guarantors.
Defendants
Nos. 1 and 3 did not put in appearance in spite of service. They were
accordingly? proceeded against ex parte.
The suit is
being resisted and contested only by defendant No. 2-United Polyfab, one of the
alleged guarantors for defendant No. 1. It was pleaded that defendant No. 2
never stood as a surety for defendant No. 1. The surety if any, guaranteed by
the erstwhile partnership firm was not binding on the present partnership firm
which came into being on April 1, 1991. Even otherwise, the surety furnished is
illegal since defendant No. 2 being a consumer of L.T. connection could not
have stood surety for a consumer of H.T. connection. It is further pleaded that
defendant No. 1-company has been ordered to be wound
up on February 4, 1994, by the High Court of Punjab and Haryana in Company
Petition No. 110 of 1987 and as such the suit is not maintainable. The correctness of the
outstanding amount has also been denied. Objections as to absence of cause of
action, limitation and estoppel were also raised.
On the
pleadings of the parties, the following issues were framed on March 22, 1999:
(1) Whether
the plaint does not disclose any cause of action, as alleged? OPD
(2) Whether the plaintiff is guilty of
concealing the material facts and the present suit is not maintainable, as alleged?
OPD
(3) Whether
the suit of the plaintiff is time-barred, as alleged? OPD
(4) Whether the plaintiff is estopped by its
acts of omission and commission and conduct, as alleged? OPD
(5) Whether the electric connection to
defendant No. 1 was granted by the plaintiff On the
surety of defendant No. 2, if so, its effect? OPP.
(6) Issue No. 5 is decided in the affirmative
whether defendant No 2 is not liable to pay the suit amount, as alleged? OPD
(7) Whether
the plaintiff is entitled to the interest, if so, at what rate? OPP
(8) To what amount towards the principal and
interest is the plaintiff entitled and if so, from whom? OPP
(9) Relief.
I have heard
learned counsel for the parties and have also gone through the record of the
case. My findings on the above issues are as under:
Issue Nos. 2 and 3:
Both these
issues are being taken up together as the findings on either, of them would
have a bearing on the other.
The amount
claimed by the plaintiff is as on December 31, 1991. The present suit has been
filed on January 11, 1996. The defendant has contended that the suit having
been filed beyond the prescribed period of limitation of three years is not
within the time and is liable to be dismissed on that-short ground alone.
It is in
evidence that a reference under section 15(1) of the Sick Industrial Companies
(Special Provisions) Act, 1985, for declaring defendant No. 1 a sick company
was made to the Board for Industrial and Financial Reconstruction (for short
the BIFR) in the year 1990. Such proceedings terminated on February 8,1993, when the BIFR recorded its opinion that the company
defendant No. 1 should be wound up.
Section 22(1)
of the Sick Industrial Companies (Special Provisions) Act, 1985, provides that
where in respect of an industrial company an enquiry under section 16 is
pending, no suit for the recovery of money or for. enforcement of any security
against the industrial company or of-any guarantee, in respect of any loans or
advance granted to the industrial company, shall he or be proceeded with except with the consent of
the BIFR or, as the case may be, the appellate authority. Sub-section (5) of
section 22 further provides:
"In
computing the period of limitation for the enforcement of any right, privilege,
obligation or liability, the period during which it or the remedy for the
enforcement thereof remains suspended under this section shall be
excluded."
Learned
counsel for the plaintiff has contended that in view of the above provisions
and the fact that enquiry under section 16 of the Sick Industrial Companies
(Special Provisions) Act, 1985, was pending against defendant No. 1 till
February 8, 1993, no suit for recovery of the suit amount could have been filed
and the period till February 8, 1993, will have to be excluded. Excluding such
period, the present suit filed on January 11, 1996, is within time.
The defendant
has averred in para. 2 of the preliminary objections of the written statement
in the following terms:
"That
the plaintiff is guilty of concealing material facts and has not approached
this court with clean hands inasmuch as defendant No. 1-com-pany stood wound up
vide order dated February 4, 1994, passed by the High Court of Punjab and
Haryana in Company Petition No. 110 of 1987. Therefore, the present suit is not
maintainable and unless and until an appropriate permission to file the suit
from the authorities appointed by the High Court of Punjab and Haryana is
obtained, the suit is liable to be dismissed."
Section
446(1) of the Companies Act, 1956, provides:
"When a winding
up order has been made or the official liquidator has been appointed as
provisional liquidator, no suit or other legal proceedings shall be commenced,
or if pending at the date of minding up order, shall be proceeded with against
the company, except by leave of the court and subject to such terms as the
court may impose." (emphasis supplied)
PW-2 S. K.
Gupta, Director (Planning) of the plaintiff, during the course of cross-examination
has admitted to the following facts:
"It is
correct that an order with regard to winding up of defendant No. 1-company was passed by the High Court of Punjab and Haryana
on February 4, 1994. It is correct that no permission was obtained from the High
Court of Punjab and Haryana before the filing of the present suit."
P.W.-5 Shri
Jai Kishan, a senior assistant of the plaintiff-Board, has also admitted that
defendant No. 1-company has since been wound up.
Exhibit PA is
the copy of the order dated February 4, 1994, passed by the High Court of
Punjab and Haryana in Company Petition No. 110 of 1987 ordering the winding up
of defendant No. 1-company.
In view of
the admitted fact that an order of winding up of defendant No. 1 stood passed
on February 4, 1994, much before the filing of the present suit, the plaintiff
was required to obtain the requisite leave under section 446 (quoted above)
from the court ordering the winding up of defendant No. 1-company.
The plaintiff
has averred in the replication that the requisite permission under section 446
of the Companies Act, 1956, was obtained by the plaintiff from the High Court
of Punjab and Haryana on July 9, 1998. A certified copy of such order has been
placed on the record.
As stated
above, the present suit was filed on January 11, 1996. The requisite permission
under section 446 of the Companies Act, 1956, was obtained about 2½ years after
the institution of the suit. The winding up order was passed on February 4,
1994. Therefore, the following two questions arise for determination, namely: -
(i) Whether the permission
required under section 446 of the Companies Act, 1956, is a condition precedent
for commencing a suit or such permission can be obtained even after the
commencement of the suit or other legal proceedings?
(s) If permission/leave of the
court can be obtained even during the pendency of the suit or other legal
proceedings, what would be the effect thereof?
Section 446
of the Companies Act, 1956, in substance is the same as section 171 of the
Indian Companies Act, 1913. Section 171 reads:
"When a
winding up order has been made, no suit or other legal proceeding shall be
proceeded with or commenced against the company except by leave of the court,
and subject to such terms as the court may impose."
In Surah
Chandra Khasnabish v. Bank of Calcutta Ltd. [1951] 21 Comp Cas 110 (Cal), a
question arose before a Division Bench of the Calcutta High Court as to whether
the court under section 171 has the jurisdiction to grant leave to proceed with
a suit or other legal proceedings, against a company in liquidation, when such
leave was not obtained before the commencement of the suit or other legal
proceeding. In the said case the winding up order was passed on April 1, 1949.
An appeal was filed against the order dated February 14, 1949, against the
company on April 1, 1949, without obtaining the requisite leave under section
171. The leave was sought during the pendency of the appeal. A learned single
judge refused the leave holding that he had no jurisdiction to give leave to
continue the appeal. The Division Bench held that the court has jurisdiction to
grant leave to proceed with a suit or other legal proceeding against a company
in liquidation, even though such leave was not obtained before its
commencement.
A contrary
view has been taken by a Division Bench of the Bombay High Court in Eastern
Steamship Private Ltd. v. Pucto Private Ltd. [1971] 41 Comp Cas 43. Dealing
with section 446 of the Companies Act, 1956, it has been held that leave to
commence a suit or to proceed with it could only be granted before the suit is
commenced and no leave can be granted to continue it or to proceed with it if
it is commenced after the date of the winding up order.
In Star
Engineering Works Ltd. v. Official Liquidator of the Krishnakumar Mills Company
Ltd. (In Liquidation) [1977] 47 Comp Cas 30, the High Court of Gujarat
dissented from the view of the Bombay High Court and held that failure to
obtain leave before institution of the suit or other legal proceeding would not
entail dismissal of the suit or proceeding. The suit or proceeding instituted
without leave of the court would be ineffective until leave is obtained. Once
leave is obtained the suit or proceeding would be deemed instituted on the date
of granting leave.
The abovesaid
ratio of the Gujarat High Court was followed by the High Court of Madras in
State Bank of India v. Official Liquidator, Straps (India) Private Ltd. [1979]
49 Comp Cas 514, and it was held that obtaining of leave of the court to
proceed with a suit against a company in liquidation is not a condition
precedent for instituting the suit and even though a suit had been instituted
against a company in liquidation without obtaining leave, such leave can be
applied for and obtained even subsequently. However, the suit will be effective
only from the date such leave was granted.
Similar is
the view of the High Court of Punjab and Haryana in United Commercial Bank v.
State of jammu and Kashmir [1986] 60 Comp Cas 653 and the High Court of Madras
in Asain Travels (India) Pvt. Ltd., In re [1990] 3 Comp LJ 114.
The Supreme Court in Bansidhar Shankarlal v. Mohd. Ibrahim [1971] 41 Comp Cas 21, has also held
that the suit or proceeding instituted without the leave of the court may be regarded
as ineffective until leave is obtained but once leave is obtained the
proceedings will be deemed instituted on the date granting leave.
Since the
requisite leave under section 446 of the Companies Act, 1956, was admittedly
obtained by the plaintiff on July 9,1998, the present
suit, though instituted on January 11, 1996, would be deemed to have been
instituted on July 9,1998, the date on which leave was granted. Therefore, the
suit having been filed more than three years after the termination of inquiry
by BIFR on February 8, 1993 is, on the face of it, barred by time. The two
issues are decided accordingly.
Issues Nos. 1
and 5:
These two
issues being co-related and interconnected are being taken up together. The
case of defendant No. 2 is that since it never stood as a surety for defendant
No. 1, the plaintiff has no cause of action against it.
Exhibit
PW-4/B is the surety bond alleged to have been executed by defendants Nos. 2
and 3 in favour of the plaintiff. Admittedly, defendant No. 2 is a. partnership
firm, while defendant No. 3 is a limited company duly incorporated under the
Companies Act, 1956. The surety bond exhibit PW-4/B is alleged to have been
signed and executed by one Ravi Kumar, partner of defendant No. 2 firm and K.K.
Punchhi, director of defendant No. 3-company. The
surety has been furnished to the extent of Rs. 5,00,000.
The surety alleged to have been furnished by defendants Nos. 2 and 3 reads:
"(1)
(2) K.K.
Punchhi,
hereby
declare ourselves sureties for the above bounden and guarantee that he shall do
and perform all that he has above undertaken to do and perform, and in case of
his omission, default or failure therein, we hereby bind ourselves jointly and
severally to forfeit to the HPSEB (hereinafter referred to as "the
Board"), which expression shall unless excluded by or repugnant to the
context include his successors in office and assigns) the sum of Rs. 5 lakhs
only (hereinafter referred to as "the said sum") in which the above
bounden has bound himself or such other lesser sum as shall be deemed to be
sufficient by the Board to recover any amount of dues payable by the above
bounden and remaining unpaid and also to recover any loss, damages, costs or
expenses, which the Board may sustain, incur or pay by reason of such
omissions, default or failure.
And we agree
that the Board may without prejudice to any other right or remedies of the
Board, recover the said sum from us jointly and severally, as arrears of land
revenue and/or fine imposed by any authority under the said Act.
And we also
agree that neither of us shall be at liberty to terminate this suretyship
except upon giving the Board six calendar months notice in writing of his
intention so to do and our joint and several liabilities under this bond shall
continue in respect of all acts, omissions, defaults, failure and insolvency on
the part of the above bounden until the expiration of the said period of six
months."
A bare
perusal of the above shows that the surety was furnished by Sarvshri Ravi Kumar
and K.K. Punchhi in their personal capacities and not for and on behalf of
defendants Nos. 2 and 3, the firm and company, respectively. Therefore, it can
be safely held that the electric connection to the defendant No. 1 was not
granted by the plaintiff on the surety of defendant No. 2 and/or defendant No.
3. The plaintiff as such has no cause of action. The two issues are decided
against the plaintiff and in favour of defendants Nos. 2 and 3.
Issue No. 6:
In view of
the findings recorded under issue No. 5 above, neither defendant No. 2 nor
defendant No. 3 is liable to pay the suit amount to the plaintiff. The issue is
decided in favour of the defendants.
Issue No. 4:
This issue
was not pressed during the course of hearing. The same is as such decided
against the defendants.
Issues Nos. 7 and 8:
In view of
the findings recorded under issues Nos. 1, 2, 3, 5 and 6 above, the plaintiff
is neither entitled to recover any amount from any of the defendants nor to any
interest. The two issues are decided against the plaintiffs.
Relief:
As a result,
the present suit fails and the same is dismissed, leaving the parries to bear
their own costs.
[1944] 14 COMP CAS 133 (DC)
DIVISIONAL COURT
Director of Public Prosecutions
v.
Kent and
Sussex Contractors, Ltd.
VISCOUNT CALDECOTE, L.C.J., MACNAGHTEN, J., HALLETT, J.
NOVEMBER. 10, 11, 1943
P. Colin Duncan, for the
Appellant.
Carey Evans, for the Respondents.
Viscount Caldecote, L.C.J.—In this case the respondents were
charged under the Defence (General) Regulations, 1939, regs. 82
(1) and 82(2). A person who desires to obtain petrol coupons must
observe the requirements of the Motor Fuel
Rationing Order, 1941, and in order to strengthen the law it was thought necessary
to enact by the Defence (General) Regulations, 1939, that if a person with
intent to deceive "produces, furnishes, sends or otherwise makes use
of.……any book…....or other document which is false in a material particular he
shall be guilty of an offence". It is also enacted that "If, in
furnishing any information for the purposes of any of these regulations or of
any order, rule or by-law made under any of these regulations, any person makes
any statement which he knows to be false in a material particular, or
recklessly makes any statement which is false in a material particular, he
shall be guilty of an offence against that regulation".
The respondents were charged with producing a return false
in a material particular with intent to deceive and, secondly, with making a
statement which they knew to be false in a material particular. I should add
this, that Mr. James Henry Orpin was charged with analogous offences or an
offence at any rate connected with the offences said to have been committed by
the first-named respondents, the Kent and Sussex Contractors, Ltd. When, the
information came to be heard certain evidence was given, and as found by the
special case the respondent company sent in certain returns made for the
purposes of the Motor Fuel Rationing Order signed by Mr. M.G. Knowler, the
transport manager of the respondent company, in respect of a vehicle which was
in fact controlled by the respondent company. That return was false in material
particulars and it was known by him to be false in material particulars. It was
contended on that evidence by the appellant that the offences charged were
proved to have been committed, but the respondents met that contention,
according to the special case, by a contention that a body corporate could not
in law be guilty of the offences charged as an act of will or state of mind
implicit in the commission of the offences and that, therefore, the respondent
company was not guilty of the offences charged and accordingly the respondent
Orpin must, also be acquitted. The magistrates accepted that contention. They
thought that the contentions on behalf of the respondents were right and
dismissed the information. We have to say whether they came to a correct
determination and decision in point of law. The special case appears to me to
raise a quite clear question of law, whether a body corporate, in this case a
limited company, can in law be guilty of the offences
charged, or whether a company is incapable of any act of will or state of mind.
When, however, counsel for the respondents came to argue the case before us it
appears that he was not fully satisfied with the way the case was stated or the
question raised for the opinion of this Court, and he has laid an argument
directed to a question which, so far as I understand it, seems to me different
from that which appears to be raised by the special case.
The question is whether a company can be held to have an
intention or knowledge which its agents, the officers of the company, have,
and, therefore, whether in the circumstances of this case the respondent
company was capable of forming that intention or having that knowledge,
I think it is only right that we should deal with the
question which appears to be raised by the special case. It may be that other
contentions raised by counsel for the respondents will have to be considered in
determining that question. For my part I think it is a little easier than it
would have been, because counsel has not disputed the proposition that the
company can in the abstract be found to have the intention to do something
wilfully. The position of a company so far as criminal offences are concerned,
is that it cannot be charged with or rather it cannot be found guilty of
certain criminal offences, such as treason, nor other offences for which it is
provided that death or imprisonment is the only punishment. The law has been
stated in a way which has made it, I think, clearer as time has passed that
there are a number of criminal offences for which a company can be convicted.
There is a convenient citation from the judgment in R. v. Cory Brothers &
Co, (96 L.J.K.B., at p. 764; [1927] 1 KB., at. p. 816), In that judgment there
is a citation from the judgment of Pattern, J., in R. v Birmingham and Gloucester
Railway (11 L.J.M.C, at p. 136); 3QB ,at p. 232) as follows (it begins with a
note by Holt, C.J.: "'A corporation is not indictable but the particular
members of it are' "): "'What the nature of the offence was to which
the observation was intended to apply does not appear; and as a general
proposition it is opposed to a number of cases, which show that a corporation
may be indicted for breach of a duty imposed upon it by law, though not for a
felony, or for crimes involving personal violence, as for riots or
assaults."' Under the Defence (General) Regulations, 1939, it is very
common for offences to be created in which certain ingredients are required to
be found and this particular case seems to me very clearly to be one of such
cases. They are offences in which it. is not material
to consider whether there is or is not mens rea, which I understand to mean
criminal intention, but they are cases which state the ingredients, as, for
instance, in this case where one of the necessary ingredients in one of the
offences is intent to deceive. When that intent to deceive is stated to be
necessary it seems to me quit idle to go in search of the right answer to the
question whether mens rea or not is involved.
We have been referred to a large number of cases, one of
which is Mackay v.
Commercial Bank of New Brunswick (43 L.J.P.C., at p. 38; L.R. 5 P.C., at p.
415), cited from the opinion of Lord Cranworth, C., in Ranger v. Great Western Railway (5 H.L.C, at p. 86). There the opinion
of their Lordships given by Sir Montague Smith includes this passage, which I
most respectfully accept: "’Strictly speaking a corporation cannot of
itself be guilty of a fraud. But where a corporation is formed for the purpose
of carrying on a trading or other speculation for profit, such as forming a
railway, these objects can only be accomplished by the agency of individuals;
and there can be no doubt that if the agents employed conduct themselves
fraudulently, so that if they had been acting for private employers the persons
for whom they were acting would have been affected by their fraud, the same
principles must prevail where the principal under whom the agent acts is a
corporation' ". That passage was called to our attention by counsel for
the respondents, and he places great reliance upon it because he says that it
is only in cases where the agents had been acting for private employers, and
the persons for whom they were acting would have been affected by their fraud,
that the corporation can be held liable for the acts of its agents. In a case
to which we have not been referred, Chuter v. Freeth & Pocock Ltd., the question
seems to me to have been similar to the one raised in this case. The head note
in the Law Reports is: "By Section 26(6) of the Sale of Food and Drugs Act
1899, it is enacted that every person who, in respect of an article of food or
drug sold by him, gives to the purchaser a false warranty in writing, shall be
liable on summary conviction to a fine as therein mentioned, unless he proves
that when he gave the warranty he had reason to believe that the statements or
descriptions contained therein were true: Held, that a joint stock company
incorporated under the Companies Acts can be convicted of an offence under the
above enactment". I should have read a point stated in the special case in
that case. "The magistrate, although upon the facts as above stated he
would have convicted if the respondents' servants had been principal in the
matter, was yet of opinion that, as the exempting clause of the section implied
that only such a person could commit the offence as was capable of believing,
and as a corporation having no mind could not exercise that faculty, the
respondents 'being a corporation, were not liable under the section." Lord
Alverstone stated the facts and then said (80 L.J.K.B., at p. 1324; [1911] 2
K.B., at p. 836): "The magistrate has held that, inasmuch as 'the person'
who gives a false warranty is made liable unless he proves that when he gave
the warranty 'he had reason to believe' that the statements or descriptions
contained therein were true, therefore 'the person' cannot be construed as
including a corporation, hut must be limited to natural persons capable of
belief. In my view that is too narrow a construction. Where a person is capable
of giving a warranty that person is liable to a fine. There is no reason why a
warranty should not be given by a corporation. It can give a warranty through
its agents, and through its agents it can believe or cot believe, as the case may
be, that the statements in the warranty are true. A similar point has been
raised in cases concerning the liability of a corporation in actions winch in
the case of an individual, would involve an inquiry into a state of mind, such
as fraud, libel, or malicious prosecution. It is well settled that a
corporation may be liable in all those actions. Further, the question in this
case has in substance been decided by Channell, J., in Pearks, Gunston &
Tea v. Ward.
Taking the principle of the Act into consideration there is no reason why in
Section 20(6) 'person' should not include corporation".
In the decision in Pearks,
Gunston & Tea v. Ward, Channell, J. dealt at length with this question. He was dealing with a
particular section (Section 6) under the Food and Drugs Act, 1875, a section
which provided that no person shall sell to the prejudice of the purchaser any
article of food or any drug which is not of the nature, substance and quality
of the article demanded by such purchaser. There is also another section in the
Act (Section 3) which provides that "No person shall mix, colour, stain,
or powder, or order or permit any other person to mix, colour, stain, or
powder, any article of food with any ingredient or material so as to render the
article injurious to health, with intent that the same may be sold in that
state, and no person shall sell any such article so mixed, coloured, stained or
powdered". It was in reference to those two sections that Channell, J.
said (71 L.J.K.B., at p. 663; [1902] 2 K.B., at p. 11): "By the general
principles of the criminal law, if a matter is made a criminal offence, it is
essential that there should be something in the nature of mens rea, and,
therefore, in ordinary cases a corporation cannot be guilty of a criminal
offence, nor can a master be liable criminally for an offence committed by his
servant". I stop thereto observe that there Channell, J., is dealing with
the subject at large. "But there are exceptions to this rule in the case
of quasi-criminal offences, as they may be termed, that is to say, where
certain acts are forbidden by law under a penalty, possibly even under a personal
penalty, such as imprisonment., at any rate in default of payment of a fine; and the reason for this is, that the Legislature has
thought it so important to prevent the particular act from being committed that
it absolutely forbids it to be done; and if it is done the offender is liable
to a penalty whether he had any mens rea or not, and whether or not he intended
to commit a breach of the law". Again he elaborates those propositions.
Then he passes from Section 6 to the section which requires intent to be
proved. "As to Section 3 there is a slight difference, because, reading
Section 3 and Section 5 together, it seems that mens rea is involved in the
offence, though it need not be proved by the prosecution, as it must in
ordinary criminal cases. It is. however, so far an element in the offence that
if the defendant succeeds in proving that he had no mens rea he is to be
acquitted, the burden of proof thus being shifted from the prosecution to the
defence. A provision of that kind is enacted where the Legislature desires to
prevent the act from being done, though it is recognised that there may be
cases in which the act is done innocently, and in which the person ought,
therefore, not to be convicted. In those cases the defendant can prove his
innocence; but, as it would be difficult for the prosecution to prove mens rea
if the onus were upon them to do so in the ordinary way, the enactment is,
consequently, framed in this particular way, There may, therefore, be more
difficulty in applying the rule in those cases to a corporation than there is
under Section 6. Speaking for myself, I am inclined to think that a corporation
would come under Section 3 as well as under Section 6, but the question is not
quite so clear, and possibly it may have to be argued hereafter." That
question seems to me to be raised in this particular case as to whether a
company could have an intent, but here it is a case in
which an intent of a somewhat similar character was a necessary ingredient. In
Mousell v. London and North Western Railway the Court had
to consider Section 98 of the Railway Clauses Consolidation Act, 1845, which
reads as follows: "Every person being the owner or having the care of any
carriage or goods passing or being upon the railway shall, on demand, give to
the collector of tolls, at the places where he attends for the purposes of
receiving goods or of collecting tolls for the part of the railway on which
such carriage or goods may have travelled or be about to travel, an exact
account in writing signed by him of the number or quantity of goods conveyed by
any such carriage, and of the point on the railway from which such carriage or
goods have set out or are about to set out, and at what point the same are
intended to be unloaded or taken off the railway; and if the goods conveyed by
any such carriage, or brought for conveyance as aforesaid, be liable to the
payment of different tolls, then such owner or other person shall specify the
respective numbers or quantities thereof liable to each or any of such
tolls". Then Section 99 provided: "If any such owner or other such
person fail to give such account, or to produce his waybill or bill of lading,
to such collector or other officer or servant of the company demanding the
same, or if he give a false account, or if he unload.……any part of
his…....goods at any other place than shall be mentioned in such account, with
intent to avoid the payment of any tolls payable in respect thereof, he shall for
every such offence" be liable to a penalty. Atkin, J., as he then was,
said (87 L.J.K.B., at p. 88; [1917] 2 K.B., at p. 845): "To ascertain
whether a particular Act of Parliament has that effect or not, regard must be
had to the object of the statute, the words used, the nature of the duty laid
down, the person upon whom it is imposed, the person by whom it would in
ordinary circumstances be performed, and the person upon whom the penalty is
imposed". Then at the end of his judgment he says this (87 L.J.K.B., at p.
89; [1917] 2 KB., at p. 846): "I see no
difficulty in the fact that an intent to avoid payment is necessary to
constitute the offence. That is an intent which the servant might well have,
inasmuch as he is the person who has to deal with the particular matter. The
penalty is imposed upon the owner for the act of the servant"—of course,
the result could only be reached where any person is given express or implied
authority or is estopped from saying that he had not. "Once it is decided
that this is one of those cases where a principal may be held liable criminally
for the act of his servant, there is no difficulty in holding that a
corporation may be the principal. No mens rea being necessary to make the
principal liable, a corporation is in exactly the same position as a principal
who is not a corporation." It is necessary to bear in mind the position of
a company, which is quite different from that of a private individual, a real
person. It could not be put better than Lord Blackburn puts it in the case of
the Pharmaceutical
Society v.
Bearing that in mind I think that
a great deal of the argument of counsel for the respondents, as to whether you
can impute to a company the knowledge or intent which the agent of the company
has, falls to the ground, because although the directors or general manager of
a company are its agents, a company is incapable of acting or speaking or even
thinking except in so far as its secretary or general manager or directors and
so on have either spoken, acted or thought. In the case of Law Society v. United
Service Bureau Ltd., the matter
seems to me to have been made even clearer than in the case to which I have
referred. Section 46 of the Solicitors Act, 1932, provides that: " Any
person, not having in force a practising certificate, who wilfully pretends to be .… ualified or recognised by law as qualified to act as a
solicitor, shall be liable on summary conviction to a penalty". Avory, J.,
says (103 L.J.K B., at p. 83; [1934] 1 K.B., at p. 349): "
Mr. Strauss has taken two points in support of the magistrate's
decision. The first is that the qualification contemplated by Section 46 can
only be possessed by a natural person. With that I have already dealt. The
second is that the words 'wilfully pretends' in Section 46
could have no application to a corporate body because 'wilfully' involves
some metis rea which a corporate body cannot have. I think that that point
fails and that a corporate body might 'wilfully pretend' within the meaning of
Section 46 to be qualified to act as solicitors. It has been laid down over and
over again that where a statute absolutely prohibits the doing of an act it is
sufficient to show that the person accused did the forbidden act intentionally
and that it is not necessary to go further and prove what is commonly known as
mens rea or any intention other than to do the thing forbidden". In the
case with which we are dealing the first charge was one of doing something with
intent to deceive. The second charge was that of making a statement which the
company knew to be false in a material particular. Once the ingredients are
stated in that way it seems to me quite unnecessary to inquire whether it is
necessary to prove that you have acted on behalf of the company. In argument
counsel for the respondents on behalf of the respondents has stoutly maintained
the position that a company is incapable of having mens rea and that mens rea
cannot be imputed to it even if and when its agents could be held to have mens
rea. Here the question raised as to mens rea seems to me to be quite irrelevant
because the regulation says that if a person with intent to deceive does
certain things he shall be guilty of an offence or if he makes a return knowing
it to be false in a material particular. There was ample evidence on the facts
appearing in the special case to show that this company has, by the only people
who could act or speak or think for it, made a return with intent to deceive,
and in the second case made a statement which it knew to be false in a material
particular.
I see nothing whatever in any of
the authorities to which we have been referred which requires us to say that a
company is incapable of being held guilty of those offences. The magistrates
have found certain facts. They have decided on the facts and they think that
the company is incapable of having that state of mind or forming an intention
or having knowledge. 1 think the magistrates were wrong in arriving at that decision, and the case should go back to them with an
intimation of our opinion to that effect.
Macnaghien, J.—I am of the same opinion and
have very little to add. In this case there are two respondents, one is a
limited company and the other is an officer of that company. The appellant says
that the respondents made use, for the purpose of the Motor Fuel Rationing (No.
3) Order, 1941, of a document, namely, a fortnightly vehicle record which was
false in a material particular. In order that that act should be a criminal
offence it was necessary that the act should be done with intent to deceive.
Counsel for the appellant has argued, and it has been admitted, that the charge
was proved. Objection was taken on behalf of the respondents which is set out
in the case in these terms: "On behalf of the respondents it was contended
that a body corporate could not in law be guilty of the offences charged as an
act of will or state of mind was implicit in the commission of the offences and
that therefore the respondent company was not guilty of the offences charged
and accordingly the respondent Orpin"—that is the officer of the
company—"must also be acquitted". That contention found favour with
the magistrates and accordingly they dismissed the summons. Counsel for the
respondents conceded that a body corporate being an artificial person in the
eyes of the law is not a person to whom, amongst the various attributes it may
have, there should be included the attributes of a mind capable of knowing and
capable of forming an intention—indeed ii is much too late in the day to
suggest the contrary of those propositions. It can only know through its human
agents, it can only form an intention through its human agents, but
circumstances may he such that the knowledge of the agent must be imputed to
the body corporate and the intention of the agent must likewise be imputed to
the body corporate. Counsel for the respondents says that although a body
corporate may be incapable of having an intention or of having knowledge in the
eyes of the law it is capable, and the statute has so expressly provided. He
says it is not capable of having what he called a criminal intention—a mens
rea. I asked him for a translation of the words "mens rea", but I do
not think I got one other than that criminal intention is intention to commit a
crime. In this particular case the intention was the intention to deceive. It
the responsible agents of a body corporate do an act making a document or
putting forward a document that has been made by some body else knowing it to
be false and intending that it should deceive, I apprehend, according to the
authorities that my Lord has cited, that knowledge must be imputed to the
company of the intention to deceive and the knowledge of the agents of the
company must also be imputed to the body corporate. In my opinion the
submission that was made to the magistrates that the company could not in law
be capable of a criminal intention is one that cannot now be raised, I agree
with the judgment of my Lord.
Hallett, J.—I agree. As the point in this
case appears to be of considerable importance to the appellant, and as it does
not appear to be precisely covered by any of the authorities, I should like to
add a few words of my own.
First of all, I think it may be
convenient to consider what were the objects of regulation 12(1) of the Motor
Fuel Rationing (No. 3) Order, 1941, which says: "Every person desiring to
obtain (a) a licence under any of the provisions of this Order, or (b) coupons
for the purposes of this Order, shall furnish such information (i) as may be
requested by or on behalf of the Board of Trade; (ii) as may be prescribed by
direction of the Board of Trade, and any such direction may specify the form in
or on which such information is to be furnished". Then regulation 82(1) of
the Defence (General) Regulations, 1939, provides: "If, with intent to
deceive, any person (a) forges or uses, or lends to or allows to be med by any
other person, any document issued for the purposes of any of these regulations
or of any Order, rule or by-law made under any of these regulations; or (b)
makes or has in his possession any document so closely resembling such a
document as aforesaid as to be calculated to deceive; or (c) produces,
furnishes, sends or otherwise makes use of, for the purposes aforesaid, any
book, account, estimate, return, declaration or other document which is false
in a material particular ; he shall be guilty of an offence against that
regulation ". Then by regulation 82 (2) it is provided :
" If, in furnishing any information for the purposes of any of these
regulations or of any Order, rule or by-law made under any of these
regulations, any person makes any statement which he knows to be fake in a
material particular, or recklessly makes any statement which is false in a
material particular, he shall be guilty of an offence against that
regulation." According to the case the record which was here sent in and
which is alleged to have been false was a record for the purposes of the above
Motor Fuel Rationing Order, so that the position is that by
that Order those who desired coupons had to supply certain information, and in
this case the information was false within regulation 82 of the Order of 1939.
By regulation 99B the provisions of the Interpretation Act, 1889, are made
applicable, and by Section 2 (1) of the Interpretation Act? 1889, it is
provided that: "In the construction of every enactment relating to an
offence punishable on indictment or on summary conviction, whether contained in
an Act passed before or after the commencement of this Act, the expression
'person' shall, unless the contrary intention appears, include a body
corporate". Therefore, looking back at regulation 82, under which these
respondents are charged, the words "any person" prima facie includes
a limited liability company, such as the respondents. The argument for the
respondents is that the contrary intention appears, that the offence cannot
have been committed by the respondents because the respondents, an incorporated
company, cannot have been guilty of intent to deceive. It is obvious that as a
corporation which is a fictitious person is not capable of acting in its own
person but can act only through its agent or servant, its wrongful acts must be
in fact the acts of its agents or servants although imputed in law to the corporation
itself The liability of a body corporate is, therefore, in all cases a
vicarious liability for the act of other persons. For that reason it seems to
me that it was not helpful to us to consider the case of a principal who could
act in his own person, and for that reason I myself derive no help from what
has been cited from the case of Chisholm v. Doulton, or a decision
to which I was a party on March 31, 1943, in an unreported case of Parker v.
Price. At one time the extent of the liability in a civil action of tort was a
matter of doubt due partly to the theoretical difficulty of imputing wrongful
acts of intention to fictitious persons but as regards civil proceedings these
doubts have, in course of time, been cleared up and it is not necessary to
refer to them.
I think in criminal matters the existence of liability of a
corporation has been to some extent, and it may be still is, a matter of doubt
due partly to technical difficulties of procedure and partly to the theoretical
difficulty of imputing criminal intention to a fictitious person. As for the
difficulties of procedure they have been in part dealt with by legislation,
such as Section 33 of the Criminal Justice Act, 1925. As regards the
theoretical difficulty of imputing criminal intent to fictitious persons I
thick there has been greater development in the attitude of the Courts than there has been
in the case of a civil liability.
The first case that I might
mention is the case of the Pharmaceutical Society v.
The next case dealt with and
which I should like to refer to is the case of R. v.
Then there was the case of
Pearks, Gunstcn & Tee, Ltd. v. Ward. Then in 1917
comes the case of Mousell v.
With regard to the case of Law
Society v. United Service Bureau, Ltd., I am not sure
that I agree with the judgment of Avory, J., when determining the matter that
he had to consider. I think it is inconsistent with the views that had already
been expressed.
Finally, in the case of Triplex
Safety Glass Go. v. Lancegaye', the judgment
of du Parcq. L.J., seems to me to say, as counsel for
the appellants has argued, that a corporation by its servants or agents may be
guilty of malice so as to render itself liable to be indicted for criminal
liability. It seems to me that the magistrates were wrong and I agree that the
case should be returned to them for their determination.
[1945] 15
COMP CAS 47 (CA)
IN THE
COURT OF CRIMINAL APPEAL
v.
I.C.R. Haulage, Ltd.
HUMPHREYS, J., CROOM-JOHNSON,
J., STABLE, J.
APRIL 24, 25. 26; MAY 10,
1944
Serjeant Sullivan, K.C., and W.A.L. Raeburn, for the Appellant company.
Comyns Carr, K.C., and A. Atken Watson, for the Crown.
Stable, J., read the following judgment of the Court.— I.C.R.
Haulage, Ltd., the appellant company, was charged at the last autumn assizes
for the county of Kent, together with ten other defendants, in an indictment
containing only one count, with a common law conspiracy to defraud.
The appellant company is a private company incorporated under the
Companies Acts. Its managing director was the registered owner of all but one
of the issued shares. The charge arose out of a contract between the appellant
company and Rise & Son, Ltd., public works contractors, under which the
appellant company was to deliver loads of hard core and ballast at a certain
site to be paid for at the rate of 8s. a cubic yard.
This contract the appellant company performed partly by loading and delivering
the hard core in its own lorries driven by its own servants, and partly by
sub-contractors who were paid by the appellant company at the rate of 7s. 6d. a cubic yard. The substance of the charge against the
defendants, who consisted of the managing director of the appellant company,
two of the appellant company's lorry drivers, a number of sub-contractors and
two servants of Messrs. Rice, who it was alleged were in a position to check
the deliveries of hard core, was that they agreed together to charge Messrs.
Rice for a quantity of hard core in excess of that which was in fact delivered.
At the trial a motion was made on behalf of the appellant company to
quash the indictment against it, which motion the Commissioner refused. After
the trial at the Kent Assizes, which lasted twelve days, the jury returned a
verdict of guilty against the appellant company, its managing director and the
two drivers of the company, the two servants of Messrs. Rice and one of the
sub-contractors. The other defendants, who were all sub-contractors, were found
not guilty and were discharged. All the defendants against whom a verdict of
guilty was returned, with the exception of the one sub-contractor, appealed to
this Court which, on April 26, 1944, gave judgment dismissing all the appeals,
setting out the grounds of decision, with the exception of those dealing with
the point peculiar to the company, namely, that an indictment alleging a common
law conspiracy to defraud, which this unquestionably was, cannot lie against a
limited company. We rejected this contention, but reserved stating the grounds
on which we based that part of our decision. With those grounds this judgment
is solely concerned.
The question before us is whether a limited company can be indicted for a
conspiracy to defraud. Section 33 of the Criminal Justice Act, 1925, removed
certain procedural obstacles which had hitherto existed in connection with the
trial of criminal offences alleged against corporations. This section did not,
however, enlarge the ambit of a company's criminal responsibility, but provided
machinery for simplifying its enforcement. It was conceded by counsel for the
appellant company that a limited company can be indicted for some criminal
offences, while it was conceded by counsel for the respondent that there were
some criminal offences for which a limited company cannot be indicted. The
controversy centred round the question where and on what principle the line
must be drawn and on which side of the line an indictment such as the present
one falls. Counsel for the appellant company contended that the true principle
was that an indictment against a limited company for any offence involving as
an essential ingredient metis rea in the restricted sense of a dishonest or
criminal mind must be bad, for the reason that a company, not being a natural
person, cannot have a mind, honest or otherwise, and that consequently, though
in certain circumstances it is civilly liable for the fraud of its officers,
agents or servants, it is immune from criminal process.
Counsel for the respondent contended that a limited company, like any
other entity recognised by the law, can as a general rule be indicted for its
criminal acts which, from the very necessity of the case, must be performed by
human agency and which, in given circumstances, become the acts of the company,
and that for this purpose there was no distinction between an intention or
other function of the mind and any other form of activity.
The offences for which a limited company cannot be indicted are, it was
argued, exceptions to the general rule and arose from the limitations which
must inevitably attach to an artificial entity such as a company. Included in
these exceptions are the cases where, from its very nature, the offence cannot
be committed by a corporation, as, for example, perjury, an offence which
cannot be vicariously committed, or bigamy, an offence which a limited company,
not being a natural person, cannot commit, vicariously or otherwise. A further
exception, but for a different reason, comprises offences of which murder is an
example, where the only punishment the Court can impose is corporal, the basis
on which this exception rests being that the Court will not stultify itself by
embarking on a trial in which, if a verdict of guilty is returned, no effective
order by way of sentence can be made. In our judgment these contentions of the
respondent are substantially sound, and the existence of these exceptions, and it may be that there are others, is by no
means inconsistent with the general rule.
The appellant company relied on a number of authorities, including
Pearks, Gunston and Tee, Ltd. v. Ward, a decision
under Section 6 of the Food and Drugs Act, 1875, and more particularly on a
passage in the judgment of Channell, J. (71 L.J.K.B., at p. 663; [1902] 2 K.B.
at p. 11), where he said: "By the general principles of the criminal law,
a criminal offence imports something in the nature of metis rea. Therefore, in
ordinary cases a corporation cannot be guilty of a criminal offence, nor can a
master be liable criminally for an offence committed by his servant." This
passage was cited with approval in Mousell Brothers v.
In Mousell Brothers v. London and North Western Railway, it was held
that a limited company was properly convicted of an offence under Section 99 of
the Railways Clauses Consolidation Act, 1845, of giving a false account with
intent to avoid the payment of tolls, the basis of the decision being that in
relation to that Section there was no distinction between a limited company and
a natural principal. In our judgment that case does not determine the question
which we have to decide one way or the other, inasmuch as the construction
which the Court placed on that section of the Act of Parliament was that it
made the principal criminally responsible for the act of the servant, irrespective
of whether the principal was a natural or artificial person, or had or had not
present in his own mind the intention which was a necessary ingredient in the
offence. It did not decide that in no circumstances could a criminal intention
in the mind of a servant or agent be imputed to a principal who is a limited
company.
The authority latest in date which the appellant cited in support of its
contention was R. v. Corry Brothers & Co., where
Finlay, J., on motion quashed an indictment against a limited company
containing two counts, the first for manslaughter, which is a felony, and the
second for an offence under Section 31 of the Offences against the Person Act,
1861, a statutory misdemeanour punishable with penal servitude. Both these
offences can be punished on conviction with the infliction of a fine, the
felony under Section 5 of the Offences against the Person Act, 1861, and the
misdemeanour by common law. It appears from the report that the substantial
argument addressed to the Court was that Section 33 of the Criminal Justice
Act, 1925, had enlarged the category of offences for which a corporation could
be indicted, a contention which, as we think rightly, the Judge rejected,
holding that the section merely dealt with procedure. The Judge advanced no
reasons of his own for quashing the whole indictment, simply expressing the
view that he felt compelled by the authorities to which his attention had been
called to decide as he did.
It is sufficient, in our judgment, to say that, inasmuch as that case was
decided before the decision in Director of Public Prosecutions v. Kent and
Sussex Contractors, Ltd., and that
Chuter v. Freeth and Pocock, Ltd., was not Cited at all, if the matter came before the Court
to-day the result might well be different. As was pointed out by Hallett, J.,
in Director of Public Prosecutions v. Kent and Sussex Contractors, Ltd., this is a
branch of the law to which the attitude of the Courts has, in the passage of
time, undergone a process of development.
In support of the respondent's contention we were referred to a number of
authorities. The earliest of these to which we think it necessary to refer is
Pharmaceutical Society v.
Lord Blackburn's emphatic expression of opinion that a limited company
can be indicted and convicted for publishing a criminal libel was later
accepted by the Court of Appeal in Triplex Safety Glass Co. v. Lancegaye Safety
Glass,
where it was held that a limited company was entitled to object to answering an
interrogatory on the ground that the answer would tend to incriminate it. As an
actual condition of mind amounting to express malice may be an element in the
offence of libel, it is plan that the Court of Appeal decided that, whatever
the principle may be which fixes the line between those offences for which a
limited company can and those for which it cannot be indicted, it is not the
presence or absence in the human agent of a particular condition of mind. It
would be unreasonable to suppose that a limited company can be indicted for a
criminal libel only in those cases in which express malice is not proved, or
that it could defeat a prosecution by proving that its duly authorised agent
was in fact actuated by malice.
The latest authority is Director of Public Prosecutions v. Kent and
Sussex Contractors, Ltd. A limited
company was there charged with offences under a Defence of the Realm Regulation
which involved an intent to deceive. The justices dismissed the informations on
the ground that a body corporate could not be guilty of the offences charged
inasmuch as an act of will or state of mind which could not be imputed to a
corporation was implicit in the commission of these offences. On a case stated
to a
In that case, Viscount Caldecote, L.C.J.,said (14 Comp. Cas. at p. 134;
[1944] 1 K.B., at p. 149): "The real point we have to
decide...is...whether a company is capable of an act of will or of a state of
mind, so as to be able to form an intention to deceive or to have knowledge of
the truth or falsity of a statement," and after dealing with a number of
authorities he proceeded : "The offences created by the regulation are
those of doing something with intent to deceive or of making a statement known
to be false in a material particular. There was ample evidence, on the facts as
stated in the special case, that the company, by the only people who could act
or speak or think for it, had done both these things, and I can see nothing in
any of the authorities to which we have been referred which requires us to say
that a company is incapable of being found guilty of the offences with which
the respondent company was charged." In his judgment in the same case
Macnaghten, J., said as follows (14 Comp. Cas. at p. 142; [1944] 1 K. B., at p.
156): It can only know "through its human agents, and it can only form an
intention through its human agents, but circumstances may be such that the
knowledge of the agent must be imputed to the body corporate. ... If the
responsible agent of a body corporate, acting within the scope of his
authority, puts forward on its behalf a document which he knows to be false and
by which he intends to deceive, I apprehend that, according to the authorities
that my Lord has cited, his knowledge and intention must be imputed to the
company." With both the decision in that, case,
and the reasoning on which it rests, we agree.
In our judgment, both on principle and in accordance with the balance of
authority, the present indictment was properly laid against the appellant
company, and the Commissioner rightly refused to quash.
We are not deciding that in every case where an agent of a limited company,
acting in its business, commits a crime the company is automatically to be held
criminally responsible. Our decision only goes to the invalidity of the
indictment on the face of it, an objection which is taken before any evidence
is led and irrespective of the facts of the particular case. Whether in any
particular case there is evidence to go to a jury that the criminal act of an
agent, including his state of mind, intention, knowledge or belief is the act
of the company, and, in cases where the presiding Judge so rules, whether the
jury are satisfied that it has been so proved, must depend on the nature of the
charge, the relative position of the officer or agent, and the other relevant
facts and circumstances of the case.
It was because we were satisfied on the hearing of the appeals in this
case that the facts proved were amply sufficient to justify a finding that the
acts of the managing director were the acts of the company, and that the fraud
of that person was the fraud of the company, that we upheld the conviction
against the company, and, indeed, on the appeal to this Court no argument was
advanced that the facts proved would not warrant a conviction of the company
assuming that the conviction of the managing director was upheld and that the indictment
was good in law.
[1952] 22 COMP CAS 175 (
HIGH COURT OF
v.
Corporation of
CHUNDER, J.
APPEAL NO. 16 OF 1952
MAY 21, 1952
Debabrata Mukherji, for the Appellant.
Bireswar Chatterji, for the respondent.
N.C. Chakravarty, for the State.
JUDGMENT
Chunder, J.—This is an appeal against a conviction of the appellant Anath Bandhu Samanta under Section 407 of the Calcutta Municipal Act read with Section 488 and a sentence of fine of Rs. 500 only by the Third Municipal Magistrate of Calcutta. The complaint was also against Messrs. Samanta Industries Ltd. Sri Anath Bandhu Samanta was convicted as proprietor. It has been pointed out by Mr. Debabrata Mukherji appearing on behalf of the appellant that as it is a limited company there can be no proprietor and the person in charge of the limited company should have been proceeded against. He very fairly points out that the person in charge is the son of Anath Bandhu Samanta called Shib Kanta Samanta who is the General Secretary. His first contention is that the proceeding should have been against Shib Kanta Samanta. As the matter has to go back to the Municipal Magistrate, when the matter goes back the learned Magistrate may draw up proceedings against Shib Kanta Samanta instead of Anath Bandhu Samanta, as Shib Babu is admitted to be the person in charge of the business.
Mr. Chakravarty on behalf of the State has raised the point whether Samanta Industries Ltd. can be charged with the substantive offence or/and whether Shib Babu is to be charged with abetment of the same by the company. His contention is that a limited company under the Indian law cannot be proceeded against criminally. According to him, Samanta Industries Ltd. being a limited company cannot be proceeded against even under the municipal law and his further contention is that although Samanta Industries Ltd. cannot be proceeded against, the law allows the abettor to be proceeded against, when the principal for some reason or other cannot be brought to trial. As far as the second part of Mr. Chakravarty's argument is concerned, it can be accepted without hesitation. It is clear that in law the fact that the principal cannot be brought to trial does not prevent a charge of abetment. This has been accepted also in the Indian Penal Code in the chapter dealing with abetment.
The contention of Mr.
Chakravarty that under the Indian criminal law a limited company cannot be
proceeded against does not appear to me to state the correct position in law.
It is said in Ratanlal's edition of the Indian Penal Code in connection with
the comments on the word "person" used in Section 11 of the Indian
Penal Code that it will not include a limited company and the authority given is
of an English case. I have not been able to find out any Indian decision on the
point. It is quite clear that if there is anything in the definition or context
of a particular section in the statute which will prevent the application of
the section to a limited company, certainly a limited company cannot be
proceeded against. For example, rape cannot be committed by a limited company.
There are heaps of other sections in which it will be physically impossible by
a limited company to commit the offences. Then again it is quite clear that a
limited company cannot generally be tried where metis rea is essential. Again
it cannot be tried where the only punishment for the offence is imprisonment
because it is not possible to send a limited company to prison by way of a sentence.
If we leave these classes of cases aside, it is not clear why under the Indian
law a limited liability company cannot be proceeded against. Under the General
Clauses Act as also the Bengal General Clauses Act "person" includes
a limited liability company. There is no doubt about the same. We are dealing
with a case under the Calcutta Municipal Act and Section 3 (32) of the Bengal
General Clauses Act (Bengal Act I of 1899) applies and it is definitely stated
that a "person" shall "include any company or association or
body of individuals whether incorporated or not". As far as the
interpretation of the word "person" in any of the sections of the
Bengal Act or an Indian Act is concerned, unless there is any repugnancy in the
context a person may be interpreted so as to include a limited company. It
appears that the authority cited for the proposition that a limited liability
company cannot be the subject of an indictment, that is, cannot be tried in a
criminal court, is based upon a decision of the Court of Criminal Appeal in the
case of The King v. Daily Mirror Newspapers Ltd., and The King v. Charles
William Glover. It was held there that a limited company cannot be committed
for trial on an indictment and therefore it cannot also be tried. The position
is made clear in the argument of Sir John Simon which was accepted by the Court
of Appeal. He points out that in order that a person may be brought to trial he
must be committed for trial. In that case, the company could not be committed
for trial because the Interpretation Act of 1889 in England explained what was
meant by the expression "committed for trial" and the provision was
that the expression "committed for trial" used in relation to any
person shall, unless the contrary intention appears, mean, committed to prison
with a view to being tried before a judge or july. This interpretation of
"committed for trial" has not found a place in the Indian law. There
is no such definition of commitment for trial as in the English Interpretation
Act. Therefore, because of the difficulty of committing for trial under the
English law it could not be possible for a judge or a jury to try a limited
liability company but in the Indian law "committed for trial" or
being prosecuted does not mean being actually detained in a prison. Therefore,
the reason given why a limited liability company could not be tried in
Under the circumstances, I am unable to accept the contention of Mr. Chakravarty that the limited liability company cannot be proceeded against by the learned Magistrate. It will be quite optional for the learned Magistrate, if he so likes, to proceed against the limited liability company itself instead of its officer and more so as a fine is the only sentence provided for in the present case. If the learned Magistrate so likes he may also proceed against the principal officer for abetment. This is a matter for use of his judicial discretion.
Under Section 407(1)(v) of the Calcutta Municipal Act it provided that in the case of mustard oil it shall be derived exclusively from seed. If therefore mustard oil is adulterated with any other kind of oil which is not mustard oil then certainly whatever be the saponification test or other consideration there will be an offence committed of violation of Section 407. In the present case the analyst who was examined spoke about the saponification test and other things and said that the sample of mustard oil was mixed with other oil, but he in his cross-examination did not say that the other oil was not some other kind of mustard oil, but was some oil other than mustard oil which he might or might not have been able to identify. So long as this is not clear, namely, that the adulteration is with something other than mustard oil, whatever that other oil may be, Section 407 as far as mustard oil is concerned is not violated. Therefore, in the present case it has become necessary to send the case back to the learned Magistrate for taking fresh action. Under Section 425 of the Act, the help of the Public Analyst may be taken advantage of in the present case and the sample of oil may be sent to him for determination as to whether the adulteration is with any kind of oil other than mustard oil derived from mustard seed. This point should be made clear before a conviction can take place.
Under the circumstances, the conviction and sentence are set aside and the appeal is remanded to the Municipal Magistrate for further trial in the light of this judgment.
It is desirable that the trial should be by some other Municipal Magistrate.
[1975] 45 COMP. CAS. 16 (BOM)
HIGH COURT OF
v.
UDHARAM BHAGWANDAS JAPANWALLA
VAIDYA AND REGE, JJ.
CRIMINAL APPLICATION NO. 633 OF 1972
JANUARY 18, 19, 1973
R. Jethmalani and S.B. Keswani for the Applicant.
M.V. Paranjpe and M.K. Nesari for the Respondent.
M.B. Kadam for the State.
Vaidya, J.—This is an
application under section 561 of the Criminal Procedure Code. The applicant is
a public limited company by name, Esso Standard Inc., registered in the State
of
The above application is filed by Esso Company
contending that the continuation of the proceedings before the Magistrate is a
gross abuse of the court's process and praying that in exercise of the powers
of this court under section 561-A of the Criminal Procedure Code the
proceedings in Case No. 18/3 of 1972 pending in the court of the Presidency
Magistrate, 28th Court, Esplanade, Bombay, should be quashed and the complaint
dismissed, or, in the alternative, the process issued by the learned Magistrate
be set aside and the complaint required to be disposed of after holding an
inquiry under section 202 of the Criminal Procedure Code. The application of
the company is opposed by respondent No. 1. Mr. M.B. Kadam,
learned Assistant Government Pleader, appearing for the State of
Mr. Jethmalani, the learned counsel appearing for the
applicant-company, submitted that having regard to the categories of cases
settled, though not exhaustive of all other cases as mentioned in R.P. Kapur v.
State of Punjab,
the complaint filed by respondent No. 1 squarely falls within the second
category, i.e., the category of cases where the allegations in the first
information report or the complaint even if they are taken on their face value
and accepted in their entirety do not constitute an offence alleged and, apart
from that, the ends of justice require that the proceedings pending before the
Presidency Magistrate should be quashed against the applicant-company and its
officers who are mentioned as accused Nos. 2 to 5. He submitted that on the
face of it the complaint disclosed no criminal offence under any section of the
Indian Penal Code under which process has been issued by the learned
Magistrate, viz., sections 420, 417 read with sections 34, 109 and 114 of the
Indian Penal Code because the allegations made in the complaint were wholly
false and even assuming them to be true they did not establish the ingredients
of the said offence. He argued that the dispute between the parties was at the
worst a civil dispute and even according to the complaint the claim of the
complainant was time-barred. He pointed out that in the year 1963, with respect
to the same dispute, respondent No. 1 made a claim of Rs. 85,000; in May, 1969,
he made a claim of Rs. 7,56,840 and in February, 1971,
he inflated it to Rs. 22,56,840 with the ulterior motive of blackmailing the
officers of the applicant-company and to force a settlement of a frivolous and
time-barred claim. He argued further that although the complaint repeatedly
refers to assurance and representations which were false, it is not stated as
to which of the representations was false and in view of this it was clear that
the complainant was abusing the process of the court by asking the court to
issue process particularly when the complaint filed earlier on the same facts
in the same court before another Presidency Magistrate was withdrawn after
issuing process on December 8, 1971, and was, therefore, dismissed by the
learned Magistrate. He submitted that even on the allegations of the
complainant it was obvious that the alleged offences took place in the year
1963 and it was discovered by the complainant on February 8, 1968, and the
learned Presidency Magistrate had not exercised his discretion properly in
issuing process without even making an enquiry under section 202 on a stale
complaint filed in 1972. Mr. Jethmalani argued that although there is reference
in the complaint to both section 417 and section 420, section 420 is the more
serious section which will be attracted if the complaint wants to suggest
cheating as the offence by the allegations made in the case; and the complaint
would be barred against the applicant-company in view of the decision of this
court in State of Maharashtra v. Syndicate Transport Co. Ltd.
Further relying on the principles enunciated regarding the liability by a
corporation or company in Tesco Supermarkets Ltd. v. Nattrass,
he submitted that the complaint was liable to be dismissed against the
applicant-company on the ground that there was no allegation in the complaint
that accused Nos. 2 to 5 were acting under authority of the company and further
that no act was attributed to them which could be the act of the company. He
further submitted that having regard to the allegations made in the complaint
that the offences were committed by all the accused with a common intention the
complaint was liable to be dismissed against all the accused as the company
could not be indicted on a charge under section 420 or section 417 of the
Indian Penal Code in the facts and circumstances of the case. Mr. Jethmalani
further submitted that, although the application is filed only by Esso Standard
Incorporated Co., the ends of justice require that the proceedings should be
quashed against all the accused and this court has power to quash the
proceedings even against persons who had not moved this court under section 439
of the Criminal Procedure Code as held in Parbaii Devi v. State.
These arguments of Mr. Jethmalani were sought to be
repelled by Mr. Paranjpe, learned counsel for the complainant, reading the
entire complaint and by contending that the allegations made .in the complaint
prima facie fulfilled all the ingredients of section 417 of the Indian Penal
Code against all the accused including the company. He submitted that although
the company cannot be indicted under section 420 of the Penal Code as held in
State of Maharashtra v. Syndicate Transport Co. Ltd.,
the applicant-company and its officers were liable for criminal action in the facts
and circumstances having regard to the nature of the offences disclosed in the
allegations in the complaint, the relative position of the officers vis-a-vis
the company and all other relevant facts and circumstances which clearly showed
that the company had meant or intended to cheat the complainant through its
agents, accused Nos. 2 to 5.
In view of these contentions it is necessary for us
to consider the allegations made by the complainant in the complaint. The
complainant claims to be a merchant and manufacturer of car polishes and car
cleaners. On February 16, 1961, one, A.G. Neff acting for and on behalf of
Standard Vacuum Oil Company entered into an agreement with the complainant.
Under the agreement two products of Standard Vacuum Oil Company, viz., (1)
Stanclean (car body cleaner) and, (2) Stanwax (car body polish) were to be
manufactured by the complainant on a royalty basis of Rs. 3 per dozen. The said
Neff had assured the complainant that this agreement, though mentioned to be
for one year, should be taken for ever, and even if he was not in office
representing Standard Vacuum Oil Co., the complainant should contact and convey
his assurances to his successors in office who were bound to honour the
assurances given by him. As desired by the company, a separate concern, viz.,
James Laboratory, Post Bag No. 10115, Bombay-1, was started by the complainant.
Standard Vacuum Oil Co. was converted into Esso
Standard Eastern Incorporated Co., in or about March, 1962. In accordance with
clause 13 of the agreement with Standard Vacuum Oil Co., the company was bound
to reimburse the complainant's company with the actual cost of all empty and
all filled containers surrendered by the complainant's company on the expiry of
the agreement because of the change in the name of the company. The
complainant, therefore, lodged a claim of Rs. 50,000 against the
applicant-company for 20,000 tins most of which were filled and became
unsaleable because of the change of name of the applicant-company. Accused No.
2, Z.A. Merchant, tried through the branches of the applicant-company to sell
those 20,000 tins but he failed in his attempt. There was no sale of these tins
up to June, 1962. The complainant, therefore, insisted that Rs. 50,000 be paid
to him as the cost of 20,000 unsold tins. But accused No. 2 made a
representation to the complainant that the applicant-company would make a new
agreement with him for Esso polishes for a period of 50 years if he took upon
himself the entire loss of Rs. 50,000 which was the cast of the filled and
empty 20,003 tins. The complainant agreed to this arrangement.
Relying on representation made by accused No. 2 on
June 26, 1962, the complainant wrote a letter to the company pi icing on record
the representation made by accused No. 2 and agreeing to remit his claim of Rs.
50,000 in consideration of the applicant-company entering into a new agreement with the complainant for 50
years. Further, as a result of this arrangement, the complainant was induced to
pay the royalty amounting to Rs. 2,452.50 which was payable by the complainant
to Standard Vacuum Oil Co.
However,
accused No. 2 delayed completing the agreement. The complainant wrote a letter
on August 30, 1962, requesting him to expedite the matter and arrange for
executing an agreement for 50 years. The complainant informed the
applicant-company that as per their wishes he had already placed orders for
containers subject to the final approval of the colour of the tin by the
applicant-company. At that time accused No. 4, R.D. Vyas, was the sales
manager. He transferred the file of correspondence with the complainant to
accused No. 3, R.K. Gupta. Accused No. 3 asked the complainant to change the
names of the products three times, i.e., from (1) Auto-Wax, Auto-Gloss and
Auto-Cleaner to (2) Kar-Wax, Kar-Gloss and Kar-Cleaner, and ultimately to (3)
Car-Wax, Car-Gloss and Car-Cleaner. All these preliminaries were finished; and
the complainant placed on record by a letter dated October 15, 1962, the
changes suggested by accused No. 3. According to the instructions of accused
No. 3, the complainant further got the tins printed so that in four weeks Esso
polishes should be out in the market. At that time the complainant told accused
No. 3 that a written agreement for 50 years should be executed first and he
could proceed with the printing of new Esso tins after this as it would entail
an amount of about Rs. 40,000 which the complainant was not prepared to invest
until he was assured of the continuance of the agreement for 50 years. Accused
No. 3 told him that he had no reason to worry and that the agreement for 50
years would definitely be executed. He asked the complainant to give him the
old original agreement with Standard Vacuum Oil Co. which would enable him to
have a fresh agreement prepared. The complainant told accused No. 3 that he was
not sure where the original was but he would send a copy which was lying in his
office file. Accused No. 3 said that that would do but asked the complainant to
proceed with the printing of the tins at once. Relying on this assurance the
complainant invested Rs. 35,000 by getting 75,000 tins prepared with new design
and name.
In spite of
this, accused No. 3 did not prepare the agreement for 50 years. On the
contrary, he insisted on the complainant signing a one-year agreement and asked
the complainant to cancel the proposed para. 13 of the agreement which entitled
the complainant to be reimbursed in respect of the actual cost of all empty and
all filled containers surrendered by the complainant's company. Surprised at
this the complainant thought that it would be better to collect Rs. 50,000 plus
Rs. 35,000 invested in Esso printed tins. Hence, on January 3, 1963, he wrote a
registered letter with acknowledgment due to accused No. 4, R.D. Vyas,
general sales manger, putting on record the fact that he had agreed to bear the
loss of Rs. 50,000 consequent upon the change in the name of the company on the
representations made by accused No. 2, Merchant, that the applicant-company
would enter into an agreement with the complainant's company for 50 years. The
complainant wrote to accused No 4, Vyas, that unless the promise of 50 years'
agreement and the retention of para. 13 of the old agreement were agreed to, he
would insist on claiming Rs. 50,000 which was his loss when the company changed
its name and Rs. 35,000 being the investment made by the complainant in the new
Esso tins as a result of tha assurances given to him by the officers of the
company, i.e., accused No. 2 and accused No. 3.
On receipt of this letter accused No. 4 sent for the
complainant and informed him personally that he would accede to his demands and
directed Patel, who was also an officer in the company, to prepare the
agreement for 50 years with clause 13 in it. Mr. Patel prepared the agreement
and sent it to the complainant for approval. After approval, the complainant
returned the draft with two stamped papers on February 5, 1963. Thereafter, the
complainant went to have a meeting with accused No. 4, Vyas, and Patel. At that
meeting accused No. 4, Vyas, told the complainant that in view of the fact that
they were entering into an agreement with the complainant for 50 years, the
complainant should withdraw the registered letter dated January 3, 1963,
demanding Rs. 85,000. Believing accused No. 4 the complainant gave a letter
withdrawing his demand of Rs. 85,000 contained in his letter dated January 3,
1963.
February 8, 1963, was fixed as the date for signing
of the agreement. The complainant wrote on February 7, 1963, that he would be
coming to the company's office for the purpose along with his brother who was
the proprietor of Venus Polishes. On February 8, 1963, the meeting took place.
The complainant accompanied by his brother went to sign the agreement. He was
shocked to find that the agreement which was handed over to him for his
signature by accused No. 3 was not for 50 years but only for one year. The
complainant got upset. He searched for Patel. He could not find Patel or
accused No. 4. He insisted on a mention of 50 years in the agreement and refused
to sign the agreement and demanded Rs. 85,000. Both accused No. 3 and accused
No. 2 told him that the legal department of the applicant-company had said that
they could not take the agreement for 50 years and instead they had suggested
the mention of the words "the agreement is renewable every year".
Accused Nos. 2 and 3 told the complainant that these words were in substance
intended to give effect to the agreement for 50 years as the agreement was
renewable automatically every year and the complainant was in possession of the
letter dated June 27, 1962, incorporating the arrangement for 50 years. They
also said that only if there was any breach of the agreement that the company
could exercise option of termination by referring to para. 14
of the said agreement. In view of these assurances and representations
made by accused Nos. 2 and 3 and similar representations made by them and
accused No. 4 earlier and without suspecting that they were making false
representations and giving the complainant false assurances, the complainant
signed the agreement.
After the execution of the agreement, the complainant
started manufacturing and marketing the products which were the subject-matter
of the agreement. Differences arose between the officers of the company and the
complainant. The complainant approached with his difficulties accused No. 4
whose attitude towards the complainant was unco-operative. The complainant,
therefore, complained to the general manager, Thomas, accused No. 5, by his letter of August 3, 1964, who wrote back
suggesting that the complainant should contact accused No. 4. On September 21,
1964, the complainant contacted accused No. 4. What followed is described as
follows by the complainant:
"He heard me well and promised to solve all my
difficulties and asked accused No. 3, Gupta, to look into the matter. I again
requested for 50 years' agreement, and in reply he said 'Mr. Japanwalla, I am
not at all interested in any other polish maker, nobody is interested, when we know you have suffered the loss. I tell you that we
have all discussed and decided that the present agreement stands good for fifty
years and every ten years we shall renew with a letter, provided you forget
about your claim of fifty thousand rupees and maintain the same top quality of
all Esso polishes always; and to keep you secured, you pay us our royalty every
ten years, as we have full trust in you and, therefore, we have given you Esso
polishes for making for fifty years. You too should have the same trust in us
and stop writing registered letters. I have made all facts very clear to you'.
I thanked him and came away and sent a letter addressed to him incorporating
what had transpired at the meeting including what he had told me".
A copy of the letter was also sent by the complainant
to the general manager, accused No. 5. The complainant thereafter continued
manufacturing and marketing Esso polishes in pursuance of the assured 50 years'
agreement till April 3, 1968. On April 24, 1967, accused No. 3, Gupta, on
behalf of the applicant-company placed an order for 1,500 gross Esso polishes
to sell to about 2,500 dealers in the course of "Esso Polish
Compaign" which he had said they would start after the monsoon in October,
1967, and the complainant agreed to allow a special discount of 25 per cent. as against the usual discount of 20 per cent. to buyers of one gross and above with free enamel plate. The
complainant also agreed to give 200 dozen polishes free to the dealers
suggested by the company for free polishing of customer's cars on Esso pumps.
The complainant made preparation for the entire goods but the campaign did not
start. On January 4, 1968, the complainant wrote a letter informing them how a
large amount had been blocked in the goods and requested the company to start
the campaign. In December, 1967, when the complainant had gone to the
applicant-company and met accused No. 3, he wanted the original agreement made
with the complainant dated February 7, 1963, for sanction of the compaign. The
complainant gave a copy of the agreement as the original was not traceable. The
officer insisted on having the original agreement. On January 4, 1968, the
complainant informed accused No. 3 that the original agreement was misplaced.
Soon thereafter by their letter dated April 3, 1968,
the accused informed the complainant that their agreement was for one year
renewable at their option and that as the agreement was not renewed "it
stands terminated". They also asked the complainant to hand over to them
all the empty tins. This made the complainant to send a claim of Rs. 7,56,840 of the value of the ordered goods in filled tins and
of all the empty tins by a letter dated May 27, 1968. On June 12, 1968, the
solicitors of the company denied the liability of the company. In January,
1971, the complainant found his Esso file in which he found the true copy of
the agreement certified by an Honorary Presidency Magistrate. Relying on this,
the complainant sent a notice through his solicitors dated February 23, 1971,
to the accused-company demanding Rs. 22,56,840 for
cost of the filled and empty tins and damages for the unexpired period of 50
years. The company filed a complaint against the complainant and others under
sections 78 and 79 of the Trade and Merchandise Marks Act alleging that the
agreement had expired after one year and that the complainant had manufactured
and marketed goods after the expiry of the agreement which is pending before
the Presidency Magistrate, 28th Court, and the hearing of which is stayed on an
application made by the applicant-company sine die.
The complainant further alleged that he realised by
this time that the accused had all the time been playing a game. The
complainant, therefore, alleged that they had a dishonest intention from the
very inception and had cheated him by dishonestly inducing him to withdraw his
claim of Rs. 50,000 for the cost of the stock remaining unsold at the time of
the change of the name of the company by falsely assuring him that the
agreement though at first for one year was automatically renewable every year
for 50 years and further strengthening this false assurance by referring to his
letter of June 27, 1962, which they had not denied or repudiated.
The complaint in this case, was, therefore, filed
with contents as aforesaid alleging as follows :
"That their intention was dishonest from the
beginning is clear from the fact that in their complaint they have stated that
the agreement expired after the first year because it was not renewed. I have
evidence in the shape of correspondence to show that even after the expiry of
one year and in fact right up to the date of termination, i.e., April 3, 1968,
they had knowledge that I was manufacturing and marketing their goods. They
evidently waited for my claim to be time-barred before revealing their dishonesty
by writing the letter of termination. The timing of the letter of termination
was the result of their discovery that I had misplaced my original agreement
and, therefore, was helpless in the matter of taking any action against them.
All the accused have in
committing this offence of cheating me acted in furtherance of common intention
of each other and have aided and abetted each other. I, therefore, charge them
under sections 417 and 420 read with sections 34, 109 and 114 of the Indian
Penal Code and I request that this honourable court may proceed against them
according to law for the offence committed by them".
It is manifest that but for the averments that the
claim of the complainant was time-barred and process should be issued against
the accused the complaint sounds almost like a plaint in a civil suit. As far
as we can see, what is alleged is nothing more than a breach of an assurance or
undertaking or representation made by accused Nos. 2, 3 and 4 to the
complainant that even though the agreement was not an agreement for 50 years as
it was automatically renewable every year it amounted to an automatic agreement
renewable for 50 years and, hence, when they wrote on April 3, 1968, that the
agreement was terminated, the said accused Nos. 2, 3 and 4 and the company
committed breach of the agreement to renew the agreement for 50 years. Merely stating in the complaint that the termination showed that
the parties were "dishonest" from the beginning cannot convert a
purely civil dispute like the present one into a crime.
A civil proceeding has for its object the recovery of
money or other property, or the enforcement of a right for the advantage of the
person suing, while a criminal proceeding has for its object the punishment of a
public offence. Criminal proceedings cannot be used as a means of recovering a
civil debt in the absence of express provision to that effect. (See Halsbury's
Laws of England, Volume X, para. 502, page 271, and R. v. Peel).
The allegations made in the complaint are not at all sufficient to attract the
application of sections 417 and 420 read with sections 34, 109 and 114 of the
Indian Penal Code. The complainant himself had signed the agreement which was
an agreement renewable every year. Merely because he signed it believing the
assurances of the officers that if he did not commit breach of the agreement
the agreement would be renewed, it could not make the conduct of accused Nos. 2
to 4 dishonest in any manner. The complainant is a business man. He has signed
the agreement with open eyes. It was clear that the agreement was renewable
every year. It could not be so renewed without the consent of both the parties.
In the face of the written agreement it is not open to the complainant to
allege dishonest intention against the officers of the company. In these
circumstances it is doubtful whether even a civil claim could be made by the
complainant against the accused. By mere reproduction of the words
"dishonestly" or "intention to cheat" a party cannot
convert a purely civil dispute into a crime.
Cheating is denned in section 415 of the Indian Penal
Code. The section requires:
"1. Deception of
any person.
2. (a) Fraudulently or
dishonestly inducing that person— (i) to deliver any property to any person ;
or
(ii)
to consent that any person shall retain any property,
or
(b) intentionally inducing
that person to do anything which he would not do or omit if he were not so
deceived, and which act or omission causes or is likely to cause damage or harm
to that person in body, mind, reputation or property".
The allegations made in the complaint are not
sufficient to show deception of the complainant. He cannot say that he was
deceived when he signed the agreement because the officers assured him that if
he did not commit breach of the agreement the agreement would be renewed. He
did not give up this claim under any deception. He gave it up because he wanted
a further agreement as admitted in the complaint itself.
Distinction between mere breach of contract and
cheating depends upon the intention of the accused at the time of the alleged
inducement which may be judged by his subsequent act of which the subsequent
act is not the sole criteria. The complainant has inferred a dishonest
intention on the part of the officers by their subsequent declaration that the
agreement was already terminated as one year had expired. This inference is not
open to him because on his own allegations he had signed the agreement
renewable every year believing that it was renewable for a period of 50 years.
He need not have signed the agreement. He has said in the complaint itself that
the legal department of the applicant-company had said that the officers could
not put in 50 years in the agreement. Hence it is clear that the complainant
knew that the officers could not assure him at all that the agreement was
renewable for 50 years. The allegations made in the complaint itself disclose
only at the highest a mere breach of the contract which cannot give rise to a
criminal proceeding against any of the accused. The ends of justice, therefore,
require the proceedings to be quashed to prevent waste of time of the criminal
court and multiplicity of proceedings and consequent harassment to the accused.
Although this would have been enough to quash the
proceedings and dispose of this matter, it is further necessary to deal with
the contention of Mr. Jethmalani that the applicant-company and its officers could
not be indicted under section 417 or section 420 of the Indian Penal Code
having regard to the nature of the company which is incorporated in the United
States of America with its memorandum of association and articles of
association and also having regard to the necessity for proof of mens rea which
is an essential element under sections 417 and 420 of the Indian Penal Code.
The law in
"....Since a company, or any other corporate
body, is a legal abstraction without a real mind of its own, the courts at one
time were unwilling to convict a company of an offence involving proof of
mental state whether of intention, malice or dishonesty. At this period it was
only possible to charge a company with criminal offences of strict liability.
In a number of cases the courts were prepared to allow a company to be
prosecuted for offences committed by its employees where the statutes creating
the offence could properly be construed as imposing vicarious liability upon
the company as employer".
In order to hold a company liable for crimes
involving proof of mens rea the courts have had to develop a new principle of
corporate liability which is sometimes referred to as the alter ego doctrine.
This allows the law to attribute the mental state of those who in fact control
and determine the management to the company itself as being its "directing
mind and will". The criminal intentions of a company's ordinary servants
and agents will not suffice for the purpose, since the company is not being
called to answer simply on the principle of respondeat superior.
The question of whether the mental state of the
directors or other officers, collectively or individually, can be attributed to
the company as its own act must "depend on the nature of the charge, the
relative position of the officer or agent and other relevant facts and
circumstances of the case". This test applies both as to whether there is
evidence to go to the jury on the issue and as to how the jury should satisfy
themselves that mens rea on the part of the company has been proved. On this
basis companies have been convicted of crime involving dishonesty whether
created by statute or by common law.
The court will investigate as a question of fact how
the management of the company has in reality been conducted so as to determine who is the responsible officer in the area of activity in which the
offence occurred. The "directing mind and will
" of the company need not, in an appropriate case, be in the
exalted position of the board of directors or the managing director. Thus, in
Mr. Jethmalani also relied on the comment made by
Professor Glan-ville Williams in Criminal Law, 2nd edition, 1961, at page 858,
in foot-note 5, with reference to a decision in
The question has been considered thoroughly in Tesco
Supermarkets Ltd. v. Natlrass.
Though it was a case under the English Trade Descriptions Act, 1968, the House
of Lords discussed the question of criminal liability of a company and it will
be useful to quote here the relevant observations. Lord Reid stated:
"Normally the board of directors, the managing
director and perhaps other superior officers of a company carry out the
functions of management and speak and act as the company. Their subordinates do
not. They carry out orders from above and it can make no difference that they are
given some measure of discretion. But the board of directors may delegate some
part of their functions of management giving to their delegate full discretion
to act independently of instructions from them. I see no difficulty in holding
that they have thereby put such a delegate in their place so that within the
scope of the delegation he can act as the company. It may not always be easy to
draw the line but there are cases in which the line must be drawn".
Lord Morris of Borth-y-Gest stated
;
"In general criminal liability only results from
personal fault. We do not punish people in criminal courts for the misdeeds of
others.* The principle of respondeat superior is
applicable in our civil courts but not generally in our criminal courts".
Viscount Dilhorne stated :
"In the course of the argument a great many
cases were cited with regard to the criminal liability of a company. A company
can only act through individuals and it is well-established that a company can
be criminally liable even if the offence involves proof of an
intent. Mousell Brothers
v.
Lord Pearson stated :
"A company may have an alter ego, if those
persons who are or have its ego delegate to some other person the control and
management, with full discretionary powers, of some section of the company's
business. In the case of a company, it may be difficult, and in most cases for
practical purposes unnecessary, to draw the distinction between its ego and its
alter ego, but theoretically there is that distinction.
Mr. Clement, being the manager of one of the
company's several hundreds of shops, could not be identified with the company's
ego nor was he an alter ego of the company. He was an employee in a relatively
subordinate post. In the company's hierarchy there were a branch inspector and
an area controller and a regional director interposed between him and the board
of directors".
Lord Diplock, with respect, made the most valuable
observations which run as follows :
"In my view, therefore, the question : what
natural persons are to be treated in law as being the company for the purpose
of acts done in the course of its business, including the taking of precautions
and the exercise of due diligence to avoid the commission of a criminal
offence, is to be found by identifying those natural persons who by the
memorandum and articles of association or as a result of action taken by the
directors, or by the company in general meeting pursuant to the articles, are
entrusted with the exercise of the powers of the company.
This test is in conformity with the classic statement
of Viscount Haldane L.C. in Lennard's
Carrying Company Ltd. v. Asiatic, Petroleum Company Ltd.
"
He further stated :
"My Lords, there may be criminal statutes which
upon their true construction ascribe to a corporation criminal responsibility
for the acts of servants and agents who would be excluded by the test that I
have stated to be appropriate in determining whether a corporation has itself
committed a criminal offence".
The passage of Viscount Haldane, Lord Chancellor, in
Lennard's Carrying Company Ltd. v. Asiatic Petroleum Company Ltd.,
referred to by Lord Diplock, is as follows :
"My Lords, a corporation is an
abstraction. It has no mind of its own any more than it has a body of its own;
its active and directing will must consequently be sought in the person of
somebody who for some purposes may be called an agent, but who is really the
directing mind and will of the corporation, the very ego and centre of the
personality of the corporation. That person may be under the direction of the
shareholders in general meeting ; that person may be
the board of directors itself, or it may be, and in some companies it is so,
that that person has an authority co-ordinate with the board of directors given
to him under the articles of association, and is appointed by the general
meeting of the company, and can only be removed by the general meeting of the
company".
In view of these principles it was submitted by Mr.
Jethmalani that although L.M. Paranjpe J. was right in holding in State of
".... a corporate body ought to be indictable for criminal acts or omissions of its directors, or authorised agents or servants, whether they involve mens rea or not, provided they have acted or have purported to act under authority of the corporate body or in pursuance of the aims or objects of the corporate body and that the question whether a corporate body should or should not be liable for criminal action resulting from the acts of some individual must depend on the nature of the offence disclosed by the allegations in the complaint or in the charge-sheet, the relative position of the officer or agent, vis-a-vis, the corporate body and the other relevant facts and circumstances which could show that the corporate body, as such, meant or intended to commit that act".
and further that each case
will have necessarily to depend on its own facts, must be considered as
propositions which ignore the constitution of corporate bodies under the
memorandum of association and articles of association. This criticism appears
to us to be justified having regard to what Lord Diplock has stated in his speech
but the remarks of L.M. Paranjpe J. were obiter as the case was decided in the
context of the question of liability of a company under section 420 of the
Indian Penal Code alone and it was rightly held by L.M. Paranjpe J. that as
section 420, Indian Penal Code, made it necessary for the court to inflict
imprisonment, a company could not be indicted under that section.
Perhaps the true view appears to be what Lord Reid
has stated:
"I think that the true view is that the judge
must direct the jury that if they find certain facts proved then as a matter of
law they must find that the criminal act of the officer, servant or agent
including his state of mind, intention, knowledge or belief is the act of the
company".
But it must be proved as a matter of fact that the
officers were acting within the limits of their authority on behalf of the
company.
Applying this test to the present case we feel no
hesitation in holding that the complaint was drafted without any regard to
these principles. There is not a word to suggest anywhere in the complaint that
the officers —accused Nos. 2 to 5—had done any act on behalf of the company so
as to make such act in law the act of the company. On the contrary the
averments made in the complaint as stated above are that they had common
intention with the company; this, in our judgment, is nothing but confused
thinking on the matter. The law attributes to the company intention of the
officers of the company under certain circumstances. The company's intention
could be ascertained only when the company in a general body or at the meeting
of the board of directors or in accordance with the memorandum of association
or articles of association has expressed that intention in the form in which it
should be expressed. In the absence of any such averment it is clear that the
complaint against the applicant-company is clearly not maintainable in law
having regard to the general principles of criminal liability enunciated by the
House of Lords in the above case.
Mr. Jethmalani, in our opinion, is also right in his
contention that as the substance of the complaint is with respect to the loss
sustained by the complainant in giving up his claim against the Esso Co.,
although section 417, Indian Penal Code, is referred to in the complaint and in
the process issued by the learned Magistrate the only section which could be,
if at all, invoked by the complainant on the basis of his allegations was section
420, Indian Penal Code, and not section 417, Indian Penal Code, and hence the
ratio of L.M. Paranjpe J.'s judgment in State of Maharashtra v. Syndicate
Transport Co
would also apply and no indictment could be made against the company under
section 420, Indian Penal Code. If no indictment could be made against the
company the allegations of the complainant that the accused had common
intention with the company also will fall to the ground and the complaint must
be dismissed against all the accused.
Mr. Paranjpe, learned counsel for the complainant,
fairly stated that he could not submit that this court had no jurisdiction
under section 561-A read with section 439 of the Criminal Procedure Code to
quash the proceedings against all the accused on an application filed by the
applicant-company if this court found, as it has found, that the allegations
made in the complaint did not constitute any offence and the complaint was not
maintainable as it involves a civil dispute. It is, therefore, unnecessary for
us to discuss the question any further.
Mr.
Jethmalani submitted that as the present complaint was filed on the same
allegations on the basis of which the earlier complaint was filed and
withdrawn, it was clear that the complainant's motive in filing this complaint
was not to vindicate the law but to coerce the accused by criminal process to
enter into a settlement with regard to his false claim. He, therefore, submitted
that this was a case in which compensation should be ordered under section 516-A A of the Criminal Procedure Code. There is undoubtedly
some force in what Mr. Jethmalani has stated, but it is clear that there is a
dispute as found by us above. In view of that dispute it is possible that the
complainant was advised to file a complaint and it cannot be said that it is
without any reasonable or proper cause.
For the above
reasons, we allow the application and quash all the proceedings against the
applicant and all the other accused pending in the court of the learned
Presidency Magistrate, 28th Court, in Case No. 18/S of 1972. All the accused
are discharged.
Application allowed.
[1961] 31 COMP. CAS. 705 (MAD.)
Naguneri Peace Memorial Co-operative Urban Bank Ltd.
v.
Alamelu Ammal
RAJAMANNAR,
CJ.
AND
VENKATADRI, J.
C.R.P.NO.
766 OF 1957
DECEMBER
16, 1960
VENKATADRI,
J. - This civil revision
petition belongs to the unfortunate class of cases in which the courts have to
decide which of the two innocent parties has to suffer for the fraud of a third
party.
The petitioner
is a co-operative bank doing banking business. The respondent is a lady who had
dealings with the bank from the year 1952. She made two fixed deposits with the
bank one for a sum of R. 2,300 on 24th January, 1955, and another for a sum of
Rs. 550 on 5th APril,1952 for three years, the interest payable being 5 per
cent. per annum. The fixed deposit receipts bearing
Nos. 1293 and 1192 respectively were issued to her by the secretary. As she did
not receive interest once in six months as per the rules of the bank , she issued a notice calling upon the bank to pay the
interest accrued due on the said two deposits. The petitioner (bank) promptly
denied its liability and replied to her letter stating that only a sum of Rs.
1,000 had been deposited under fixed deposit receipt No. 1293. The respondent
filed the suit S.C.No. 926 of 1956 for a decree directing the bank to pay Rs.
237-8-0 for the interest accrued due on the fixed deposits. The petitioner, who
was the defendant in the suit, contended that the fixed deposit receipt No.
1293 for a sum of Rs. 2,300 and No. 1192 for a sum of Rs. 550 were not issued
by the bank, that there was no entry in the account books of the bank either for
the alleged deposit of Rs. 2,300 or Rs. 550 that the fixed deposit receipts
were never signed by the directors except the secretary and that the fixed
deposit receipts now held by the respondent are bogus ones and not binding on
the bank.
The learned district
munsif who tried the suit found that the fixed deposit receipts were not
genuine and the secretary of the bank committed a forgery by affixing the
signatures of three directors. Nevertheless he came to the conclusion that as
the secretary was authorised to receive the money according to the bye-laws of
the bank , the bank was liable to pay the amounts due
on the fixed deposit receipts held by the respondent and he accordingly decreed
the suit. The bank has filed this revision petition and as an important
question is involved in this case, namely, how far a bank is answerable to
third parties for the fraudulent acts of its servants or officers, the civil
revision petition has come up before a Bench for consideration.
Before considering the question of law involved in this case it is
necessary to set out the relevant bye-laws framed by the bank. They are :
Bye-law 14 : Deposits may at the discretion of the board of
directors be received at any time from members or non-members.
Bye-law 15 : Deposits from members shall be given preference to
deposits from non-members.
Bye-law 21 : The board of directors shall appoint a paid secretary
who shall have no seat in the board. The board shall fix the nature and extent
of the security to be furnished by the secretary...
Bye-law 25 : Receipts shall be issued for all moneys paid to the
society. For moneys paid by members, the receipt shall be signed by the
president or the secretary whoever is selected by the board of directors to
discharge his function. In the case of borrowings from non-members or from
other societies the receipt or bond shall be executed by at least four members
of the board of directors of whom the President shall be one.
Mr. Ramamurthi,
the learned counsel for the petitioner, contends that the bank is not liable
for the unauthorised and fraudulent act of a secretary committed for his own
benefit unless there has been negligence on the part of the bank. His further
contentions may be stated thus : “There is no warrant
or justification either in the Act or rules or bye-laws, that the secretary was
authorised to receive money from the customers. Apart from the forged fixed
deposit receipts the bank accounts did not contain any entry regarding the
alleged deposits. The fixed deposit receipts were not signed by the directors
but on the other hand were forged by the secretary himself. These fixed
deposits are simply null and void. They are merely a piece of waste paper. Thus
the bank is not liable to pay the respondents any amount found on the fixed
deposit receipts but they would be liable only to the extent of the amount
found in the account book.”
In order to
fortify his argument, the learned counsel referred to a leading case, viz.,
Ruben V. Great Fingall Consolidated. The facts in that case are similar to our
case. The plaintiff advanced in good faith a sum of money to the secretary of
the defendant company for his own purposes on the security of a share
certificate of the company issued to them by the secretary. This certificate
was in point of form in accordance with the articles of association inasmuch as
it bore the seal of the company and appeared to be signed by the directors and
counter-signed by the secretary. The seal of the company was, however, affixed
to it by the secretary fraudulently and without authority and the signatures of
the two directors were forged by him. On the discovery of the fraud, the
plaintiff filed a suit against the company on the certificate issued by the
secretary. Their Lordships held that the documents were forged and could not
bind the company unless some official acting with his authority had warranted
that it was genuine. Even assuming that the secretary might be taken to have
impliedly warranted this he had no colour of authority, actual, usual, or
apparent to do and, therefore, the company was not bound. LORD LOREBURN L.C.,
in his speech, observed :
“I cannot see
upon what principle your Lordships can hold that the defendants are liable in
this action. The forged certificate is a pure nullity. It is quite true that
persons dealing with limited liability companies are not bound to inquire into
their indoor management, and will not be affected by irregularities of which
they had no notice. But this doctrine, which is well established applies only
to irregularities that otherwise might affect a genuine transaction. It cannot
apply to a forgery.”
Another noble
lord, LORD MACNAGHTEN, said :
“The thing put
forward as the foundation of their claim is a piece of paper which purports to
be a certificate of shares in the company. This paper is false and fraudulent
from beginning to end. The representation of the company’s seal which appears
upon it, though made by the impression of the real seal of the company, is
counterfeit, and no better than a forgery. The signatures of the two directors
which purport to authenticate the sealing are forgeries pure and simple. Every
statement in the document is a lie. The only thing real about it is the
signature of the secretary of the company who was the sole author and
perpetrator of the fraud. No one would suggest that this fraudulent certificate
could of itself give rise to any right or bind or affect the company in any
way. It is not the company’s deed, and there is nothing to prevent the company
from saying so.”
This case was
considered on two occasions by the Court of Appeal in Kreditbank Cassel v.
Schenkers Ltd. and South London Grayhound Race Course Ltd. v. Wake. In the
former case, a bill of exchange was signed by the manager of a company with his
own signature under words stating that he signed on behalf of the company in
favour of the payee to whom the manager was personally indebted. As it was
found to be a forgery it was contended before the Court of Appeal that the
holders were not entitled to enforce payment of them against the company.
Following the principles laid down in Ruben’s case, SCRUTTON L.J. observed that
the doctrine that everybody is presumed to know the contents of the registered
articles of association did not extend to a forgery, a forged instrument being
simply null and void. He further observed:
“It seems to
me clear that this document is a forgery within the language of the Forgery
Act. It contains a false statement, namely, that the manager is acting for the
company and it purports to bind the company. That statement is in fraud of the
company, and those two elements appear to make the document a forgery within
the Forgery Act. That being so, I feel bound by the decision of the House of Lords
to hold that in this case, it is not open to the plaintiffs to say : ‘This matter, whether authority has or has not been
delegated to Clerk, the Manchester manager, is a matter of internal management
about which I need not inquire under the rule in Royal British Bank v. Turquand
‘.”
ATKIN L.J.
also observed :
“This is the
ordinary case of a person having exercised or purported to exercise an
authority to bind the company in fraud of the company, outside the scope of his
ordinary ostensible authority- To my mind, inasmuch as the act was done within
the ostensible authority of the agent, the principal is not precluded from
setting up the want of authority.”
In South
London Grayhound Race Course Ltd. v. Wake the articles of association of the
company required that the “seal of the company shall not be affixed except by
the authority of a resolution of the board of directors and in the presence of
at least one director and the secretary, and the said one director and
secretary shall sign every instrument to which this seal shall be so affixed in
their presence.”
In this case
the secretary and one of the directors of the company without any authority of
any sort or kind of the board of directors fraudulently affixed the company’s
seal on the share certificate, which they both signed, describing themselves,
as in fact they were,as secretary and director
respectively of the company, and dishonestly issued the said certificate to the
defendant. In the course of the judgment, CLAUSON J. observed
:
“The facts, as
they have been proved before me,appear to me to bring
the case directly within the principles laid down in RUben v. Great Fingall
Consolidated. If I felt any doubt about it, that doubt would be removed by a
statement of the law contained in the judgment of ATKIN L.J. in Kreditbank
Cassel v. Schenkers Ltd.. In that case, the learned
Lord Justice said :’But we have the authority of the
House of Lords in Ruben’s case for saying that the doctrine that you need not
investigate whether or not the conditions regulating the internal management of
the company have been strictly carried out in accordance with the articles has
no application in the case of a document which is an obvious forgery.’ In this
case the defendants are entitled to say :’These are
not our bills and we are not precluded from denying the authority of the person
who purported to sign them on our behalf.”
Following
these two decisions it was held that as the seal of the company was not affixed
under the authority of the board of directors, the certificate was not duly and
truly sealed in the company’s behalf, and was therefore a forgery and not
binding on the company and the company was not, consequently, stopped from
denying the validity of the certificate. The doctrine that one need not investigate
whether or not the conditions regulating the internal management of the company
have been strictly carried out in accordance with the articles has no
application in the case of a document which is an obvious forgery.
Mr. Champakesa
Aiyangar, the learned counsel for the respondent, argued that the secretary in
the instant case had authority to receive the fixed deposits and every act done
by him in the course of his employment would bind the bank. He drew our
attention to a case decided in our High Court by GENTLE J. in Mathias v.
Milator Agricultural CO-operative Bank. The facts in that case are : the plaintiff’s association used to make deposits with
the defendant bank through its secretary. In the course of their dealings the
secretary of the bank received fixed deposits even outside the bank premises
and used to issue fixed deposit receipts. It was contended by the bank that the
secretary had authority to receive the deposits only at the bank premises but
as he received the deposits outside the bank premises his conduct in receiving
the money and his act in giving the fixed deposit receipt was outside the scope
of his authority. But this was negatived. GENTLE J. observed
:
“It is not
contended that the secretary and treasurer had no authority to receive money
and to receive fixed deposits and that he was not their agent so to do and it
was not in the course of his employment so to act. Every act done by an agent
in the course of his employment on behalf of his principal and within the
apparent scope of his authority binds the principal, unless the agent is in
fact unauthorised to do that particular act and the person with whom he is
dealing is aware that the agent in doing as he does is exceeding the authority
given by the principal.”
The learned
counsel for the respondent also cited Lloyd v. Grace Smith and CO., where the
managing clerk of firm of solicitors in
All these
cases cited above establish two principles. One is that the well established
principle that strangers are entitled to assume that all things connected with
the transactions and pertaining to the internal management of the company have
been validly done has no application to fraud and forged instruments, as forged
instruments are simply null and void. The other principle is
: A secretary is a mere servant. His position is that he has to do what
he is told and no person can assume that he has any authority to represent
anything at all. If the secretary is shown to have either express authority to
perform certain acts or implied authority by a course of dealing the company
would be liable. In other words, if he is acting within the scope of his
authority the actions of the secretary will bind the company even if done
tortiously or fraudulently and even though they ensure not for the company’s
benefit but for the secretary himself.
These
established rules and principles will equally apply whether in the law of
agency, or in the law of master and servant.
In Gower’s
Modern Company Law, at page 157, the learned author has put the whole
proposition of law in a nutshell thus :
“If a document
purporting to be sealed by or signed on behalf of the company is proved to be a
forgery, it does not bind the company. But the company may be stopped from
disclaiming the document as a forgery if it has been put forward as genuine by
an official acting within his actual, usual, or apparent authority and if a
transaction is binding on the company under the foregoing rules the company
will be liable notwithstanding that the official has acted fraudulently or
committed forgery.”
Similarly
Boawstead in his well known book, A Digest of the Law of Agency, has stated
under article 82 :
“No principal
is bound by any act of his agent which is not done within the agent’s actual or
implied authority unless the principal in fact authorised the agent to do the
particular act.”
In Smith’s Law
of Master and Servant, the learned author states the rule thus at page 229 :
“A person may
be liable for a fraud committed by his agent or servant, if the agent or
servant committed it while acting within the scope of his authority, while
doing, and purporting to do, something on behalf of his employer although in
doing it he commits a wrong which his employer neither sanctioned nor intended.
But if the agent or servant is not acting or purporting to act for his
employer, the fraud cannot be treated as the fraud of the employer.”
Now we have to
consider whether in the light of the above principles the bank is liable.
According to the bye-laws of the bank, in the case of non- members, deposit
receipts should be issued by at least four members of the board of directors of
whom the president shall be one. The respondent is not a member of this
Co-operative Urban Bank. The secretary was not a director at any time. Though
it was brought to our notice that subsequently bye-law 25 was amended thereby
authorising the secretary along with four members of the board of directors to
issue deposit receipts, there is nothing on record to show that after the
amendment the secretary was co- opted as a director or appointed as a director
of the petitioner bank. We do not know whether the bye-law was amended either before
or after the suit.
Therefore ,
according to the bye-laws of the bank, the secretary has no right nor even
apparent authority nor ostensible authority to issue fixed deposit receipts to
a non-member. The fact that the deposit receipt is in the proper form and
delivered by the secretary in the ordinary course of duty does not operate as a
representation of genuineness and estop the bank from denying its validity. The
directors of the bank do not owe the depositors the duty of adopting unusual
precautions to discover whether or not such employees or agents are doing their
duty or perpetrating frauds. In any event, the secretary is not authorised or
empowered to issue deposit receipts as per the provisions of the bye-laws
framed by the petitioner bank. While issuing the fixed deposit receipts to the
respondent, the secretary is not acting within his authority or in the course
of his employment or within the scope of his agency. The secretary in this case
exercised or purported to exercise an authority to bind the bank by committing
a fraud and thereby he acted outside the scope of his ordinary ostensible
authority. When he has no such authority, the deposit receipt signed by him is
only a waste paper. Further, he has forged the signature of the directors and
thereby committed a fraudulent act. Certainly the fraudulent act of the
secretary of the bank would not bind the bank. Though the learned district
munsif gave a finding that the fixed deposit receipts were not genuine, still
he was of the view that as the secretary was authorised to receive the money,
the petitioner bank should be held responsible. We think that this is not a
correct view according to law and according to the bye-laws of the bank. We
hold that the fixed deposit receipts bearing No. 1293 for a sum of Rs. 2,300
and No. 1192 for a sum of Rs. 550 issued by the secretary are not valid
receipts and they are not binding on the petitioner bank. The learned district
munsif has also given a finding that in any event the bank is liable to pay
interest for the fixed deposit of Rs. 1,000 as found in the account books of
the bank under the heading F.D. No. 1293 dated 24th January 1955. We agree with
him.
In the result,
we set aside the judgment and decree of the learned district munsif and declare
that the plaintiff is entitled to interest on the fixed deposit of Rs. 1,000
above referred to . The suit is otherwise dismissed.
No costs.
Petition
allowed.
[1969] 39 Comp. Cas. 119 (
v.
State
T.P. MuKHERJI, J.
July 14, 1966
Rathindranath Das and Nirendra
Krishna Mitra for the petitioner.
Nikhil Chandra Talukdar for respondent.
Sarathi Mohan Sanyal for the State.
The
seven complaints out of which these seven revision cases arise were registered
as seven cases in the court of the Chief Presidency Magistrate of
The
petitioners in both sets of cases obtained the present rules against their
conviction under sections 162(1), 168, 220(3) and 210(5) of the Companies Act,
1956, and the sentence of a fine of Rs. 50 on each count passed on each of them
thereunder. Madan Gopal Dey and Sm. Anjali Dey were sentenced to suffer simple
imprisonment for 14 days each in default of payment of fine and half of the
fine imposed in all these cases was directed to be paid to the Registrar of
Joint Stock Companies, if realised, as cost.
T.
Dey and Co. (Private) Limited was incorporated on December 12, 1960, and Madan
Gopal Dey and Sm. Anjali Dey were declared to be its first directors. The
charge under section 162(1) of the Companies Act relates to the failure of the
company as well as of its directors to prepare and file with the Registrar
under section 159 of the Act the annual return within 42 days of the annual
general meeting. The charge under section 168 of the Act arises out of the
failure of the company as well as of its two directors to hold the first annual
general meeting as required by section 166 of the Act. The charge under section
220(3) of the Act relates to the violation of the requirement of section 220(1)
thereof which requires the company and every officer of the company in default
to file the balance-sheet and the profit and loss account of the company with
the Registrar, while the charge under section 210(5) relates to the failure of
the directors to place before the annual general meeting of the company the
balance-sheet and the profit and loss account for the specified period as
required in section 210(1) of the Act.
The
default in the matter of submission of the annual return, in
holding the annual general meeting and in placing the balance-sheet and profit
and loss account at the meeting and in
filing the same with the Registrar were all admitted by the petitioners. The learned advocate
appearing on behalf of the petitioners took objection to the amalgamation of
the cases for the purpose of a joint trial and contended that section 234 and
section 239 of the Criminal Procedure Code would bar both the joinder of the
charges in the cases as well as the joinder of different sets of persons for
the purpose of a single trial. The second contention that was raised before me
was that, although the company in Criminal Revision Cases Nos. 640-643 of 1964
might be liable for the defaults under the relevant sections, there is no basis
for the conviction of the two directors in the absence of a finding that they knowingly
or wilfully authorised or permitted the defaults concerned.
It appears from the
Magistrate's records that when the seven cases came up for trial on the same
date the learned Magistrate examined the two directors on the charges under the
four heads in one record and the trial of all the seven cases in respect of
these charges thereafter proceeded jointly against the company as well as its
directors. If the joint trial were held under section 234, Criminal Procedure
Code, so far as the two directors are concerned, the same obviously would be
bad in law inasmuch as that section permits a person to be charged with and
tried at one trial for any number of offences of the same kind not exceeding
three which might have been committed by him within the space of twelve months
from the first to the last of such offences. On behalf of the petitioner I was
referred in this connection to the case, Satish Chandra Chakrabarty v. Subrata
Majumdar, wherein it
was held that beyond the ambit of section 284, Criminal Procedure Code, there
is no provision for amalgamation of cases that by strict adherence to the
provisions of the Code are required to be tried separately. In that case 3
complaints by different complainants, one under sections 323 and 504, Indian
Penal Code, and the other two under section 323, Indian Penal Code, only for
offences committed on different dates were amalgamated and sought to be tried
together. This order for amalgamation was set aside and the cases were directed
to be tried separately.
Mr. Talukdar appearing on
behalf of the opposite party in these cases referred to the case, Dulal Chandra Bhar v. State of
Quite
obviously the charges in these cases could not be joined for the purpose of a
single trial under section 234 of the Code in the present cases. The section
itself is the clearest authority on the point. If, however, the offences which
are the subject-matter of the charges in these seven cases were committed in
the course of the same transaction, section 235 of the Code would authorise
their joinder for the purpose of a single trial. The question is whether the
offences under sections 162(1), 168, 220(3) and 210(5) could be said to be so connected
together as to form the same transaction. The term "
same transaction " has nowhere been defined. The term suggests a
continuity of action and purpose and it has been held that the real and
substantive test for determining whether several offences are so connected
together as to form one transaction depends upon whether they are related
together in point of purpose or as cause and effect or as principal and
subsidiary acts so as to constitute one continuous action. If a continuous
thread runs through the acts complained of, charges arising out of those acts
would be liable to be joined together under this section. Continuity of action,
therefore, seems to be a very important test in the matter.
The
substance of the charges framed against the petitioners in these cases is that
they had failed to hold the annual general meeting and that they had failed to
place the balance-sheet and profit and loss account at the meeting and they had
further failed to file with the Registrar the annual return and copies of the
balance-sheet and profit and loss account within the specified periods
following the annual general meeting. A limited company holding public funds is
liable to account for those funds to the shareholders and also to the Registrar
of Joint Stock Companies to whom the company is also liable to submit an annual
return embodying certain specified particulars regarding its management and
other affairs. The requirements of the law in these regards fall into a pattern
and the action that is to be taken to satisfy those requirements carries a
sense of continuity in the matter of the administration of the company. The
failure to act up to the legal requirements in these regards and the defaults
in the matters mean a failure to pursue that continuity of action. A continuity
of action when the charge is default or failure to take action is not
inconceivable. If the action required to carry a thread of
continuity, the failure to take the action would constitute omissions which,
connected together, will have a continuous thread of common purpose running
through them. In my view the defaults and omissions in the present cases
constitute a series of acts which are so connected as to form the same
transaction and as such whatever offences might have been committed in the
course of that transaction are liable to be joined together under section 235
of the Code for the purpose of a single trial. Section 239 of the Code permits the joinder at the same
trial of persons accused of the same offence committed in the course of the
same transaction. The directors as well as the company were thus liable to be
jointly tried and the learned Magistrate cannot be said to have fallen into an
error of law in jointly trying the petitioners in these seven cases at the same
trial.
Coming
now to the second contention raised on behalf of the petitioners, as I have
already stated, exception was not taken to the conviction of the company in the
cases out of which arise Criminal Revision Cases Nos. 641-643 of 1964. No
exception could be and was also taken to the conviction of the two directors
under section 210(5) of the Companies Act in the case out of which arises Criminal Revision Case No. 640 of 1964. Section
210(5) makes liable every director of a company who fails to take all
reasonable steps to comply with the provisions of section 210(1) which requires
the placing of the balance-sheet and the profit and loss account before the
general meeting. This leaves us to consider the legality of the sentence passed
in the three cases out of which arise Criminal
Revision Cases Nos. 637-639 of 1964.
The
convictions of the directors in the above three cases were under sections
162(1), 168 and 220(3). So far as the directors of the company are concerned,
it is only "every officer of the company who is in default" that
becomes liable. The term "officer" is defined in section 2(30) of the
Act as including any director and the term "officer who is in
default" is defined in section 5 of the Companies Act. According to that
definition, "officer who is in default" means any officer of the
company who is knowingly guilty of the default or who knowingly and wilfully
authorises or permits such default. Any director of the company who is
knowingly guilty of the default or who knowingly or wilfully authorises or
permits such default would be an "officer who is in default" under
the above section. There is no dispute that the petitioners in Criminal
Revision Cases Nos. 637-639 of 1964 were the promoters of the company and were
its first directors.
Reference
was made on behalf of the petitioners to the case Rajkumar Kusari v. Emperor, wherein it was held
that, for the purpose of convicting a person under section 76 of the Companies
Act corresponding to section 166 of the present Act, it has to be shown at the
first instance that the accused had knowingly been a party to the default in
holding the general meeting and where that question was not enquired into at
all the case has not been properly tried and the conviction cannot stand. The
accused in the case was the secretary of a company and not a director and,
unless it could be proved that he had any duty in the matter of calling the
general meeting and there had been default knowingly and wilfully in the
performance of that duty necessarily, he could not be convicted. A secretary,
without more, has no duty under the Act in that regard.
The
case, Surendra Nath Sarkar v. Emperor, is another case cited
on behalf of the petitioner on this point. That was a case where the managing
director of a company was convicted under section 32 corresponding to section
162(1) of the present Act for wilful default in submitting the annual return.
It was held that, before he could be so convicted, it must be found that he was
responsible for the default. The managing director, as the report of the case
shows, had previously been convicted under section 76 of the Act for default in
respect of the holding of the general meeting. This case no doubt supports the
petitioners' contention.
The
learned advocate for the petitioners also referred to the case, In re Bank of
Deccan Ltd. The
subject-matter of the decision in that case was the scope of section 633(1) and
the powers of the High Court under section 633(2) of the Companies Act. There
relief was granted to the company for its failure to prepare the balance-sheet
and profit and loss account on the ground that, in the circumstances of that
case, it was not possible for the company to do so, or, in other words, that
there had been no default knowingly and wilfully in the matter.
On
behalf of the opposite party Mr. Talukdar referred to the case, Bhagirath
Chandra Das v. Emperor.
The prosecution in that case was under sections 32(5) and 134(4) which
correspond to section 162(1) and section 220(3) of the present Act. It was
observed by the learned judge that:
"It is clearly the duty of all directors to see that the particular returns, the list and summary under section 32 and the copies of the balance-sheet and profit and loss account are submitted under section 134. There is nothing on record to show that these directors made any attempt to see that these returns, list and statement were properly submitted or that they were prevented in any way from seeing that the proper list, statement and returns were submitted If directors, who are responsible for the management of a company and who presumably know the duties imposed upon them by law, make no attempt to see that those duties are carried out, there is justification for holding, in my opinion, that they have wilfully and knowingly permitted the company to fail to carry out those duties".
In
the case, In re Arcot Citizen Bank Ltd., the directors of the
bank were prosecuted under section 32(3) corresponding to section 162(1) and
under section 131(1) corresponding to section 210(5) and, while considering the
question as to how far the petitioners could be liable thereunder, it was held:
"....it would be
enough if the evidence makes out blameful inadvertence on the part of the
offender, that is, first, the accused must be shown under this third group to have had
guilty knowledge that the forbidden event is happening. Secondly, that the
accused with such knowledge and being in a position to prevent the event happening
does nothing about it".
This
case quoted with approval a portion of the judgment in the case, Bhagirath
Chandra Das v. Emperor,
referred to in the previous paragraph.
The
relevant provisions of the Companies Act have been enacted to protect the
shareholders and, in some cases, to protect the general public and they impose
definite duties on the directors. When the directors fail to perform their
statutory duty, they bring themselves within the mischief of the penal
provisions of the law. In order that a conviction, under the sections involved
in the present cases, of "an officer of the company" may be
sustained, the only thing to prove is that that particular officer knowingly
and wilfully authorised or permitted these defaults. The offence is complete if
the officer of the company knew of the defaults and permitted the same.
So
far as the present cases are concerned, it would appear that, since its
incorporation, nothing was done either by the company or by its two directors
to comply with the provisions of the Indian Companies Act. It is the
petitioners' case that the company did not function and so it was impossible
either to call a general meeting of the company or to prepare the balance-sheet
and the profit and loss account or to submit the annual return. If the company
did not function, the Act provides for winding-up proceedings. It is not for
the Registrar of Joint Stock Companies to know whether a company is functioning
or not. All that he is concerned with is compliance with the provisions of the
Act, which are meant for protecting the interest of the shareholders. So long
as the company is not wound up, nothing stood in the way of the company and its
directors holding a meeting or in preparing blank balance-sheet and profit and
loss account and in submitting the annual returns. The fact that the company
did not function is, in my view, no excuse, though it might extenuate the
offence to some extent. The petitioners in Criminal Revision Cases Nos. 637-640
are the promoters and first directors of the company. It was for them to take
the necessary actions, for failure to take which the prosecutions against them
were started. Nobody else comes into the. picture
regarding these matters. If they were required to to take those actions and if
they have defaulted to take the same, certainly they are "officers in
default", as defined in the Companies Act. In view of this and in view of
what I have stated earlier, I am of the view that the petitioners in these
seven cases have been rightly convicted. The rules must accordingly be
discharged.
It
is ordered accordingly.
[1961] 31 COMP. CAS. 324 (BOM.)
HIGH COURT OF
v.
Y. S. TAMBE AND V. M. TARKUNDE, JJ.
Criminal
References Nos. 50 to 68 1960
DECEMBER
19, 1960
TARKUNDE,
J.-These criminal references
arise from 19 criminal cases filed by the Nagpur Municipal Corporation against
the Nagpur Electric Light and Power Co. Ltd., hereafter referred to as the
company, for alleged evasion of octroi dues. In all the cases the company is
accused of offenses under section 152 of the City of
On December
18, 1959, the Municipal Corporation filed a list of witnesses to whom summonses
were to be issued, and the list included the store-keeper of the Wardha branch
of the company and the assistant accountant of the company at Nagpur, both of
whom were cited only for the production of certain documents and records
belonging to the company. Summonses were accordingly ordered to be issued by
the learned trial Magistrate. The company then applied to the learned
Magistrate for the withdrawal of the summonses, on the ground that they
violated the protection against self- incrimination guaranteed by article 20(3)
of the Constitution. The objection having been overruled by the learned trial
Magistrate, the company went in revision to the Sessions Court, Nagpur, and the
learned Additional Sessions Judge, who heard the revision application, has made
these references to this court, recommending that the objection raised by the
company should be accepted and that the summonses to the store-keeper and the
assistant accountant be ordered to be withdrawn.
It is common
ground that the direction contained in the summonses, calling upon the
company’s officers to produce certain documents, was given under section 94 of
the Criminal Procedure Code. If such a direction were given to a person accused
of an offense, the direction would violate the protection against testimonial
compulsion guaranteed by article 20(3) of the Constitution. Article 20(3)
provides that, ‘No person accused of any offense shall be compelled to be a witness
against himself.’
In M.P. Sharma
v. Satish Chandra, District Magistrate,
“ ‘To be a
witness’ is nothing more than ‘to furnish evidence’, and such evidence can be
furnished through the lips or by production of a thing or of a document or in
other modes.”
It is thus
clear that to procedure a document in a criminal case in support of a
prosecution is a testimonial act. If an accused person can be summoned under
section 94 of the Criminal Procedure Code to produce documents likely to
incriminate him in the course of a trial of an offense alleged to have been
committed by him, his refusal to produce the documents would be punishable
under section 175 of the Indian Penal Code, or by committing him for contempt
of court. It must, therefore, follow that article 20(3) of the Constitution
prohibits a summons to be issued under section 94 of the Criminal Procedure
Code against an accused person, requiring him to produce documents in support
of the prosecution case. A similar view was expressed by a Division Bench of
the Allahabad High Court in R.C. Gupta v. State.
In the present
case, the store-keeper and the assistant accountant of the company are not
themselves the accused, but the documents which they are asked to procedure
belong to the company which is the accused. Under section 131 of the Evidence
Act the company can object to its own employees producing is documents in court
without its consent, if the company itself cannot be compelled to produce them.
It must, therefore, follow that if the company cannot be required by virtue of
article 20(3) of the Constitution to produce those documents, the summons
issued against the company’s employees requiring them to produce the company’s
documents would be invalid.
It is, however,
urged by the learned Special Government Pleader on behalf of the State, and by
Mr. Saranjame on behalf of the Municipal Corporation, that the protection
against testimonial compulsion, which is available under article 20(3) of the
Constitution to natural individuals, is not available to companies and other
corporate bodies, and that the summonses issued to the company’s officers are,
therefore, valid. We are unable to accept this argument. Article 367 of the
Constitution provides that “Unless the context otherwise requires, the General
Clauses Act, 1897, shall .... apply for he
interpretation of this Constitution ...” Section 3[42] of the General Clauses
Act says that the word “person” shall include any company or association or
body of individuals whether incorporated or not. It follows that the word
“person” occurring in article 20[3] must, unless the context otherwise
requires, be deemed to include companies and unincorporated bodies. We do not
find that the context in which the word “person” occurs in article 20[3]
requires that the word should be limited to natural individuals. It is true
that a company as such cannot give oral evidence in any case, but the
expression “to be a witness” has been interpreted to mean “to furnish
evidence”, and a company is certainly capable of furnishing documentary
evidence against itself. It is also clear that a summons issued under section
94 of the Criminal Procedure Code is in the nature of a coercive process, even
when it is issued against a company. There is no reason why a company,
supposing it resolves to disobey a summons issued under section 94, cannot be
fined for contempt of court. At any rate, the company’s officers who refuse to
produce documents in response to a summons under section 94 are liable to be committed
for contempt, and the necessity of avoiding that consequence would amount to a
compulsion on the company to obey the summons. Since the context does not
require that the word “person” in article 20[3] should be interpreted otherwise
than as provided by section 3[42] of the General Clauses Act, we are of the
view that the protection of article 20[3] is available not only to natural
individuals but also to companies.
Our attention
was drawn to a number of American decisions in which it was held that the
protection against self-incrimination contained in the Fifth Amendment of the
American Constitution does not extend to corporate bodies. The leading case on
the point is Hale v. Henkel. In that case it was observed in the course of the
majority judgment delivered by Mr. JUSTICE BROWN:
“Conceding
that the witness was an officer of the corporation under investigation, and
that he was entitled to assert the rights of the corporation with respect to
the production of its books and papers, we are of the opinion that there is a
clear distinction in this particular between an individual and a corporation,
and that the latter has no right to refuse to submit its books and papers for
an examination at the suit of the State.”
The reason for
the distinction was stated to be that an individual receives nothing from the
State beyond the protection of his life and property, whereas a corporation is
the creature of the State and holds its special privileges and franchises
subject to the laws of the State. This decision was followed in other cases of
the Federal Supreme Court including
“The reason
underlying the restriction of this constitutional privilege to natural
individuals acting in their own private capacity is clear. The scope and nature
of the economic activities of incorporated and unincorporated organizations and
their representatives demand that the constitutional power of the federal and
state governments to regulate those activities be correspondingly effective.
The greater portion of evidence of wrong doing by an organization or its
represent active is usually to be found in the official records and documents
of that organisation. Were the cloak of the privilege to be thrown around these
impersonal records and documents, effective enforcement of many federal and
state laws would be impossible.”
The above observations
show that the main reason why the American Supreme Court excluded associations
from the protection against self-incrimination was that the privilege would
make it impossible to enforce federal and state laws in respect of these
bodies. No such apprehension exists in Indian law. As pointed out by our
Supreme Court in M.P. Sharma v. Satish Chandra a power of search and seizure is
not subjected by our Constitution to any limitations such as are found in the
Fourth Amendment of the American Constitution. Consequently, the refusal of a
company or other body to produce documents on response to an order of a court
will not preclude the documents being searched for and seized in pursuance of
appropriate legal provisions, like the one contained in section 96 of the
Criminal Procedure Code.
Our attention
was also drawn to a case decided by the Court of Appeal in
“It is true
that a company cannot suffer all the pains to which a real person is subject.
It can, however, in certain cases, the convicted and punished, with grave
consequences to its reputation and to its members, and we can see no ground for
depriving a juristic person of those safeguard which the law of
In view of
this divided opinion, in view further of the definition of the word “person” in
the General Clauses Act, and also because we are unable, in the absence of an
adequate reason, to allow a restriction to the scope of a fundamental right, we
have come to the conclusion that the protection against self-incrimination is
available to companies as much as to natural individuals.
Accordingly,
these reference are accepted and the learned trial Magistrate
is directed to withdraw the summonses issued to the store-keeper and the
assistant accountant of the company. This order will not prevent action being
taken according to law for the search and seizure of the documents required in
these cases.
References
answered accordingly.
[1973] 43 COMP. CAS. 361 (BOM)
HIGH COURT of
Akhil Deshastha Rigvedi Brahman
Madhyawarti Mandal
v.
Joint Charity Commissioner
NAIN, J.
SEPTEMBER 16, 1971
R.W. Adik and W.N. Yande for the appellant.
V.H. Gumaste for the respondent.
Nain, J.—This is an appeal by the original applicants No. 1 against
the order dated 3rd March, 1966, of a judge of the
A few facts leading to this
litigation may be briefly stated. The mandal applied for and obtained a licence
under section 26 of the Indian Companies Act, 1913, to register itself under
the said Act without the word "Limited" added to its name on the
representation that it was a non-profit making concern and charitable institution.
The mandal was incorporated on 3rd April, 1939, as a company limited by
guarantee without the word "Limited" added to its name. It appears
between 1939 and 1961, the mandal acquired some
property for the objects set out in its memorandum of association. On 12th
October, 1961, the mandal made an application to the Charity Commissioner for
its registration as a public trust under the Public Trusts Act. It is alleged
on behalf of the mandal that this application was made under protest and to
find out whether it was liable to be registered under the Public Trusts Act so
that it may not be charged with the contravention of the provisions of the
Public Trusts Act. On 26th April, 1962, as a result of an inquiry, the
Assistant Charity Commissioner,
Against the decision of the
Joint Charity Commissioner the mandal appealed to the
As I have stated above the
mandal is a company limited by guarantee registered under a licence under
section 26 of the Indian Companies Act, 1913, corresponding to section 25 of
the Companies Act, 1956. It is a corporation and, therefore, a juristic person
and a distinct legal entity. This is a well-established proposition from the
time of the decision of the Judicial Committee of the House of Lords in Salomon
v. Salomon and Company Ltd., which has been followed in India by the Supreme
Court in Mrs. Bacha
F. Guzdar v. Commissioner of Income-tax, State Trading Corporation of India
Ltd. v. Commercial Tax Officer and Tata Engineering and Locomotive Co. Ltd. v.
State of Bihar. As a juristic person the mandal can
carry on all human activities subject to such limitations as arise from its not
being a natural person and the limitations imposed upon its activities by its
own charter contained in the objects clause in the memorandum of association. A
juristic person cannot marry and procreate, but it is certainly capable of
owning property. It is also capable of owning property in its capacity as a
trustee. Corporations carrying on the activity of becoming trustees and
executors are not unknown. There can, therefore, be no objection to a
corporation acting as a trustee provided its objects clause in the memorandum
of association so permits.
On behalf of the mandal my
attention was drawn to the definition of "trust" in section 3 of the
Indian Trusts Act, 1882. This Act does not apply to public trusts, but the
definition of "trust" contained in it is nonetheless a proper
definition of the word "trust". Section 3 provides that a
"trust" is an obligation annexed to the ownership of property and
arising out of a confidence reposed in and accepted by the owner or declared
and accepted by him for the benefit of another. . . . The person who reposes or
declares the confidence is called the "author of the trust". The
person who accepts the confidence is called the "trustee", and the
person for whose benefit the confidence is accepted is called the
"beneficiary" and the subject-matter of the trust is called "trust
property". In my opinion if a corporation is capable of accepting the
ownership of property with an obligation annexed to the ownership for the
benefit of another which may be a class of persons, there can be no objection
to a corporation acting as a trustee. The only question is whether in this case
the mandal has accepted such trust.
Section
2(13) of the Public Trusts Act defines a "public trust" as under:
"
'Public
trust' means an express or constructive trust for either a public religious or
charitable purpose or both and includes. ... a society
formed either for a religious or charitable purpose or for both and registered
under the Societies Registration Act, 1860".
The
difference between a private trust and a public trust arises from the
difference between the objects. While in the private trust the intention is to
benefit an individual or a group of persons and there is no public religious or
charitable purpose, in a public trust there is a public religious or charitable
purpose. It is expressly provided in the definition of "public trust"
that a society formed for a religious or charitable purpose or for both and
registered under the Societies Registration Act, 1860, is included in the
definition of "public trust". There is no reference to a company
incorporated under the Companies Act, but that should not make any difference.
If a company is authorised by its objects clauses in its memorandum of
association to hold property in trust for public religious or charitable
purposes, there is no reason why its ownership of property for such purposes
should not form a public trust.
We
must, therefore, refer to the constitution of the mandal and find out whether
the objects clauses and the other provisions in its memorandum of association
authorise it to hold property for public religious or charitable purposes. We
must also see if there are other circumstances, if any, pointing to the
existence of a public trust. Under section 26 of the Indian Companies Act,
1913, and under section 25 of the Companies Act, 1956, a licence can only be
granted by the Central Government if the company is formed for promoting
commerce or science, religion, charity or any other useful purpose and intends
to apply its profits, if any, or other income in promoting its objects and to
prohibit the payment of any dividend to its members. In the case of the mandal
the licence granted to it by the Central Government provides that the
memorandum of association shall prohibit payment of any dividend to its
members.
Now,
we come to the objects clause in the memorandum of association of the mandal. Several
sub-clauses provide for establishment of a home for the use of Akhil Deshastha
Rigvedi Brahman Community, providing a lecture hall, educational and religious
classes, industrial workshops and hospitals,
etc. The objects also include rendition of medical aid to the members of the
said community, scholarships for the education of the members of the said
community and provision for gymnasiums, gymkhanas and other recreation.
Sub-clauses (11), (12) and (13) of clause 3 provide as under;
"(11) To accept and undertake any trust and to
act as sole trustee or executor in respect of any estate if such acceptance and
undertaking is conducive to the attainment of the above objects or any of them.
(12) To
accept donations for the purposes aforesaid in cash or in kind.
(13) To hold the property and funds of the
mandal in trust and to apply the same and/or the income thereof in promoting
the above objects or any one or more of them".
It will thus appear that
the object clauses contained in the memorandum of association of the mandal
expressly provide that the mandal shall act as a trustee in respect of its
property for the attainment of the objects of the mandal, and that it shall
hold such property in trust and apply the same for the said purposes. The
educational and other purposes set out in the memorandum would in my opinion
constitute public religious and charitable purposes. The mandal is, therefore,
in my opinion, a trustee in respect of the property it holds for carrying out
the said public religious and charitable purposes and there is in existence a
public trust which is liable to be registered under the Public Trusts Act.
On behalf of the mandal it
was contended that at the time of incorporation of the mandal in 1939, there
was no property and, therefore, there could be no public trust. It is true that
there is no evidence that in 1939 there was any property of the mandal and it
may be that at that time the objects clauses in the memorandum of association
only contained an intention that when the property came into existence, it
would be held by the mandal in trust for the members of the said community for
charitable purposes. But the moment the property came into existence the mandal
became a trustee in respect of the said property, the beneficiary was the
community for whose benefit the property was held and the objects are those set
out in the memorandum of association.
The second contention taken
was based on two judgments, one of Jahagirdar J., in the case of Bhaskar
Sadashiv Joshi v. Registrar, Bombay Public Trusts Registration Act, 1935, and
the other an unreported judgment dated 12th July, 1956, in Appeal No. 657 of
1954 of a Division Bench of this court consisting of Chagla C.J. and Dixit J.
In Bhaskar Joshi's case1 it was held that a society registered under
the Societies Registration Act, 1860, even if it is religious or charitable, is
exempt from the operation of the Bombay Public Trusts Registration Act, 1935. This may be a
correct interpretation of the 1935 Act but it cannot apply to the Bombay Public
Trusts Act of 1950 because such a society is now expressly included in the
definition of a public trust. Apart from this we are in this case concerned
with a company and not with a society. In the case before the Division Bench
(Civil Appeal No. 657 of 1954) there was a panchayat holding property for the
benefit not of the members of a particular community for the benefit of such
members of that community who were members of the panchayat. It was in view of
that limitation that the Division Bench held that the panchayat was not a
public trust and was not liable to be registered under the Public Trusts Act.
In this case, however, the memorandum of association of the mandal expressly
provides for holding property in trust for the objects specified in the
memorandum, and the beneficiaries are the members of a particular community
irrespective of whether they are or are not the members of the mandal. The
Division Bench decision has no application to the facts of this case
Another
contention taken on behalf of the mandal was that if the mandal was compelled
to register itself under the Public Trusts Act it will come under dual control
and such dual control will create conflict the dual control being of the
Companies Act and of the Public Trusts Act. 7 my opinion there is no substance
in this contention. The mandal is a trustee. With regard to its own
constitution, it may be governed by the provisions of the Companies Act. But
with regard to property held by it trustee for public religious and charitable purposes, it will be liable to comply with the provisions of
the Public Trusts Act. A company incorporated under the Companies Act has to
comply with the other laws of the land applicable to its activites. This does
not result in any conflict
The
last contention taken was that if the mandal was compelled to register itself
under the Public Trusts Act, and it is removed as a trustee for any breach of
trust or other malversation, the trust would come to an end. I find no
substance in this contention. It may be that the mandal may be found guilty of
breach of trust or malversation of the property of the trust and may be removed
as a trustee. There is no reason why the removal as a trustee of the mandal
should bring an end to the trust. The Charity Commissioner or the court can
always frame schemes for the administration of the trust and the trust can
continue with substitute trustees. It would not matter if in that event the
mandal has to be wound up. Many companies find themselves in this position, if
their business comes to an end and their substratum is gone. This cannot be a
reason for exempting the mandal from registering itself under the Public Trusts
Act.
If
the contention that a company even if it owns property as a trustee in trust
for a class of beneficiaries for public religious and charitable purposes is not required to be registered under the Public
Trusts Act were accepted, it would result in large-scale evasion of the
provisions of the Public Trusts Act. All that the trustees have to do is to
register a company under the Companies Act, vest the trust property in the
company and become its directors in order to escape the provisions of the
Public Trusts Act. Such a construction is not to be favoured.
In
the result, the appeal fails and is dismissed. The order of the
[1991] 70 COMP. CAS. 181 (AP)
HIGH COURT OF ANDHRA PRADESH
v.
K. RAMASWAMY J.
MARCH 23, 1989
P.L.N. Sarma and P. Sriraghuram for the
Appellant.
D.V. Seetharama Murthy, S.
Venkat Reddy for the Respondents.
K. Ramaswamy J.—The appellant is one of the
directors of Rainbow Sea Foods P. Ltd., a company registered under the
Companies Act, 1956, under Certificate of Incorporation No. 9163 of 1982, dated
January 16, 1982. It consists of the four first directors under article 33(a),
viz., (i) C. Pattabhiraman ; (ii) C. Renie Fernando ;
(iii) M.A. Rajendran, and (iv) S.A.P. Fernando, the appellant. Under article
51(a), M.A. Rajendran shall be the first managing director of the company and,
unless he shall voluntarily resign that office, he holds that office for five
years from the date of incorporation of the company. He shall be eligible,
after the expiry of the period, for reappointment on such terms as may be
mutually decided by the managing director and the board of directors for a
further period of five years until he voluntarily resigns or becomes incapable
of acting. The company acquired two vessels "Sunshine" and "
Sri P. Sriraghuram, learned
counsel for the appellant, contended that the suit itself is not maintainable
in view of the fact that it is a company registered under the Companies Act and
that, therefore, the interlocutory application also is
not maintainable. It is unnecessary to go into that question at this stage.
Suffice it to state that it is a matter to be gone into at the trial. It is
found by the court below that the possession of the vessel "Sunshine"
was taken by the appellant. The claim of the plaintiff, Pattabhiraman, that he was unlawfully
excluded from participation has been prima facie accepted by the court below.
There is a scramble for possession. In that regard, what is a suitable order
that could be made is the question. The court below found that the company
itself could be appointed as a receiver under Order 40, rule 1, Civil Procedure
Code, so that the company could manage the fishing operations of the vessel
"Sunshine", submit the report of the statement of the expenditure and
the profits and deposit the sale proceeds to the credit of the suit. In Kerr on
the Law and Practice as to Receivers, fourteenth edition, by Raymond Walton, at
page 106, it is stated that a body corporate is not qualified for appointment
as receiver of the property of a company formed and registered under the
Companies Act, 1948, or preceding Companies Acts. Any such purported
appointment is a nullity. This was stated following the ratio in Budgett v.
Improved Patent Forced Draught Furnace Syndicate Ltd. [1901] WN 23. The reason
stated therein was that, in case of companies, an accountant is very frequently
appointed. It is only in special circumstances that the court will appoint the
plaintiff in a debenture holders' action as a receiver, and then only, as a
rule, subject to production of an affidavit that all the other
debenture-holders consent to it. A director will not, as a rule, be appointed.
Thus, a chartered accountant, resident near
With
the above modification, the appeal is allowed in part. But,
in the circumstances, without costs.
[1991] 70 COMP. CAS. 248 (
v.
State
Anandamoy
Bhattacharjee and
Amulya Kumar Nandi J J.
July 28, 1989
Pradip
Kumar Ghosh, D.P. Roy and Debabrata Mukherji for the Petitioner.
Sasanka Ghose for the State.
JUDGMENT
Bhattacharjee
J. —Questions of
considerable importance appear to be involved in this revision. The first question
is as to whether, when an incorporated company or any other body corporate is
accused of any offence, it can invoke the provisions of article 20(3) of the
Constitution mandating that "no person accused of any offence shall be
compelled to be a witness against himself." And, secondly, even if it can
do so, would such protection extend to its directors, officers or employees who
are not roped in as accused or co-accused ?
In
view of article 367 of the Constitution making the provisions of the General
Clauses Act, 1897, applicable for the interpretation of the Constitution and
the definition of the word "person" in section 3(42) of that Act, a
company or other body corporate is to be ordinarily treated as a
"person" for the purpose of the Constitution. There is no room for
doubt that the word "person" in the former article 31(1) and now in
its successor article 300A, applied and applies to a body corporate, which
accordingly cannot be deprived of its property save by the authority of law. Section
305(2) of the Code of Criminal Procedure also dealing with prosecutions against
"corporations" and defining "corporation" to mean an
incorporated company or other body corporate, has used the expression
"where a corporation is the accused person". But, as is usual with
all definitions, and as is expressly provided both in article 367(1) of the
Constitution as well as section 3 of the General Clauses Act, the definition in
section 3(42) of the Act would apply to make the expression "person"
include a company, provided there is nothing in the subject or context to rule
out its application. And we are inclined to hold that, in view of the subject
and in the context of a criminal prosecution, a company or other body corporate
would not be a "person" within the meaning of the provisions of
article 20(3). It is not disputed that if that be our view, the rule must be
discharged. Here are our reasons.
Article
20(3) forbidding any compulsion to make the accused "a witness against
himself" did not have much relevance when these provisions were enacted in
1949, for, under the provisions of the Code of Criminal Procedure, 1898, as it
stood then before its amendment in 1955 by insertion of section 342A, an
accused, far from being compelled to be a witness, was not and could not at all
be a competent witness, even if he volunteered to become one. But the framers
of the Constitution, may be because of their bitter experiences about criminal
proceedings during the pre-inde-pendence period and in tune with the then
prevailing pro-accused criminal jurisprudence, probably wanted to put this
matter on the higher pedestal of a fundamental right, so that the same could
not be affected by any alteration by ordinary legislation.
Be
that as it may, can a non-natural, artificial and a juridical person "be a
witness" at all, whether voluntarily or under compulsion, for or against
itself or any other person ? A witness is a person who
testifies, who gives evidence. Under our system, as provided now in the Oaths
Act, 1969, a witness, before he can give evidence, must make an oath or
affirmation, except a child-witness under the age of twelve years who, in the
opinion of the court, does not understand the nature of an oath or affirmation.
It is obvious that an incorporated company or other corporate bodies cannot
make any oath or affirmation and, therefore, cannot become a witness. Article
20(3), on its very terms, can only apply to an accused who, if he so chooses,
can become a witness, and since a company or other corporate bodies, being
incapable of making or taking any oath or affirmation, cannot become a witness,
article 20(3) must be held not to have contemplated cases where such
non-natural persons, having only juristic personality, are accused of any
offence.
A
reference to the relevant provisions of the Evidence Act would also fortify our
view. To be a witness is to furnish evidence. "Evidence" has been
denned in section 3 of the Evidence Act as to mean and include—(a) "all
statements which the court permits or requires to be made before it by
witnesses, in relation to matters of fact, under inquiry and "such
statements are called oral evidence", and (b) "all documents produced
for the inspection of the court" and "such documents are called
documentary evidence". It is obvious that a body corporate cannot make
oral statements. Assuming that such a body corporate, being "unable to
speak", may be branded as a dumb witness for the purpose of section 119 of
the Evidence Act who can give evidence "by writing", the
"evidence so given", even though in writing, "shall be deemed to
be oral evidence". Under section 60, however, "oral evidence must, in
all cases whatever, be direct, that is to say, if it refers to a fact which
could be seen, it must be the evidence of a witness who says he saw it, if it
refers to a fact which could be heard, it must be the evidence of a witness who
says he heard it, and if it refers to a fact which could be perceived by any
other sense or in any other manner, it must be the evidence of a witness who
says he perceived it by that sense or in that manner". We are afraid that
whatever juridical personality the law might have conferred on a body
corporate, it has not, as it obviously cannot have, invested a body corporate
with sense organs to see, hear or perceive a thing. And, therefore, it could
never be in the contemplation of law that a body corporate would or could give
oral evidence as denned in section 3 read with section 60 and section 119 of
the Evidence Act.
It
may, however, be conceded that a body corporate may nevertheless be summoned to
produce documents which would be "documentary evidence". But, section
139 makes it unmistakably clear that any one "summoned to produce a
document does not become a witness by the mere fact that he produces it".
So, even if a body corporate, which is accused in a case, is summoned to
produce documents, it would not thereby become a witness and if it could not
become a witness, the question of its being compelled to be a witness cannot
obviously arise. On a consideration of these relevant provisions of the
Evidence Act, we are inclined to hold that, in view of the inability on the
part of a body corporate to give "oral evidence" as pointed out
hereinabove including evidence in writing, to be deemed as "oral
evidence" in view of section 119 and thus to be governed by section 60,
and it is not becoming a witness even when summoned to produce a document, a
body corporate cannot, even if it so chooses, be a witness in any case and, therefore,
the question of its enjoying any protection under article 20(3), which
countermands all compulsion against a person to be a witness against himself,
cannot arise.
It
is true that in M.P. Sharma v. Satish Chandra, AIR 1954 SC 300 an eight-judge
unanimous Bench decision of the Supreme Court, the Supreme Court observed (at
page 304) that even though section 139 of the Evidence Act provides that a
person summoned to produce a document does not thereby become a witness,
"but that section is meant to regulate the right of
cross-examination", but "it is not a guide to the connotation of the
word 'witness', ". If that was the law, we might have had to hold that
since a body corporate can be summoned to produce documents, it would become a
witness on being so summoned and, therefore, would have been entitled to the
protection under article 20(3) from being compelled to produce such document
and that article 20(3) would have occasion for its application even when a body
corporate is the accused. But the majority in a later eleven-judge Bench of the
Supreme Court in State of Bombay v. Kathi Kalu Oghad, AIR 1961 SC 1808 has
overturned this view (at page 1815) and it has been ruled that "it is
well-established that clause (3) of article 20 is directed against self-incrimination
by an accused person" and that "self-incrimination must mean
conveying information based upon the personal knowledge of the person giving
the information and cannot include merely the mechanical process of producing
documents in court which may throw light on any of the points in controversy,
but which do not contain any statement of the accused based on his personal
knowledge". It has been observed further that only the giving of such
"personal testimony" would come within article 20(3) which must,
accordingly, "depend upon his volition" and must not be the result of
any compulsion against him.
Now,
if a body corporate, like any other person, does not become a
"witness" merely on its being summoned to produce a document, it
cannot obviously adduce oral evidence, and even such evidence in writing which
is to be treated as "oral evidence" under section 119, because of its
incapacity to see or hear or perceive by sense, and above all cannot take or
make oath or affirmation which is a must for witnesses (other than children),
we would like to hold that such body corporate cannot be within the
contemplation the provisions of article 20(3) which seeks to guarantee to every
person the right not to be compelled to be a witness against himself.
In
M.P. Sharma, AIR 1954 SC 300, however, some of the petitioners who moved the
Supreme Court under article 32 of the Constitution were no doubt incorporated
companies. But the question as to whether such bodies corporate can or do come
within the expressions "person" and "witness" as used in
article 20(3) to enable them to invoke the protection was not even remotely
raised, as would appear from the judgment itself (M.P. Sharma's case, AIR 1954
SC 300, 304). The decision, therefore, can be no authority at all on the
question before us. If, in that case, the Supreme Court afforded the protection
under article 20(3) to a body corporate also, that was obviously binding on the
parties as something res judicata. But what binds and can bind others, not
parties to that lis, as a precedent under article 141 is the declaration on a
question of law and if no question was raised on the point and there is no
decision or declaration of law on that question, the decision is obviously no
authority on that question. We do not think that it can reasonably be contended
with any semblance of plausibility that since the Supreme Court allowed article
20(3) to operate in a case where the accused happened to be bodies corporate
without any advertence to the question as to whether bodies corporate can at
all invoke that article, it must still logically follow that, according to the
Supreme Court, the provisions of article 20(3) are available to them. And even
assuming arguendo that it may so follow, we have the authority of Lord Halsbury
in Quinn v. Leatham [1901] AC 495, followed by the Supreme Court in Sudhansu
Sekhar Misra, AIR 1968 SC 647, 652, that a decision is no authority "for a
proposition that may seem to follow logically from it."
The
only Indian decision to which our attention has been drawn and which appears to
have decided the question is the Division Bench decision of the Bombay High
Court in State of Maharashtra v. Nagpur Electric Light and Power Co. Ltd.
[1961] 31 Comp Cas 324 where it has been ruled by Tarkunde J., speaking for the
Division Bench, that the protection under article 20(3) is available to an
incorporated company. The ratio appears to be (at page 327) that though
"it is true that a company as such cannot give oral evidence in any case,
but the expression 'to be a witness' has been interpreted to mean 'to furnish
evidence' and a company is certainly capable of furnishing documentary evidence
against itself." As we have already seen, though, under section 139 of the
Evidence Act, a person summoned to produce a document does not thereby become a
witness, the Supreme Court in M.P. Sharma, AIR 1954 SC 300 at page 304 ruled
that this section was "meant to regulate the right of cross-examination
'only and was' " not a guide to the connotation of the word "witness"
in article 20(3). As already noted, this view in M.P. Sharma, AIR 1954 SC 300,
has been negatived by a larger Bench of the Supreme Court in Kathi Kalu Oghad,
AIR 1961 SC 1808, 1815 and, therefore, if we may say so with respect, the ratio
in the Bombay decision in Nagpur Electric Light and Power Co. Ltd. [1961] 31
Comp Cas 324 can no longer be accepted to be good law.
In
respect of the various articles in Part HI of the Constitution which deal with
fundamental rights, the framers of our Constitution derived inspiration from
the American Constitution and the provision corresponding to article 20(3) is
to be found in the fifth amendment of the American Constitution providing,
inter alia, that "no person shall be compelled in any criminal case to be
a witness against himself". And the American law, as noted also in the
Supreme Court decision in M.P. Sharma, AIR 1954 SC 300, and the Bombay decision
in Nagpur Electric Light and Power Co. [1961] 31 Comp Cas 324, is well-settled
to the effect that the protection against self-incrimination contained in the
fifth amendment of the American Constitution does not extend to corporate
bodies. A leading decision on the point appears to be Hale v. Henkel (201 US
43), but it would suffice to refer to a much later decision in United States v.
Jasper White (322 US 694), where it has been ruled that "the
Constitutional privilege against self-incrimination is essentially a personal
one, applying to natural individuals" and "since the privilege
against self-incrimination is a purely personal one, it cannot be utilised by
or on behalf of any organisation, such as a corporation". This provision
of the American fifth amendment is in pari materia
with article 20(3). It may be noted that this very fifth amendment also
provides in the next succeeding provision that "no person shall be
deprived of life, liberty or property without due process of law", and
though in respect of that provision in the same fifth amendment, the word
"person" has all along been held in the American law to apply to
corporate bodies also owning property, in respect of the preceding provision
relating to protection against self-incrimination, American courts have held
the word "person" not to apply to corporations. We find no good
reason not to accept this view.
It
is true that one of our eminent judges, later the Chief Justice of this court,
Dr. P.B. Mukharji J. warned us as early as in 1951 in Mahadeb Jiew v. B.B. Sen,
AIR 1951 Cal 563, 569 that "the craze for American precedents can soon
become a snare" and that "a blind and uncritical adherence to
American precedents must be avoided or else there will soon be a perverted
American Constitution operating in this land under the delusive garb of the
Indian Constitution." There can be no doubt that the craze, if it means,
as it does, insane fancy or mania, for anything is obviously bad and a blind
and uncritical adherence to anything, foreign or indigenous, must be avoided.
But as our ancient sages declared almost at the dawn of human civilisation,
noble or good thoughts must be allowed to come from all directions. Be it
however noted, that as Mahatma Gandhi put it, while we must allow all the
cultures of all the world to be blown around us, we
must not allow ourselves to be blown off our feet by any of them. It appears
that many of our legal scholars regret that our craze for American precedents
has led us to transplant a "due process clause" in our Constitution,
even though the proposal for insertion thereof in the body of the Constitution
was rejected by our founding fathers in the Constitutent Assembly after a long,
detailed and thorough debate.
In
the case at hand, however, as discussed hereinbefore in some detail, we have
come to our own conclusion on a critical interpretation of our own Constitution
and our own laws, holding that the expressions "person" and
"witness" in article 20(3) do not and cannot contemplate a juridical
person like an incorporated company or other corporate bodies. It is settled
law in company jurisprudence, since the celebrated decision of the House of Lords
in Salomon v. Salomon and Co. [1897] AC 22 (HL), that a company is a distinct
legal entity having a juridical personality independent or separate from its
members, directors, officers and employees. Even though, as pointed out by us
in Chira Kumar Basu v. Property Development Trust Ltd., AIR 1989 Cal 176,
relying on a rather recent decision of the Supreme Court in State of U.P. v.
Renusagar Power Co., AIR 1988 SC 1737; [1991] 70 Comp Cas 127 and the Tagore
Law Lectures of Dr. Justice P.B. Mukherji entitled New Jurisprudence (1970,
page 183), the doctrine of lifting the corporate veil of a body corporate has
now become more permissible than it was before, a company cannot be allowed to
put on and put off the veil at its pleasure to suit its purpose and to invite
us, not to look at its independent legal entity, but at its directors or
officers or even employees and to treat them as inseparably one with the
company and entitled to all the privileges and protections available to the
body corporate.
At
any rate, in the case on hand, the two employees of the company who have been
sought to be cited as witnesses in the prosecution against the company, cannot
be equated with the company as to treat the incriminating evidence, if any,
adduced by them, to be self-incriminatory evidence adduced by the accused
company itself. In the present day, where multi-faceted and multi-coloured
crimes which could not even be conceived of a few decades ago, have endangered
our society by spreading their tentacles far and wide and deep, the doctrine
against self-incrimination has ceased to enjoy wholesale approbation. As
pointed out by the Supreme Court in M.P. Sharma, AIR 1954 SC 300, 303, itself,
opinion has been strongly held in some quarters that this doctrine has an
undesirable effect on social interests and that in the detection of crime, the
State is confronted with overwhelming difficulties as a result of this
privilege. "It is said that it has become a hiding place of crime and has
outlived its usefulness and that the rights of the accused persons are amply
protected without this privilege and that no innocent person is in need of
it". The Supreme Court referred to Wigmore on Evidence, volume VIII, pages
314 and 315, where it has been observed that even though indirectly and ultimately
it works for good—for the good of the innocent accused, but directly and
concretely it works for ill, for the protection of the guilty and the
consequent derangement of civic order. There ought to be an end to the judicial
cant towards crime. We have already too much of what a wit has called
"justice tempered with mercy". There is, therefore, a good reason for
the view that the privilege should be kept within the strictest possible limits
and to quote from the Supreme Court decision in M.P. Sharma, AIR 1954 SC 300 at
page 303 "there is no inherent reason to construe the ambit of this
fundamental right as comprising a very wide range". We are afraid that if
the officers and employees of a company are not permitted to appear as
witnesses for the prosecution against the company on an extension of the
doctrine against self-incrimination, many of the offences committed by
companies cannot be detected, prosecuted and punished.
One
word more before we conclude and that is about section 305 of the Code of Criminal
Procedure which provides that when a body corporate is an accused, it may
appoint a representative for the purpose of any inquiry or trial and such
representative is to be examined under section 313 of the Code providing for
examination of the accused to explain any circumstances appearing against the
corporation. We would like to make it clear that we have not decided the
question as to whether such an one, while representing
the corporation, can be compelled to appear as a witness against the corporation.
We
would, accordingly, reject the revisional application and discharge the rule. The records to go down at once to the court below to enable it to
proceed with the trial with expedition.
Nandi
J.—I agree.
[1980] 50 COMP. CAS. 219 (
HIGH COURT OF
v.
Amarendra Nath Sircar
MRS. PADMA KHASTGIR, J.
JUNE 9, 1978
S.S.
Ray, P.C. Sen and Goutam Mitra for the Petitioner.
Sankar
Das Banerjee, Ashoke Sen, Samiram Sen, Sankar Ghosh, Sudipta Sircar and R.C.
Nag for the Respondent.
Mrs. Padma Khastgir J.—A company formerly known as N.C.R. Corporation and since
April, 1974, known as M/s. National Cash Registers Co. with limited liability
incorporated in the U.S.A., having its registered office at U.S.A., carried on
business in India, inter alia, at 4/D, B.B.D. Bag, East Calcutta, within the
jurisdiction of this court, at Madras, New Delhi, Bombay and Ahmedabad. The
said company hereinafter referred to as "the American company" was
carrying on the business of import and marketing in
By an agreement in writing
dated 16th of February, 1974, executed between the American company and the
defendants Nos. 1, 2 and 3, the American company agreed to sell and transfer to
the defendants Nos. 1, 2 and 3, the entire business of the American company as
a going concern with effect from the 1st of December, 1973, together with all
benefits, assets, properties, losses, book debts, liabilities, for the total
price of rupees equivalent to 2,00,000 dollars. The
salient terms and conditions of the said
agreement were first of all that the said transfer would be completed on or
before the 1st of June, 1974, after obtaining the consent and approval of the
Reserve Bank of India under the provisions of the Foreign Exchange Regulation
Act, secondly, the vendee shall take over and retain in its employment all the
staff, employees, workmen and other personnel employed by the American company at
various places in India, on the same terms and conditions of their services as
they were with the American company, thirdly, the Indian company will allow the
employees to participate in the share capital of the company to the extent of
15 per cent.
On the 16th of May, 1974,
the defendants Nos. 1, 2 and 3 caused the defendant No. 4, i.e., Cash Register
Co. India Private Ltd., to be incorporated under the Companies Act, 1956,
hereinafter referred to as "the Indian Co". Under the articles of
association of the company, the first directors of the said company are the
defendants Nos. 1, 2 and 3 for their lives or until one of them voluntarily
retires because of personal reasons. None of the said first directors are
liable to retire by rotation. The other material articles for the determination
of the dispute between the parties at this stage are:
Article 62 which provides
that unless otherwise determined by the company in a general meeting, the
directors shall not be required to hold more than one share in the share
capital of the company as qualification for his or her eligibility as a
director. Article 60 provides that until otherwise determined by the general
meeting the number of directors shall not be less than two or more than seven.
Article 68 provides that the office of the director shall ipso facto be vacated
if, inter alia, on the ground he ceases to hold the qualifying shares. Article
71 of the company provides that the company in its general meeting may, subject
to the provisions of these articles from time to time appoint new directors in
office and may impose, increase or reduce share qualification of any other kind
for the eligibility of the directors. Article 1 provides that the regulations
contained in Table 'A' in the First Schedule to the Companies Act, 1956, shall
apply to this company except in so far as modified or altered by the articles
herein contained.
Pursuant to the agreement
with the American company and also in accordance with the sanction and order of
the Reserve Bank of
According to Mr. Malkani,
he has served the American company for the last 25 years with great efficiency
and neither the American company nor the
Indian company has any complaint against him. On the contrary being fully
satisfied with the valuable services rendered by him, the defendants Nos. 1, 2
and 3 have agreed under an oral agreement to take him as a director on
partnership basis and on equal terms with that of the defendants Nos. 1, 2 and
3 in the said company. It is his further case that as a result of various
assurances, discussions and negotiations it was agreed that the petitioner, Mr.
Malkani, would be appointed as a director and he would have equal rights along
with the other three defendants in respect of the shareholding, rights and
responsibilities in terms of the articles of association of the company. In
this respect many correspondence passed by and between the parties wherefrom it
would appear that the defendants Nos. 1, 2 and 3 agreed to take the plaintiff
as a working director of the defendant No. 4 at the next general meeting which
was due to be held in November, 1976. In the meantime, they agreed to take him
as an additional director for which the petitioner was required to give a
letter of consent and a draft consent prepared by M/s. Orr Dignam & Company
was sent by the defendant No. 1 to the petitioner. At a meeting of the board of
directors held on 16th of February, 1976, the petitioner was appointed as a
working director of the defendant No. 4 and by a letter dated 23rd of December,
1976, the defendant No. 1 communicated the said decision of the board of
directors to the petitioner and requeted the petitioner to apply for
'directorship which according to the petitioner, he duly accepted in writing
which fact of course is denied by the defendants in their affidavits. It was also
notified to the petitioner that his remuneration, perquisites and contribution
of share would be determined in the general meeting soon after the business of
the American company is transferred to the Indian company. At a meeting of the
board of directors held on 24th May, 1976, it was resolved that the petitioner
would be appointed as a working director of the company with effect from 1st of
August, 1976, at a remuneration to be decided after the business of the
American company is transferred to the Indian company. One equity share of Rs.
100 was decided to be issued to Mr. Malkani as the qualifying share.
According to the petitioner
on 5th of January, 1978, the petitioner for the first time came to know from a
circular dated 1st of January, 1978, that the entire Indian business of the
American company has been acquired by the defendant No. 4 and such acquisition
has become operative and effective on and from 18th of November, 1977. From
another announcement it appeared that the company called upon the employees of
the Indian company to participate in the shareholding of the company to the
extent of 15 per cent. pursuant to the direction of
the Reserve Bank of
As a result of that, the
present suit has been filed by the plaintiff for' various reliefs and the
present application has been taken out by the petitioner, Mr. Malkani, for an
injunction restraining the defendants from issuing any shares, an injunction
restraining the defendants from interfering with his position as a director,
and also an injunction restraining the defendants from removing and/or
interfering with his services as a branch manager of the company. Various
orders have been passed in this suit. The first of such orders was passed by
his Lordship Mr. Justice S.C. Deb on 25th of January, 1978, whereby his
Lordship injuncted the defendants as the directors of the defendant No. 4 from
allotting any share, except to the employees of the defendant No. 4 for 10 days
and also injuncted the defendants and the directors of the company from
interfering with the functions of the plaintiff as a director of the defendant
No. 4 and/or terminating as a manager of the Bombay branch of the defendant No.
4 or National Cash Register Co. Thereafter, the suit and the application were
released by his Lordship Mr. Justice S. C. Deb and by way of special assignment
they appeared before me. On 10th of February, 1978, I modified the order passed
by his Lordship Mr. S.C. Deb to the extent that till the hearing of the
application the plaintiff will not act or hold himself as the director of the
defendant No. 4. Thereafter, another application was taken out on behalf of the
petitioner seeking for various directions in respect of various details of
management, control and administration of the Bombay branch and necessary
orders were passed to suit the convenience of all the parties and also
considering the fact that the usual working of the Bombay branch which had 46
employees should not be affected by this dispute amongst the directors, and as
such various directions were also given regarding the working of the banking
accounts so that the smooth day to day running of the Bombay branch is not
hampered because of this dispute amongst the parties.
Mr. S.S. Roy appeared with
Mr. P.C. Sen and Goutam Mitra on behalf of the petitioner and submitted that
first of all an order of injunction be passed restraining the defendants from
interfering with the petitioner's services as the manager of the Bombay branch
till the hearing of this suit. He submitted that while granting such an
injunction the court has ample power under O. 39 of the CPC to grant such an
interim relief and the court is not confined
to or restricted by the provisions of the Specific Relief Act. As, according to
Mr. Roy, the Specific Relief Act is not a complete code and is not exhaustive
by itself, as such the court's power to grant such an interim relief is not
confined to or restricted to the provisions of the Specific Relief Act. He
further submitted that in proper cases the court has in fact granted an order
of injunction. In this respect he craved reference to two English decisions
reported in [1975] 2 All ER 233 (CA) (Chappell v. Times Newspapers Ltd.) and
[1971] 3 All ER 1345 (CA) (Hill v. C.A. Parsons & Co. Ltd). Mr Roy further
referred to a case reported in AIR 1976 SC 888 (Executive Committee of Vaish Degree College,
Shamli v. Lakshmi Narain) and submitted that
although a contract of personal service cannot ordinarily be specifically
enforced but an order of injunction can be granted, and he submitted that this
case of the petitioner falls within the special exceptional category and as
such an order of injunction restraining the defendants from interfering with
the services of the petitioner as a branch manager should be granted. He
particularly drew my attention to the judgment of Mr. Justice Bhagwati
delivered in the case referred to above and submitted that a progressive view
of the matter should be taken and considering the present difficulties in
securing jobs in India, the law regarding master and servant should be given a
liberal interpretation and reliefs should be granted in favour of the
petitioner. He further submitted that cases involving personal relations and of
personal nature should be distinguished from professional management of
impersonal nature and in such cases there is no reason why specific performance
should not be granted of any contract of employment which does not involve
relationship of personal character. He further referred to cases reported in
AIR 1914 Cal 362 and [1906] ILR 33 Cal 351, AIR 1925 Cal 233 (Ram Sadan Biswas
v. Mathura Mohan Hazra) and [1932] 36 CWN 291 and AIR 1932 Cal 353 (Nanda Lal
Mukherji, In re) and submitted that the court's power to grant an interim injunction
is not limited in such a case to the provisions of the Specific Relief Act but
the court in special circumstances may grant an order of injunction under o. 39 of the CPC. His second submission
was that the plaintiff's position as a director should not be disturbed by the
defendants till the hearing of this suit. He drew my attention to the fact that
although Mr. Malkani was required to take the qualification share within two
months from the 1st of August, 1976, before the said period of the two months
expired, the articles of association of the company have been amended whereby
it has been made no longer necessary for a director to hold any qualification
share, and as such he is not disqualified from acting and holding himself out
as a director of the company. Thirdly, he submitted that although Mr. Malkani
was holding an office of profit of that of a manager with the company that fact
was within the knowledge of the board of
directors and the shareholders and in spite of having the said knowledge they
have decided to appoint Mr. Malkani as a director, and as such he is not
disqualified under s. 314 of the Companies Act. Fourthly, he submitted that not
only the directors have written letters to him and accepted him as a director
of the company but they have also written various letters to various parties
including the directors of the American company bringing to their knowledge the
fact that Mr. Malkani has been taken in as a director of the Indian company.
Moreover, from the statutory returns filed by the company all along even as
late as on 5th of January, 1978, it would appear that Mr. Malkani has been
shown in the returns as a director of the company. Nowhere from the returns it
would appear that Mr. Malkani was taken as a tentative director as alleged to
be claimed by the respondents in these proceedings. He further submitted that,
as his name appears from the statutory returns filed with the Registrar of
Companies, those returns under s. 164 of the Companies Act shall prima facie be
evidence of such directorship of the company. Moreover, under s. 303 of the
Companies Act, every company is required to keep at its registered office a
register containing the names of its directors, managing directors, secretary
and other particulars. The company in this case has not produced the said
register to show the actual position. As such his client should be regarded as
a director of the company and the defendants should be injuncted from
interfering with his position as a director. Last of all Mr. Roy submitted that
the purported allotment of shares in favour of the defendants Nos. 1, 2 and 3
are not binding on the petitioner as from the returns filed with the Registrar
of Companies it would not show that such a meeting was held and such shares
were issued by the company to the said directors. Although he has not taken
this point in the petition, he has submitted that he has taken this point in
the affidavits in reply and the court is entitled to pass an order taking into
consideration all the facts as pleaded in the affidavit-in-reply.
Mr. Sankar Das Banerjee,
Mr. Ashoke Sen, Mr. Samiran Sen, Mr. Sankar Ghosh, Mr. Sudipta Sircar and R.C.
Nag appeared on behalf of the defendants. The first point taken by them is, the
petitioner is not entitled to get any order of injunction restraining the
company from interfering with or dispensing with his services as a branch
manager of the company at Bombay as the court will not specifically perform a
contract of personal service by giving an order of injunction ; secondly, Mr.
Ghosh submitted that Mr. Malkani by not taking the qualification share within
two months' time has disqualified himself to remain or act as a director;
thirdly, Mr. Malkani by not disclosing his position or office of profit in the
company has disqualified to remain as a director; fourthly, the board of
directors under the articles of association of the company cannot appoint any
new directors, and as such any appointment by the
directors is ultra vires the articles and is not binding on the company. Mr. Ghosh's
further contention is that the oral agreement as set out by the petitioner is
wrongful as there has never been such an agreement by and between the
petitioner and the defendants Nos. 1, 2 and 3 to take him as a director on
partnership basis and on equal terms. The court should not look into an oral
agreement which is against the provisions of the articles of the company as
under the articles of association of the company, it
is the company which has the right to appoint the new directors. Moreover, he
submitted that the terms alleged to have been agreed upon by and between the
petitioner and the respondents Nos. 1, 2 and 3 are
vague and not complete and as such not binding on the parties. He submitted
that, although in the letters the expression "equal partnership" has
appeared, yet no literal construction to the said words be given except to mean
that the directors wanted to act in comradeship or in friendship with Mr.
Malkani who was looking after the Bombay branch of the Indian company. Mr. Ghosh
has submitted that the shares having already been allotted in favour of the
defendants Nos. 1, 2 and 3 and as such no order of injunction can be passed in
respect of non-allotment of shares. The petitioner, according to Mr. Ghosh, was
not entitled to get any shares as there has never been any oral agreement to
allot to him any share on equal basis along with the respondents Nos. 1, 2 and
3. Lastly, he submitted that no order should be passed on this application in
favour of the petitioner.
It is the admitted case
that Mr. Malkani was acting as a branch manager at
In a case reported in AIR
1976 SC 888 (Executive Committee of Vaish Degree College v. Lakshmi Narain), it
has been held that, "a contract of personal service cannot ordinarily be
specifically enforced and a court normally would not give a declaration that
the contract subsists and the employee, even after having been removed from
service, can be deemed to be in service against the will and consent of the
employer. This rule, however, is subject to three
well recognised exceptions—(i) where a public servant is sought to be removed
from service in contravention of the provisions of art. 311 of the Constitution
of
In the
case reported in AIR 1933 Lah 203 (N.W. Rly. Administration v. N.W. Rly.
Union,
Applying the principles as
laid down amongst other cases and in the case reported in AIR 1976 SC 888 (Executive Committee of Vaish
Degree College, Shamli v. Lakshmi Narain) the
plaintiff's case is not a case of any special circumstances, as such it does
not fall in any of the three categories of exceptions as laid down by the
Supreme Court of India. Generally, when there is an adequate remedy in damages
injunction will not be granted. An injunction is granted in aid of the legal
right sought to be established. While granting an order of injunction, the
court will have first to see that there is a bona fide contention between the
parties and then on which side in the event of obtaining a successful result of
the suit will be the balance of inconvenience if the injunction is not issued.
The petitioner who seeks the aid of the court must be able to show a fair prima
facie case in support of his claim although he need not make out a clear legal
title but he must satisfy the court that he has a fair question to raise as to
the existence of his legal right which he sets up but if the cause of action
discloses no prima facie case that the contract on which the court cannot and
will not grant specific performance then in such a case no temporary injunction
should be granted. From the undisputed facts, it would appear that under the
terms of the contract of service the petitioner's service was terminable at the
will of the employer by giving him three months' notice or salary in lieu of
three months' notice. At the hearing of this suit, the plaintiff is not
entitled to get specific performance of the said contract of personal service
nor is he entitled to get a permanent injunction restraining the defendants
from dispensing with his services or terminating his services. As such, the
plaintiff's claim in case of such wrongful dismissal would be damages only.
Moreover, neither in the plaint nor in the petition, the petitioner has made
out a case of any threat or intention on the part of the respondent to dispense
with his service. The law frowns on specific performance of a contract of personal
service. It is true a great hardship or humiliation would be caused if his
service as the branch manager is terminated by the defendants by giving him
three month's notice or salary in lieu of three months' notice. For that the
plaintiff has all the sympathy of this court but in view of the law relating to
master and servant existing at present and in view of the provisions of the
Specific Relief Act and also in view of the numerous decisions of the Supreme
Court, I am unable to come to the plaintiff's rescue by granting him an order
of injunction to that effect. However hard the case of the plaintiff may be,
that cannot be allowed to make bad law. As such, I am of the opinion that, in
view of the existing law relating to master and servant and in view of the
numerous decisions of the Supreme Court of India, the plaintiff is not entitled
to an order of injunction restraining the
respondents from dispensing with his service as a manager of the
Although
in the case of Executive Committee of Vaish Degree College v. Lakshmi Narain, AIR 1976 SC 888, Mr. Justice Bhagwati has
suggested that a distinction should be drawn in different types of cases of
personal service but he agreed with the other learned judges as to the
proposition that under the ordinary law of master and servant the court should
not grant an order of injunction unless the petitioner's case falls into any of
these three special types of exceptional cases as laid down in that decision ;
as such the said decision cannot be of any avail to the petitioner for the
purpose of getting an injunction restraining the defendants from interfering
with his services as a branch manager or terminating his services as such. In
the case Chappell v. Times Newspapers Ltd. [1975] 2 All ER 233 (CA), Justice
Lord Denning M.R. held that an exception was created by that court in the case
of Hill v. C.A. Pearsons & Co. Ltd. [1971] 3 WLR 995; [1971] 3 All ER 1345
(CA), in view of the fact that both the employer and the man although had
complete confidence in one another, yet the employers against their wishes had
to give notice of termination of his employment under pressure from a trade
union and as such an injunction was granted, and by granting such an injunction
the law was vindicated and justice was done. The
facts of this case are totally different from the facts of the case on which
such injunction was granted. Moreover, law of master and servant as it stands
today in
The next point for
consideration in this application is whether the petitioner is entitled to get
an order of injunction restraining the defendants from interfering with his
position as a director of the Indian company. The petitioner in the plaint has
made out a case of an oral agreement whereby the defendants Nos. 1, 2 and 3
have agreed to take him as a director on partnership basis, and on equal terms
and conditions as that of the defendants Nos. 1, 2 and 3. Under the articles of
association of the company, it is the company which has the right to take in a
new director at a general meeting of the company and the directors are not
entitled under the articles of association of the company to take any new
director. Moreover, the directors have no right to enter into any agreement
where the company is not a party to it to bind the company with such an
agreement. Whether there was such a valid agreement or not would be the
subject-matter of this suit but at the moment certain factors are important for
the purpose of a decision for granting an interim relief pending the disposal
of the suit. It is an admitted case that Mr. Malkani, although required to take
a qualification share of Rs. 100, failed to do so in terms of the articles of
association of the company. Although the articles of association of the company
have been amended and/or modified, yet the said amendment has not been given
any retrospective effect. Moreover, Mr. Malkani, although he has submitted that
his holding of the position of the branch manager is an office of profit with
the company was known to the company and in spite of that knowledge the board
of directors have decided to appoint him as a director, in my opinion, that
does not absolve Mr. Malkani from satisfying the provisions of s. 314 of the
Companies Act. Under s. 314 of the Companies Act, only when the company accords
its consent by a special resolution in that case the director is absolved from
the liability as envisaged under s. 314 of the Companies Act. Although the
appointment of Mr. Malkani by the board of directors was adopted by the company
subsequently at a general meeting, yet there was no special resolution which
accorded a consent to Mr. Malkani's holding the
position of the branch manager at
From the minutes of the
meeting, it would appear that although it was within the knowledge of the
directors and that of the shareholders of the company that Mr. Malkani was
holding such office, in terms of s. 314 of the Companies Act the company has
not by its special resolution accorded or exempted the plaintiff from such
disqualification. As such, the plaintiff is not entitled to get any advantage
of the minutes of the board meeting as also of the meeting of the shareholders
of the company. Mr. Ghosh also submitted that from the minutes of the meeting
dated 8 th of January, 1978, it would be abundantly clear that the shareholders
of the company and the directors do not wish to have Mr. Malkani as a director
of the company. As such, the court should not impose an undesirable director on
the company. More so, when the company at its next meeting would remove the
said director and the court's order would be rendered nugatory by the company
at the first available opportunity. As such, the court should not interfere
with the internal and/or domestic affairs of the company. The articles of
association of the company give power to the company to appoint a director and to
nobody else. In this respect, Mr. Ghosh referred to a case reported in [1888]
37 Ch D 1 (CA) (Browne v. La Trinidad) and the case reported in [1974] 2 All ER
653; [1974] 1 WLR 638 (Ch D) (Bentley-Stevens v. Jones), where an injunction
was refused in spite of the fact of the existence of certain irregularities in
the holding of the meeting of the company. Although
in such a case before the termination of B and a person as trustee for the
intended company, by which it was stipulated that B should be a director and
should not be removed and although such agreement was acted upon, yet no
contract adopting it was entered into between the plaintiff and the company,
and it was held in that case that there was no contract between B and the
company, and as such no order of injunction was passed. The court cannot grant
an interlocutory injunction in respect of irregularities which could be cured
by going through proper processes. Even assuming that the plaintiff was a
quasi-partner he could still be expelled by the company as the company had
statutory right to remove him from its board and his only remedy was held to be
considered at the time of winding up of the company on the ground that it was
just and equitable for the court to make such an order. Even assuming that the
plaintiff's case is correct that there was such an oral agreement to take the
plaintiff as a partner on equal terms along with the other directors of the
company, such contract for quasi-partnership would be relevant only in the case
of winding up of the company but that fact alone would not entitle the
plaintiff to get an order of injunction as the court should not interfere or
force the company to conduct their business in a particular manner. The case
reported in [1970] 40 Comp. Cas. 715 (SC) (Ram Autar Jalan v. Coal
Products P. Ltd.) held that while deciding the
question whether the plaintiff is a director or not in a company, the court
should give consideration not only to the factual aspect as to whether the
plaintiff has been functioning as a de facto director but the court should give
also due consideration to the legal aspect of the matter. The case reported in
[1908] 24 TLR 469 (CA) (Bluett v. Stutchbury's Ltd.), where it was held that
the directors who derive their power could only act in accordance with the
articles and cannot bind the company by appointing a man as managing director
for four years so as to deprive the company of their power and duty of
considering at the next general meeting whether the person so appointed was a
fit and proper person and eligible for re-election under the articles of
association of the company or removable under the articles and there the court
held that it was completely outside the power of the directors and competence
to enter into any agreement which would entirely deprive the company of its
right under the articles of association. In this case also, the company, not
being a party to the said agreement, could not be held to be bound by an
agreement entered into by and between the directors and Mr. Malkani. The
company has not ratified and/or accepted the said agreement entered into by its
directors with the plaintiff. As such, I am inclined not to pass any order
injuncting the company and/or the respondents from interfering with the
plaintiff's position as a director of the company. With regard to the last
point of allotment of shares there is neither any averment in the plaint nor in the petition challenging the allotment of
the said shares by the company in favour of the defendants Nos. 1, 2 and 3. Mr.
Roy's submission that in view of the fact that no return has been filed with
the Registrar of Companies in respect of the allotment of the shares and as
such the allotment of the said shares are invalid and not binding on the
petitioner is unacceptable to me. Under s. 75 of the Companies Act, a return of
the allotment of shares should be filed with the Registrar of Companies within
a certain period and, in the absence of that, certain penal provisions have
been made. Non-filing of the return will not make the allotment of the shares
bad. There is a distinction between the provisions of s. 75 and the provisions
of s. 108 of the Companies Act. From the records it would appear that such a
return was filed with the Registrar of Companies but the said returns being incomplete,
the company was asked to file proper returns. Filing of the return is not a
pre-requisite condition; as such the allotment in fact does not become invalid
for non-compliance of the same. Moreover, this point being taken for the first
time in the affidavit-in-reply, the defendants did not get any chance of
dealing with the same; as such it would not be proper on my part to pass any
order relying on the facts as stated in the affidavit-in-reply. Applying the
principles as laid down in [1970] 40 Comp. Cas. 715 (SC) (Ram Autar Jalan v. Coal
Products P. Ltd.) in order to get an order of
injunction, the plaintiff will have not only to satisfy the court regarding the
factual position of his acting as a director but also must satisfy the court
that in law he was holding such position as a director.
The case reported in Law
Reports [1975] AC 396, 404, 405, 406 (HL) (American Cyanamid Co. v. Ethicon Ltd.) holds "if
there be no prima facie case on the point essential
to entitle the plaintiffs to complain of the defendants' proposed activities,
that is the end of the claim to interlocutory relief ...The grant of an
interlocutory injunction is a remedy that is both temporary and
discretionary.......The object of the interlocutory injunction is to protect
the plaintiff against the injury by violation of his right for which he could
not be adequately compensated in damages recoverable in the action if the
uncertainty was resolved in his favour at the trial; but the plaintiff's need
for. such protection must be weighed against the corresponding need of the
defendant to be protected against injury resulting from his having been
prevented from exercising his own legal rights for which he could not be
adequately compensated under the plaintiff's undertaking in damages if the
uncertainty were resolved in the defendant's favour at the trial. The court
must weigh one need against another and determine where 'the balance of
convenience' lies."
The whole question for
determination is whether the petitioner in law is entitled to act as a director
and not whether he has been de facto functioning as a director.
In view of the facts and
the law as stated above, I am inclined not to pass any order on this application ; as such I dismiss the present application with
costs.
[1955] 25 COMP. CAS. 341
(
HIGH
COURT OF
v.
State
K.C. DAS GUPTA AND DEBABRATA MOOKERJEE, JJ.
CRIMINAL
REVISION NO. 717 OF 1953.
MARCH 30, 1954
A.N. Roy
with Bimal K. Chatterjee, for the petitioner.
J.M. Banerjee, for the State.
K.C. Das Gupta, J.—This rule was issued on the
Chief Presidency Magistrate,
As regards the proceedings under
section 22(1)(a) of the Act it is on behalf of the petitioner that whatever
business was carried on—whether in
contravention of provisions of section 7(1) of the Act, or not—was carried on
by the Calcutta Woollen Agency Ltd. and not by him personally. Section 7(1)
provides that no dealer shall, while being liable to pay tax (under section 4
of this Act), carry on business as a dealer unless he has been registered and
possesses a registration certificate.
Under section 22(1) whoever carries on business as a dealer
in contravention of sub-section (1) of section 7 shall be punishable with simple
imprisonment which may extend to six months or with fine or with both. The
challan which was sent up in this case states that the petitioner was charged
with carrying on business at 76,
It may or may not be that he takes a leading part in the
business but, in our opinion, neither he nor any of the other shareholders can
be considered to be the "dealer". It is the company which is the
dealer within the meaning of sections 4, 7 and 21 of the Act. If the company
has carried on business in contravention of section 7(1) of the Act it will be
open to the authorities to start proceedings against the company. The present
proceedings under section 22(1)(a) against Rameswar
Agarwalla must however be quashed, as clearly he is not a "dealer"
who carried on business.
In so far as the proceedings are under section 22(1)(g) for knowingly producing incorrect accounts, registers
or documents of the firm, we see no reason to interfere at this stage. Mr. Roy
suggested that it may very well be that the sanction of the Commissioner that
is required under section 22(2) has not been given as regards this offence,
namely, under section 21(1)(g) of the Act. The
materials on the record are not however sufficient for a decision on this
question. This point was not raised in the application on which the rule was
issued. If there be no sanction the proceedings will fail; but at the present
stage it is not possible for us to order quashing of the proceedings on that
supposed ground.
We accordingly quash the proceedings under section 22(1)(a)
of the Bengal Finance Sales Tax Act of 1941, but discharge the Rule as regards
the proceedings under section 22(1)(g) of the Act. The prayer for stay of the
proceedings is refused.
Debabrata Mookerjee, J.—I agree.
[1955]
25 COMP. CAS. 343 (ALL.)
HIGH
COURT OF
v.
BHARGAVA, J.
CIVIL
MISCELLANEOUS WRIT CASE NO. 84 OF 1954 CONNECTED WITH CIVIL MISCELLANEOUS WRIT CASES
NOS. 111, 112, 113, 114, 115 AND 116 OF 1954.
AUGUST 11, 1954
B. Dayal, for the Applicants.
The petitioners in all these writ
petitions are the shareholders of the District Syndicate Bulandshahr, Limited,
a limited company incorporated under the Indian Companies Act. Sales tax has
been assessed on this company for the assessment years 1948 and 1949. After the
assessment, the Collector of Bulandshahr, who was entrusted with realising the
amount of tax assessed as arrears of land revenue, is taking proceedings
against the assets of these petitioners. The petitioners raised objection
before the Collector, the main ground of objection being that proceedings could
not be taken against their personal assets but could be taken only against the
assets of the company. The Collector ordered these objections to be filed
without dismissing them or allowing them on the ground that the report from the
Sales Tax Officer was that departmental instructions had been issued for
rateable realization from each shareholder. It is obvious that the proceedings,
which are being taken by the Collector, are not justified in law. A limited
company, incorporated under the Indian Companies Act, is an entity separate and
distinct from its shareholders. The shareholders, it has always been held, have
no interest in the assets of the company and are not personally liable for the
debts or liabilities of the company. It does
not appear to be necessary to refer to cases in which this principle has been
clearly laid down as it has been very well recognised. In these circumstances,
since the sales tax has been assessed on the company and not on the
shareholders, the Collector is entitled to proceed against the assets of the
company only and any proceedings taken against the shareholders or their
personal assets are void and against law. Consequently, these petitions are
allowed and it is hereby ordered that a writ of mandamus be issued to the
Collector of Bulandshahr, restraining him from taking proceedings to realise
the sales tax of the District Syndicate Bulandshahr, Limited, from the person
or personal assets of these petitioners. This order is not to be interpreted as
restraining the Collector from proceeding against any assets of the company
which may be in the hands of any individual shareholder. The petitioner, in
each case, will be entitled to his costs from the opposite party in the
petition.
[1955] 25 COMP CAS 32 (ANDHRA)
HIGH COURT OF ANDHRA
Desiraju venkatakrishna sarma, In re.
CHANDRA REDDY J.
CRIMINAL REVISION CASE NO. 629 OF 1954
CRIMINAL REVISION PETITION NO. 585 OF
1954
OCTOBER 29, 1954
K. Krishnamurthy, for the
petitioner.
Chandra Reddi J.—The
petitioner is the managing director of a company called
Messrs. Uplands Trading Company Ltd., Brodipet,
One of the defences put
forward on behalf of the petitioner was that the company was not liable to pay
the tax demanded as it was already collected from their agents, Messrs. Raleigh
Brothers. The pleas raised on behalf of other accused are not material in this
enquiry, as they have all been acquitted. This defence was rejected as
section 16-A of the Madras General Sales Tax Act
precluded an assessee from questioning the validity of the assessment in any
criminal court in any prosecution. In this view of the matter, he found the
petitioner guilty of the offence charged and convicted and sentenced him to a
fine of Rs. 100 with two months simple imprisonment in default. Besides, there
was a direction that the arrears of tax of Rs. 3,285-6-3 should be recovered
from him as if it were a fine. The other directors were acquitted as no notice
of demand was served on them.
The petitioner has not questioned his conviction
under section 15(b) of the Madras General Sales Tax Act
though the Andhra State Legislature while adopting this Act omitted
section 16-A. But he challenges the validity of the direction as regards the
recovery of arrears of tax, as if it were a fine, from him
personally. In support of the contention that a personal liability cannot be
imposed upon a director of a company reliance is placed on two decisions
of the Madras High Court, Public
Prosecutor v. Jacob Nadar and Behara
Latchanna Patnaick v. State. In the
first case, Subba Rao J. (as he then was) held that
under the Madras General Sales Tax Act, a firm is a person for purposes
of assessment and prosecution, and, in default of payment
of tax, was liable to be prosecuted, and a partner who was not served
with notice of demand of tax could not be prosecuted for default by the firm. That ruling is not apposite for the reason
that in this case it is the company that is prosecuted and not particular
individuals alone. Further, the learned Judge has not decided the question
whether an individual partner is personally liable for payment of taxes.
To the same effect is the ruling in Behara Latchanna
Patnaick v. State Somasundaram J. relied on Public Prosecutor v. Jacob Nadar in
support of his conclusion that some of the partners alone cannot be prosecuted
for failure to pay taxes assessed on a firm. So these rulings do not in any way
help the petitioner. On the other hand, there is an incidental remark in the
judgment of Mr. Justice Somasundaram that every partner is individually liable
to pay the tax. But these observations cannot apply to the present case for the
reason that the position of directors of a company with limited liability is
different from the partner of a firm. It must be mentioned that the company in
this case is one with limited liability. In the case of a partner of a firm, he
is liable personally for the debts of the partnership. But different
considerations arise in the case of the members of a limited liability company
which is a legal entity.
Under section 6(iv) of the Indian Companies Act, the liability of the members is limited to the amount payable on the shares. There can therefore be no personal obligation on the shareholders or even the directors in respect of the debts or even the taxes, revenue etc., due from the company. It is only in cases where a statute creates a personal liability that it could be enforced, and apart from the statute, no personal liability can be fastened upon a director of the company. There are provisions in the Indian Companies Act which require the directors to do certain things, and the failure to comply with these requirements involves certain penalties for which they are made personally liable. Payment of tax is not one of such requirements. The taxes are to be paid by the company as such and it is not the liability of the individual members.
The company which is a body
corporate can be made liable for the payment of taxes, and in respect of taxes
payable by it, the individuals constituting the company cannot be held
responsible for the default in payment of such taxes. In this context, a
passage from Lindley on Companies, 6th edition, at page 1229, extracted
at page 323 in Harihar Prasad v. Bansi Missir, is
apposite:—
"The Society,
(speaking of an Industrial Provident Society spoken of as the Co-operative
Societies in England, see Halsbury's Laws of England, Volume 17, page 3)
being incorporated, must sue and be sued by its corporate name; and its members
are individually liable for its debts and engagements
only so far as the statute allows. As in the case of companies registered
under the Companies Act, 1862, so in the case of societies registered under the Act now in question, the members are
not liable to have executions issued against them in respect of judgments
obtained against the society. The members can only be reached individually by
the process of winding up."
There is no statutory
provision in the Companies Act which entitled either a creditor or even the
Government to proceed against a director of a limited liability company in
respect of taxes payable by the company. It is only the assets of the company
that can be proceeded against and if there is any unpaid share money, the
members could be called upon to contribute with others.
Another passage from the
same book at page 363 extracted at page 323 in Harihar Prasad v. Bansi
Missir,
is also appropriate:—
"If
the company is not registered with limited liability the members are liable to
the full amount of the company's debts and engagements, whatever that may be.
The liability however is a liability to contribute with others and such
liability can only be enforced upon the winding up and no execution can proceed
against a member."
It is thus clear that the
personal liability cannot be fastened upon a director or even a managing
director in respect of taxes payable by the company. It looks to me that in
this regard there can be no difference between debts and taxes payable by the
company.
Section 230(1) of the
Indian Companies Act makes the position clear.
Section 230(1) enacts:—
"In a winding up there
shall be paid in priority to all other debts
(a) all revenues, taxes, cesses and rates
whether payable to the Union of India or a State, or to a local authority, due
from the company at the date hereinafter mentioned and having become due and
payable within the twelve months next before that date."
It is implicit in this section that even revenues,
taxes, cesses and rates payable to the State are only recoverable from the
assets of the company. Therefore the directors cannot be personally proceeded
against in respect of revenues, taxes etc.
The learned Public
Prosecutor sought to support the judgment of the lower court on the
basis of sections 8-B(2) and 15(h) of the Madras
General Sales Tax Act, and Section 386 of the Criminal Procedure Code. I do not
think these sections have any relevancy in this
enquiry. All that section 8-B(2) says is:—
"Every person who has collected or collects any
amount by way of tax under this Act, on or after the 1st day of April, 1947,
shall pay over to the State Government within such time and in such manner as
may be prescribed, all amounts so collected by him if they are in excess of the
tax, if any, paid by him for the period during which the collections were made;
and, in default of such payment, the amounts may be recovered as if they were arrears
of land revenue."
This only contemplates
enforcement of payment of taxes by dealers, when they collect the sales taxes
from purchasers and fail to pay them to the Commercial Tax Authorities. Nor has
section 15(h) of the Madras General Sales Tax Act or section 386, Criminal
Procedure Code, any bearing on the present enquiry. Section 15(h) only directs
the Magistrate convicting a person for contravention of any of the provisions
of the Act to specify in the order that the tax or fee which such convicted person
has failed or evaded to pay or wrongfully collected shall be recoverable as if
it were a fine. That does not enable a Magistrate to give such a direction in
respect of tax which is not personally payable by a director. Section 386 of
the Criminal Procedure Code provides only the mode of collecting the fine
imposed. That also does not throw any light on the present enquiry.
For these reasons, I must
hold that the petitioner, the managing director, cannot be made personally
liable for the arrears of tax due by the company. The taxing authorities could
proceed against the assets of the company. If the tax has been collected from
the petitioner personally it will be refunded to him.
[1968] 38 COMP. CAS. 117 (
HIGH COURT OF
Ganga Metal Refining
v.
Commissioner of Income-tax
P.B. MUKHARJI AND C.N. LAIK, JJ.
AUGUST 5, 1966
D.K. De and A.K. Panja for the Applicant.
B.L. Pal and B. Gupta for the Respondent.
P.B.
Mukharji, J.—This is an Income-tax Reference under section 66(1) of the
Indian Income-tax Act. Two questions have been referred to this Court for
determination. They are as follows:—
"(1)
Whether, on the facts and circumstances of this case, the assessee was at all
entitled to set off the loss of Rs. 11,875 suffered by it on a joint venture
against its other income?
(2) If the
answer to question (1) be in the affirmative, then whether the assessee was
entitled to claim a set off of the whole of the said amount of loss against its
profits assessable for the assessment year 1959-60."
The
facts giving rise to these two questions must be recorded at the outset. The
assessee is Ganga Metal Refining Company (Private) Limited of 43,
Originally,
those articles were purchased on the 11th May, 1954, by Messrs. M. Gholam Ali
Abdul Hussein and Co., in an auction at Kharagpur for Rs. 66,000. On or about
the 31st May, 1954, the said lot was purchased at Rs. 99,900 by the assessee
and the two other said companies. Those purchases, according to the agreed
statement of facts before this Court, were made by these three companies
including the assessee in a joint venture, wherein those three companies agreed
to share the profits or losses resulting from the sale of those goods in equal
shares. The characteristic features of what are normally associated with a
partnership in the facts of this case are equal sharing of profits or losses.
It
is common ground that there was no written agreement on the basis of which this
joint venture was carried on. Therefore, the Income-tax Officer expressed the
view that in the absence of a written agreement, the joint venture could only
be treated as an unregistered firm. Once it is treated as an unregistered firm,
the Income-tax Officer necessarily followed up that conclusion by the finding
that the loss suffered by an unregistered firm can be carried forward and set
off only against the income of that unregistered firm and could not be
allocated to the partners and set off against the other incomes earned by them.
Therefore, the Income-tax Officer disallowed the loss of Rs. 11,875 which the
assessee in this case claims as a deduction for its share of loss in the joint
venture.
It
is also common ground, on the agreed statement of facts before this Court, that
of all these three companies who carried on this joint venture, one, namely,
Binani Commercial Company Private Limited, took away its own share of the goods
and that since the 6th May, 1957, the sales of the remaining goods were made on
behalf of the assessee company and the other company, namely, Binani Brothers
Private Limited.
In
fact, it is found by the Appellate Assistant Commissioner that Binani Commercial
Company Private Limited took its share of remaining goods after the sale dated
18th October, 1956, and thereafter there were only two partners, the assessee company and Binani Brothers Private Limited. The
Appellate Assistant Commissioner took the view that:
".......Even though the purchase price,
incidental expenses and sales have been apportioned amongst the partners in the
ratio of their shares in the said business, it nonetheless shows that the
business, at no stretch of imagination, can be considered as that of a joint
venture. The business was run from 31st May, 1954, to 18th April, 1958, and
mere entries in the books of- accounts in a particular way cannot make such a
business as that of a joint venture."
Finally
the Appellate Commissioner came to the following conclusion:
"Such
a business was essentially operated on by a firm of which appellant (assessee
company) was one of the partners. The said firm not being registered under
section 26A, the loss arising out to appellant from such a firm is essential
loss sustained by an
assessee from an unregistered firm and as such the same cannot be set off
against other income of the appellant."
Therefore,
the Appellate Assistant Commissioner decided that the Income-tax Officer was
right in disallowing the claim of the assessee for deduction of the said sum of
Rs. 11,875 as its share of loss in the joint venture and agreed with the
conclusion of the Income-tax Officer.
The
assessee appealed to the Tribunal. The Tribunal records and finds certain facts
which are relevant for the purpose of this reference. The Tribunal found that
the loss of these goods continued for nearly three years and there was a
systematic and organised activity with the said purposes, viz., to realise profits.
Therefore, the Tribunal holds the transactions in question to constitute an
adventure in the nature of trade. The Tribunal further points
out that it was not the assessee's case before the Tribunal that the profits
and/or losses arising from those transactions were not taxable. The
assessee's contention before the Tribunal was that this being a joint venture,
the profit or loss should be apportioned between the partners or the parties
taking part in the venture and taken to their individual assessments. It is on
that ground that the assessee claimed to set off the said sum of Rs. 11,875
from its other income as a share of loss from a joint venture.
The
Tribunal dismissed the appeal of the assessee and upheld the orders of the
Income-tax Officer and the Appellate Assistant Commissioner. The reasons which
the Tribunal gave in support of its conclusion may be briefly summarised at
this stage. The allocation sought by the assessee company in this case is
permissible only under the provisions of the Income-tax Act in case of the
partners of a firm under section 23(5) (a) and (b) of the Income-tax Act. The
joint venture was, in fact, a transaction by a partnership firm, of which the
three participating companies were the partners and that under section 3, the assessment in respect of a joint venture can only be
either in the status of a firm or in that of an association of persons. The
Tribunal expressed the opinion that it was a joint venture amounting to
business within section 2(4) of the Income Tax Act and could only be assessed
in the status either of a firm or of an association of persons. Therefore, the
Tribunal says that there is no scope in such an assessment for allocation of
the shares of the profit and/or loss of the participants in the venture and allow
it to be taken to their individual assessments.
Mr.
De appearing for the assessee has repeated these arguments before us in this
reference for his client. He has relied on a number of decisions and
authorities, to which we shall make reference at the appropriate stage. The
substance of his argument is that the same assessee must be allowed to adjust
incomes or losses appearing under different heads for its one total income that
is being assessed under the Income-tax Act. In other words, he says that this
assessee company certainly carries on business as such company and also carried
on a joint venture of the nature indicated above and if it had incurred losses
in such joint venture, it should be allowed to set off such losses against its
assessment or against its profits otherwise attributed to it in its normal
business as a company.
This
argument has an apparent force by its very simplicity. Behind its apparent
simplicity lies, however, the more dominant question, namely, whether it is the
same assessee. No doubt, if the assessee is the same, then there can be
computation under the different heads of income or revenue and then the final
striking of the balance of profits and losses for the computation of the total
income which is to be assessed but then the facts found and the agreed
statement of facts are against this contention. It was not this
assessee-company which qua the assessee and qua the company was earning this
income or making or incurring this loss. The facts found are that this was
entirely a different assessee for it was a joint venture of 3 separate
companies. The fact found also was that it was a partnership of 3 companies but
it was an unregistered firm under the Income-tax Act. Therefore, profits or
losses from this joint venture belonging to an unregistered firm or even an
association of persons under the Income-tax Act could not be adjusted against
the income of the assessee as such.
The
main reliance which Mr. De placed in support of his argument is on an
unreported judgment of the Income-tax Bench of this court of Sen J. and A.C.
Sen J. in I.T. Ref. No. 47 of 1962 under the title J.K. Alloys Ltd.,
If
we could have followed that decision, our labour would have been considerably
lightened. But Mr. Balai Pal, for the Commissioner of Income-tax, has drawn our
attention to certain distinguishing features of the present reference. In our
unreported case of I.T. Ref. No. 47 of 1962, dated 17th June, 1965, the
assessee claimed to set off not under section 24 of the Income-tax Act at all
but under section 10 of the Income-tax Act. Here the assessee's whole claim
before us in this reference is made under section 24 of the Income-tax Act.
Section 10 of the Act with which the reference in the case of Income-tax
Reference No. 47 of 1962 dated 17th June, 1965, was concerned, deals with the
tax payable by the assessee under the head "profits and gains of business,
profession or vocation" in respect of the profits or gains of any
business, profession or vocation carried on by him. Naturally, there it is the
question of the same assessee in the same status but section 24, which is the
only section with which we are concerned in this reference on the admitted
facts, introduces many other considerations and the major consideration before
us is that this joint venture was carried on by an unregistered firm of 3
companies within the meaning of the Income-tax Act. This unregistered firm is a
separate legal concept from the company as an assessee under the Income-tax
Act. The company was assessed in the status of a company. Therefore, in that
assessment it cannot be permitted to set off a loss which is not of the company
in its status as an assessee-company but in a totally different status of an
unregistered firm of which it was a partner. We are of the opinion that, while
the different heads of income of business of the same assessee can be adjusted
by a set-off, there can be no such set-off when the
assessees are different as in the present reference before us. No doubt, this
unregistered firm carrying on the joint venture, is
not found to have been assessed in this case as an assessee. But that is not
material because that unregistered firm carrying on such joint venture was
within the concept of assessee under the Income-tax Act and as such assessee in
its capacity and quality of an unregistered firm, it is distinctly different
and separate from the company in which status and capacity it has been assessed
and in which assessment it has claimed adjustment. This is really the crucial
and significant point of difference between the reference before us and the
reference in Income-tax Reference No. 47 of 1962, dated 17th June, 1965.
There
is also a second distinction, which Mr. Pal has urged before us. He formulates
that difference in this way. The venture in J. K. Alloys' case was treated
as that of an unregistered firm, but here in the reference before us, there is
the further ground that this can also be an association of persons in this
case. The decision in J.K. Alloys' case does not
discuss at all the question of association of persons within the meaning of
section 3 of the Income-tax Act. In support of this distinction, it can be said
that 3 limited companies incorporated under the Indian Companies Act, even if
they carry on a venture jointly, cannot be said to form a partnership within
the meaning of the Partnership Act. That is why the great authority of Lindley
on Partnership, 10th edition, at page 100, formulates the law thus:
"There
is no general principle of law which prevents a corporation from being a
partner with another corporation or with ordinary individuals, except the
principle that a corporation cannot lawfully employ its funds for purposes not
authorised by its constitution. Having regard,
however, to this principle, it may be considered as prima facie ultra vires for
an incorporated company to enter into partnership with other persons."
It
follows that this classical authority on the law of partnership is of the view
that prima facie a company entering into a partnership with some other person
or some other company would be ultra vires and will be against the principle
that a particular company or an incorporated body cannot lawfully employ funds
for purposes not authorised by its constitution which would be normally the
memorandum and the articles of association. This difficulty is recognised in 28
Halsbury (Simonds 3rd Edn., page 499, Article 959). It
has been pointed out there that a Corporation if so authorised by its
constitution can enter into partnership with an individual person or with
another corporation whatever may be its nationality and wherever it may be
situated. Such a partnership however would require very special articles since
many of the provisions of the Partnership Act would be difficult to apply.
In
the world of precedents one frequently comes across many mythologies growing
round certain decisions. One such decision is that of the House of Lords in
Hugh Stevenson and Sons Ltd. v. Akt. Fur Carton nagen-Industrie, which is
described in many text books and commentaries as laying down the law that a
company can be a partner with another company and two companies incorporated
can form a partnership. Scanning the speeches of the learned law Lords of the
decision I find no warrant for such a mythical proposition claimed in favour of
the decision. That point was never in issue before the House of Lords in that
case nor was it discussed nor was it decided. Therefore, following Lord Halsbury's
dictum in Quinn v. Leathern that
a case is only an authority for the proposition it decides and not for the
proposition that was either assumed or seemed to follow from such decision, we
do not think that this authority is of any help on this proposition.
On
the other hand, the decision in In re European Society Arbitration Acts : Ex parte Liquidators of the British Nation Life
Assurance Association is a more
relevant and telling authority on the proposition that we are considering. The
observations of Lord Justice James at page 704 make the law on this point
abundantly clear. It is observed there:
"The
association was formed for the purposes mentioned in article 3 of their deed of
settlement, such purposes to be carried into effect and the business to be
managed by boards of directors and by general meetings in manner there
prescribed. Prima facie there is nothing more inconsistent with the whole scope
and character of such a body than that it should enter into a contract of
partnership with any other person or persons in any other business whatever. It
would require very clear powers to enable a man's partner or partners, or, in a
joint stock company, his delegated officers, or the majority of his
co-shareholders, to make him a partner with any other person or a shareholder
in any other society. But if the society, in its quasi. corporate character, could
take shares in another partnership or body, it would in effect
be to make every shareholder a
partner or shareholder in such
partnership or body......But
in truth, the more or less similarity of
the objects, or even absolute identity of the objects, does not affect the
principle. It is the entering into a new contract of partnership with new
persons under a new constitution, which is absolutely ultra vires and void,
unless specially provided for and authorised."
There is no special
provision and authorisation in the present reference before us saying that the
assessee-company or the two other companies who were
its partners, were specially authorised by articles of association and
memorandum of association to enter into such partnership. Be it noted here that
mere implication will not help but there has to be in such a case express and
special authorisation, according to the authorities which we have just
discussed.
It will not be a digression
at this stage but an imperative necessity to bear in mind the very specific
provisions of the Partnership Act. Section 4 of the Partnership Act says that,
"'Partnership' is the relation between persons who have agreed to share
the profits of a business carried on by all or any of them acting for all.
Persons who have entered into partnership with one another are called
individually 'partners' and collectively 'a firm' and the name under which
their business is carried on is called the 'firm name'." Notionally and juristically
if two incorporated companies under the Indian Companies Act enter into a
partnership, then each company becomes agent for the other and agrees to share
the profits. This will create many problems for the two incorporated companies.
The two companies will have to be, therefore, agents for each other in a manner
which may not be permissible at all by their own charters, articles and
memorandum. It would be difficult to apply the very specific rights and
obligations as between partners in the case of companies as partners such as in
Chapter III (sections 9 to 17), Chapter IV (sections 18 to 30), and Chapter VI
(sections 39 to 55) of the Partnership Act. Then there is need also for the
registration of firms and the companies as such partners in a partnership will
have to, therefore, obey two masters, the Registrar of Firms and Registrar of
Companies. The access of each partner to the other partner's books of accounts
will mean that one incorporated company would be entitled to get into the
fields of the accounts of the other incorporated company which is its partner.
This will make nonsense of the Companies Act. Strangers then will have access
to the books, accounts and papers of the companies, whereas under the Companies
Act, they are only limited to their own members and shareholders.
Therefore, the regular
concept of partnership under the Partnership Act cannot really be applied to
say that an incorporated company under the Companies Act can enter into a partnership with another
incorporated company in the regular and technical sense. No doubt, there could
be such partnership in the loose sense of the term between two incorporated
companies for the purpose of the Income-tax Act. Instances are not rare and
that has been so here. For instance, the Supreme Court decision in Steel
Brothers and Co. Ltd. v. Commissioner of Income-tax There it is
held that a relationship brought into existence by agreement between 3
companies, A, B and C, was a relationship between partners and that the
partnership consisted of these 3 partners, A, B and C, but because the deed of
partnership did not specify their respective shares and as the application for
registration under section 26A was not signed by all the 3 companies, the
partnership was not entitled to registration under that section. That decision
has to be understood in relation to partnership of firms or registration of
firms under the Income-tax Act and not under the formal concepts of the Indian
Partnership Act or under the Indian Companies Act.
It
will be convenient here at this stage to refer to some of the cases cited at
the Bar. In Ravula Subba Rao v. Commissioner of Income-tax, it is laid
down that it is the intention of the Income-tax Act that a firm should be given
the benefit of section 23(5)(a) only if it is
registered under section 26A of the Income-tax Act in accordance with the
conditions laid down in that sectidn and the rules framed thereunder. And as
the rules required the application to be signed by the partner in person, the
signature by an agent on his behalf was held to be invalid. The principle we
have just indicated was clearly mentioned by the Supreme Court at page 171 of
the Report (Income-Tax Reports) where the following observations appear:
"Under
the common law of
The
entity known as a partnership under the Income-tax Act is not the same entity
of partnership strictly within the limits of the Indian Partnership Act.
We
may notice here a few more of the authorities cited at the bar. In the case of
Arunachalam Chettiar v. Commissioner of Income-tax, the Privy
Council had occasion to discuss this very point of the income-tax entity of a
partnership under the Income-tax Act as will be clear from the observations of
Sir George Rankin delivering the judgment of the Privy Council at pages 178 and
179 of the report (Income Tax Reports). There the Privy Council expressed the
view at pages 179 of Income Tax Reports.
"In
their Lordships' opinion whether a firm is registered or unregistered,
partnership does not obstruct or defeat the right of a partner to an adjustment
on account of his share of loss in the firm, whether the set off be against
other profits under the same head of income within the meaning of section 6 of
the Act or under a different head [in which case only need recourse be had to
section 24(1)]."
It
is therefore essential always to keep clear in the mind that the income-tax
entity of partnership under the Income-tax Act is a concept in income-tax law
separate from the concept of partnership under the Partnership Act. Income-tax
entity of partnership under Income-tax Act may not satisfy the legal
requirements of a partnership within the strict meaning of the Partnership Act.
The
Supreme Court in Seth Jamnadas Daga v. Commissioner of Income-tax, had
occasion to discuss this problem in the context of an assessee who was a
partner in two registered firms and an unregistered firm. The question,
therefore, arose if the assessee could carry forward loss of the registered
firms in the subsequent year or years. Hidayatullah J., who delivered the
judgment of the Supreme Court at page 635 of Income Tax Reports, expressly
makes this point clear by the following observations:
"The
High Court, however, held, that once losses were set
off against profits, they were to that extent absorbed, and that there was
nothing to carry forward. In our opinion this conclusion does not follow.
Section 24 provides for a different situation altogether ; it provides for the
carrying forward of a loss in business to the subsequent year or years till the
loss is absorbed in profits, or till it cannot be carried forward any further.
That has little to do with the manner in which the total income of an assessee
has to be determined for the purpose of finding out the rate applicable to his
income, taxable in the year of assessment."
The
Supreme Court although it confirmed the decision of the High Court on the main
issue held that the High Court was in error in deciding that the losses of the
registered firms could not be carried forward because they had been absorbed by
the profits of the unregistered firm.
The
Supreme Court case however was concerned with section 14(2) read with section
16(1)(a) and section 3 of the Income-tax Act.
The
point of set-off again came up for discussion before the Supreme Court in
Commissioner of Income-tax v. P.M. Muthuraman Chettiar. S. K. Das
J., delivering judgment of the Supreme Court expounded the principle at pages
713-14 of that report (Income Tax Reports) in the following terms:
"It
is worthy of note that though the profits of each distinct business may have to
be computed separately, the tax is chargeable under section 10, not on the
separate income of every distinct business, but on the aggregate of the profits
of all the businesses carried on by the assessee. It follows from this that
where the assessee carries on several businesses, he
is entitled under section 10, and not under section 24(1), to set off losses in
one business against profits in another. If as we hold that section 24(1) has
no application to the facts of the present cases, the second proviso thereto
can also have no application. Moreover, the second proviso to section 24(1)
applies only where the assessee is an unregistered firm. That is not the case
here. The assessees before us are, in one case, a Hindu undivided family and,
in the other, an individual. It is obvious, therefore, that the second proviso
to section 24(1) can have no application in these cases."
It
follows from this observation and on a parity of reasoning that if on the facts
of this reference the joint venture between the assessee and two other limited
companies was not the income-tax entity of an unregistered firm or partnership
under the Income-tax Act then in that case these three limited companies could
only be regarded as an association of persons under section 3 of the Income-tax
Act and in which event section 24(1) would not be applicable.
It
is essential to point out that set-off can be regarded both on general
principles as well as on the terms of any special statute or legislation. The
general principles of set-off are inherent in every accounting of the same
assessee. Such general principles of set-off are, what the Supreme Court said,
applicable where the assessee carries on several businesses so that under
section 10 of the Income-tax Act he is entitled to set off losses in one
business against the profit in another in computing the total income of the
same assessee. That is the reason why the Supreme Court in this case expressly
said that this set-off was not a set-off under section 24(1) when the assessees
are not the same. In the present reference before us also the assessee-company
is not the same as the assessee in the joint venture which was either an
unregistered firm or an association of persons. In either event, it is not the
same assessee and therefore on such general principles set-off cannot be permitted.
Again, set-off may be the creature of a statute, as indeed it is, for instance,
under section 24 of the Income-tax Act, specially and
expressly providing for a set-off of loss in computing aggregate income.
The
Andhra Pradesh High Court, in Commissioner of Income-tax v. Vakati Sanjeeva
Setty,
came to the conclusion that an assessee who was a partner in a registered firm
is entitled in his assessment as an individual to have the loss incurred by him
as a partner of the firm set off against his income, even though the firm has
not been assessed to tax.
In
a recent case of the Commissioner of Income-tax v. Jadavji Narsidas and Co., the
Supreme Court had again to consider this point and came to the conclusion that
the loss on the facts of that case could not be set off against the income of
the assessee-firm on the ground that the losses of the unregistered firm could
only be set off against the income of the unregistered firm and it made no
difference that the department had not assessed the unregistered firm or taken
action under section 23(5)(b). The point is made clear there in the
observations of Hidayatullah J., delivering the majority judgment at pages
47-49 of Income Tax Reports.
In
a recent decision of the Bombay High Court in Commissioner of Income-tax v.
Jagannath Narsingdas, the point
is clearly indicated and decided by Desai J., that section 24 has no
application where the set-off is not of loss under one head of income against
profits under another head but it is a case of adjustment and set-off between
profits and losses under the same head and that the adjustment of profits and
losses under the head of business is to be done not under section 24 but under
section 10 of the Income-tax Act.
In
this view of the matter, we hold that the assessee is not entitled to set off
against its other income the loss of Rs. 11,875 suffered by it in its joint
venture with two other limited companies. We accordingly answer the first
question in the negative. Having regard to this answer, question No. 2 does not
arise for determination and we do not propose to express any opinion thereon.
We need only record that the assessee's counsel's statement before the Tribunal
that in the assessment of Binani Brothers Private Ltd., and Binani Commercial
Company Private Limited, the losses from this joint venture have been allowed
as a set-off and which was mentioned by the Tribunal, was a wrong statement by
the learned counsel and the original records of assessment of Binani Brothers
Private Limited, Calcutta, were produced before the court to show that the
statement was wrong. That fact may be recorded.
There
will be no order as to costs.
LAIK J.— I agree.
[1986] 59 COMP. CAS. 548 (SC)
Life Insurance Corporation of
v.
Escorts Ltd.
CIVIL APPEALS NOS. 4598 OF 1984 AND 497 TO 499 OF 1985.
DECEMBER 19, 1985
K. Parasaran, M.K.
Banerji, V.C. Kotwal, Shardal S. Shroff, Mrs. Pallavi S. Shroff, Cyril S. Shroff,
Amit Desai, Sasi Prabhu, Ms. Prema Baxi and Suresh A. Shroff, the Appellant.
F.S. Nariman, Soli J.
Sorabjee, K.E. Venugopal, Anil B. Divan, O.P. Malhotra, R.F. Nariman, A.
Chinoy, B.H. Antia, J.B. Dadachanji, Ravinder Narain, S.C. Mathur, Rajive Sawhney,
Harish Salve, T.M. Ansari, Mrs. A.K. Verma, S.K. Mishra and Jool Pores, A.N.
Ganguli, S.C. Maheshwari and H.S. Parihar, Mahendra Shah, and A. Subba Rao, for
the Respondent.
Chinnappa Reddy, J.—Problems of high finance and broad fiscal policy, which
truly are not and cannot be the province of the court for the very simple
reason that we lack the necessary expertise and, which, in any case, are none
of our business, are sought to be transformed into questions involving broad
legal principles in order to make them the concern of the court. Similarly,
what may be called the "political" processes of "corporate
democracy" are sought to be subjected to investigation by us by invoking
the principle of the rule of law, with emphasis on the rule against arbitrary
State action. An expose of the facts of the present case will reveal how much
legal ingenuity may achieve by way of persuading courts, ingenuously, to treat
the variegated problems of the world of finance, as litigable
public-right-questions. Courts of justice are well-tuned to distress signals
against arbitrary action. So, corporate giants do not hesitate to rush to us
with cries for justice. The court room becomes their battle ground and
corporate battles are fought under the attractive banners of justice, fair play
and the public interest. We do not deny the right of corporate giants to seek
our aid as well as any Lilliputian farm labourer or pavement dweller though we
certainly would prefer to devote more of our time and attention to the latter.
We recognise that out of the dust of the battles of giants occasionally emerge
some new principles, worth the while. That is how the law has been progressing
until recently. But not so now. Public interest
litigation and public-assisted litigation are today taking over many unexplored
fields and the dumb are finding their voice.
In the case before us, as
if to befit the might of the financial giants involved, innumerable documents
were filed in the High Court, a truly mountainous record was built up running
to several thousand pages and more have been added in this court. Indeed, and
there was no way out, we also had the advantage of listening to learned and
long drawn-out, intelligent and often ingenious arguments advanced and
dutifully heard by us. In the name of justice, we paid due homage to the causes
of the high and mighty by devoting precious time to them, reduced, as we were,
at times to the position of helpless spectators. Such is the nature of our
judicial process that we do this with the knowledge that more worthy causes of
lesser men who have been long waiting in the queue have been blocked thereby
and the queue has consequently lengthened. Perhaps the time is ripe for
imposing a time limit on the length of submissions and a page-limit on the length
of judgments. The time is probably ripe for insistence on brief written
submissions backed by short and time-bound oral submissions. The time is
certainly ripe for brief and modest arguments and concise and chaste judgments.
In this very case, we heard arguments for 28 days and our judgment runs to 181
pages and both could have been much shortened. We hope that we are not hoping
in vain that the vicious circle will soon break and that this will be the last
of such mammoth cases. We are doing our best to disentangle the system from a
situation into which it has been forced over the years by the existing
procedures. There is now a public realisation of the growing weight of the
judicial burden. The co-operation of the bar too is forthcoming though in slow
measure. Drastic solutions are necessary. We will find them and we do hope to
achieve results sooner than expected. So much for
sanctimonious sermonising and now back to our case.
We do not for a moment
doubt that this is a case which requires our scrutiny, more particularly so
because of a most singular and remarkable feature of the case, namely, the
absence of the principal dramatis personae from the stage. Mr. Swraj Paul, the
hero of the drama, did not appear before the High Court and did not appear before
us ; nor did his broker and his power of attorney
holder, Raja Ram Bhasin & Co. Though the investments made and in question
run into several crores of rupees, they have acted as if they care a tuppence
for them. Obviously, Mr. Swraj Paul, a foreign national, does not want to
submit himself to the jurisdiction of Indian courts and his broker, Raja Ram
Bhasin & Co., has nothing to lose by keeping away from the court and
perhaps everything to gain by standing by the side of his principal. These may be
excellant reasons for them for not choosing to appear before us, but their
non-appearance and abstemious silence in court have certainly complicated the
case and embarrassed the Government of India, the Reserve Bank of India and the
Life Insurance Corporation of India to whose lot it fell to defend the case
since it was their policies, decisions and actions that were assailed. We must,
however, express our strong condemnation of the conduct and tactics employed by
Swraj Paul and Raja Ram Bhasin which we consider deplorable. The Punjab
National Bank, the designated bank of Mr. Swraj Paul's companies, did appear
before us but their appearance was of no assistance to the court. They had put
themselves in such a hapless situation. It was apparent to us from the beginning
that if there was much front-line battle strategy, there was considerably more
back stage "diplomatic" manoeuvring, as may be expected when
financial giants clash, though we are afraid neither giant was greatly
concerned for justice or the public interest. For both of them, the court room
was just another arena for their war, except that one of the giants carefully
kept himself at the back behind a screen as it were. One was
reminded of the Mahabharata war where Arjuna kept Shikhandi in front of
him while fighting Bhishma, not that neither of the warriors in this case can
be compared with Bhishma or Arjuna nor can the Government of India and Reserve
Bank of
The present state of Indian
economy which has to operate under the existing world economic system is such
that
"Foreign
exchange" is defined by section 2(h) of the Act to mean foreign currency
and includes—
"(i) all deposits, credits and balances
payable in any foreign currency and any drafts, traveller's cheques, letters of
credit and bills of exchange, expressed or drawn in Indian currency but payable
in any foreign currency;
(ii) any instrument payable, at the
option of the drawee or holder thereof or any other party thereto, either in
Indian currency or in foreign currency or partly in one and partly in the
other."
"Authorised
dealer" is defined by section 2(b) to mean a person for the time being
authorised under section 6 to deal in foreign exchange.
"Owner" is
defined by section 2(o), in relation to any security, as including—
"any person who has
power to sell or transfer the security, or who has the custody thereof or who
receives, whether on his own behalf or on behalf of any other person, dividends
or interest thereon, and who has any interest therein, and in a case where any
security is held on any trust or dividends or interest thereon are paid into a
trust fund, also includes any trustee or any person entitled to enforce the
performance of the trust or to revoke or vary, with or without the consent of
any other person, the trust or any terms thereof, or to control the investment
of the trust moneys."
Section 3 provides for the
establishment of a Directorate of Enforcement consisting of a Director of Enforcement
and other officers.
Section 6(1) enables the
Reserve Bank on an application made to it, to authorise any person to deal in
foreign exchange. Section 6(2) prescribes what may be authorised and section
6(4) and section 6(5) prescribe the duties of the authorised dealer.
Section 8(1) provides that,
except with the previous general or special permission of the Reserve Bank, no
person other than the authorised dealer shall deal in foreign exchange. Section
8(2) provides that except with the previous general or special permission of
the Reserve Bank, no person shall enter into any transaction which provides for
the conversion of Indian currency into foreign currency or foreign currency
into Indian currency at rates of exchange other than those authorised by the
Reserve Bank.
Section 13(1) prescribes
that subject to such exemption as may be specified, no person shall, except
with the general or special permission of the Reserve Bank, bring or send into
Section
19(1)(b) provides that no person shall, except with
the general or special permission of the Reserve Bank of
Section
19(4) and (5), which are relevant for our purpose, are as follows:
"(4)
Notwithstanding anything contained in any other law, no person shall, except
with the permission of the Reserve Bank,—
(a) enter any transfer of securities in
any register or book in which securities are registered or inscribed if he has
any ground for suspecting that the transfer involves any contravention of the
provisions of this sec tion, or
(b) enter in any such register or book, in
respect of any security, whether in connection with the issue or transfer of
the security or other wise, an address outside India except by way of
substitution for any such address in the same country or for the purpose of any
transaction for which permission has been granted under this section with knowledge
that it involves entry of the said address, or
(c) transfer any share from a register outside
(5)
Notwithstanding anything contained in any other law, no transfer of any share
of a company registered in India made by a person resident outside India or by
a national of a foreign State to another person whether resident in India or
outside India shall be valid unless such transfer is confirmed by the Reserve
Bank on an application made to it in this behalf by the transferor or the
transferee."
Section
29(1), which is also relevant for the purposes of this case, is as follows :
"29(1)
Without prejudice to the provisions of section 28 and section 47 and
notwithstanding anything contained in any other provision of this Act or the
provisions of the Companies Act, 1956, a person resident outside India (whether
a citizen of India or not) or a person who is not a citizen of India but is
resident in India, or a company (other than a banking company) which is not
incorporated under any law in force in India or in which the non-resident
interest is more than forty per cent, or any branch of such company, shall not,
except with the general or special permission of the Reserve Bank—
(a) carry on in India, or establish in
India a branch, office or other place of business for carrying on any activity
of a trading, commercial or industrial nature, other than an activity, for the
carrying on of which permission of the Reserve Bank has been obtained under
section 28 ; or
(b) acquire the
whole or any part of any undertaking in
Section
29(2) makes provision for applying for permission to continue after the
commencement of the Act any activity of the nature mentioned in clause (a) of
section 29(1) which was being carried on at the commencement of the Act, while
section 29(4) makes similar provision for applying for permission to continue
to hold after the commencement of the Act shares of a company referred to in
section 29(1)(b) which were held by a person at the commencement of the Act.
Section
30 prescribes that no national of a foreign State shall, without the previous
permission of the Reserve Bank—
(i) take up any employment in
(ii) practise any profession or carry on any occupation, trade or
business in
Section
31 prohibits any person, who is not a citizen of India or a company not
incorporated in India or in which the non-resident interest is more than 40 per
cent., from acquiring or holding or transferring or disposing of by sale,
mortgage, lease, gift, settlement or otherwise any immovable property situate
in India, except with the previous general or special permission of the Reserve
Bank.
Section
47 deals with contracts in evasion of the Act. Section 47(1) prohibits any
person from entering into a contract or agreement which would directly or
indirectly evade or avoid in any way the operation of any provision of the Act
or of any rule, direction or order made thereunder. Section 47(2) provides that
any provision of the Act requiring that a thing shall not be done without the
permission of the Central Government or the Reserve Bank of India, shall not
render invalid any agreement to do that thing, if it is a term of the agreement
that that thing shall not be done unless permission is granted. Where such a
term is not explicit, it is to be implied in every contract. Section 47(3)
further provides that, subject to certain specified conditions, legal
proceedings may be instituted to recover any sum which would be due, apart from
and despite the provisions of the Act or any term of the contract requiring the
permission of the Central Government or the Reserve Bank of
Section
50 prescribes the levy of a penalty if any person contravenes any of the
provisions of the Act except certain enumerated provisions and the adjudication is to be made by the Director of Enforcement
or an Officer not below the rank of an Assistant Director of Enforcement,
specially empowered in that behalf. Section 51 provides for an enquiry and the
power to adjudicate. Section 52 provides for an appeal to the Appellate Board
and section 54 for a further appeal to the High Court on questions of law. Section
56 provides for prosecutions, for contraventions of the provisions of the Act
and the rules, and directions or orders made thereunder. Section 57 makes the
failure to pay the penalty imposed by the adjudicating officer or the Appellate
Board or the High Court or the failure to comply with any directions issued by
those authorities, an offence punishable with imprisonment. Section 59
prescribes a presumption of mensrea in prosecutions under the Act and throws
upon the accused the burden of proving that he had no culpable mental state
with respect to the act charged in the prosecution. Section 61 provides for
cognizance of offences. Section 61(2)(ii) obliges the
court not to take cognizance of any offence punishable under section 56 or 57
except upon a complaint made in writing by (a) the Director of Enforcement; or
(b) any officer authorised in writing in this behalf by the Director of
Enforcement or the Central Government; or (c) any officer of the Reserve Bank
authorised by the Reserve Bank by a general or special order. The proviso to
this provision enjoins that no complaint shall be made for the contravention of
any of the provisions of the Act, rule, direction or order made thereunder
which prohibits the doing of an act without permission, unless the person
accused of the offence has been given an opportunity of showing that he had
such permission. Section 63 empowers the adjudicating officer adjudging any
contravention under section 51 and any court trying a contravention under
section 56, if he or it thinks it fit to direct the confiscation of any
currency, security or any other money or property in respect of which the
contravention has taken place.
Section 67 treats the
restrictions imposed by sections 13, 18(1)(a) and
19(1)(a) as restrictions under section 11 of the Customs Act and makes all the
provisions of the Customs Act applicable accordingly.
Section 71(1) lays the
burden of proving that he had the requisite permission for prosecuting or for
proceeding against for contravening any of the provisions of the Act or rule or
direction or order made there under which prohibits him from doing an act
without permission.
Section 73(3) enables the
Reserve Bank of India to "give directions in regard to the making of
payments and the doing of other acts by bankers, authorised dealers,
money-changers, stock brokers, persons referred to in sub-section (1) of
section 32 or other persons, who are authorised by the Reserve Bank to do
anything in pursuance of this Act in the course of their business, as appear to
it to be necessary or expedient for the purpose of securing compliance with the
provisions of this Act and of any rules, directions or orders made
thereunder."
Section 75 enables the
Central Government to give and the Reserve Bank to comply with general or
special directions as the former may think fit.
Section 76 requires the
Central Government or the Reserve Bank, while giving or granting any permission
or licence under the Act, to have regard to all or any of the following
factors, namely,
(i) conservation of the foreign exchange resources of the
country;
(ii) all foreign exchange accruing to the country is properly
accounted for;
(iii) the foreign
exchange resources of the country are utilised as best to subserve the common
good; and
(iv) such other relevant factors as the circumstances of the case
may require.
Section 79 invests the
Central Government with the power generally to make rules and in particular for
various specified purposes.
In exercise of the powers
conferred by section 79 of the FERA, rules called "the Non-Resident
(External) Account Rules, 1970" have been made. Rule 3 enables, subject to
the provisions of the rules, any person resident outside
The Exchange Control Manual
s published by the Reserve Bank of
"...Investment in
Paragrah 24.1(ii), however,
states:
"Foreign investment in
India is also subject to regulation through the various provisions in the
Foreign Exchange Regulation Act, 1973, viz., section 19, governing issue and
transfer of securities in favour of nonresidents, section 29 g0verning
establishment of a place of business by nonresidents for carrying on trading,
commercial or industrial activity or acquiring such an undertaking or shares in
such companies in India and section 31 governing acquisition, disposal, etc.,
of immovable property in India. But once foreign investment is permitted by Government
under its foreign investment and industrial policy, requisite permissions under
the relative sections of the Foreign Exchange Regulation Act, 1973, are more or
less automatically issued."
Paragraph 24A.1 provides:
"In terms of section
29(1)(b) of the Foreign Exchange Regulation Act, 1973,
no person resident outside
Paragraph 28A.4(i) states :
"Authorised dealers
may freely open Non-Resident (External) Accounts in the names of individuals of
Indian nationality or origin, resident outside India, provided funds for the
purpose are transferred to India in an approved manner from country of
residence of the prospective account holder or from any other foreign country
if the country of residence of the account holder and the country from which
remittance is received are both in external group."
Paragraph 28A.4(iii), however, prescribes that firms, companies and
other corporate bodies as well as institutions and organisations resident
abroad are not eligible to open Non-Resident (External) Accounts in
With a view to earn foreign
exchange by attracting non-resident individuals of Indian nationality or origin
to invest in shares of Indian companies, the Government of India decided to
provide incentives to such individuals and formulated a "portfolio
investment scheme" for investment by non-residents of Indian nationality
or origin. This scheme, announced by the Government on February 27, 1982, was
incorporated in Circular No. 9, dated April 14, 1982, of the Reserve Bank of
Applications from those
entities for permission to designated banks for investments with repatriation
benefits are required to submit form RPC to the Controller, Exchange Control
Department, Reserve Bank of
Circular No. 9 was followed
by Circular No. 10, dated April 22, 1982, from the Reserve Bank to all
authorised dealers in foreign exchange. The purpose of the circular was to
ensure that the overseas companies, partnership firms, societies, other
corporate bodies and overseas trusts to whom the benefits of the investment
scheme formulated by Circular No. 9 were extended are owned to the extent of at
least 60 per cent, by non-residents of Indian nationality/origin or in which at
least 60 per cent, of the beneficial interest (in the case of trusts) is
irrevocably held by such persons. "In order to ensure that the ownership
interest in the overseas company/ firm/society or the irrevocable beneficial
interest in the trust held by persons of Indian nationality/origin is not less
than 60 per cent., authorised dealers are required to obtain, along with the
account opening form, a certificate from an Overseas Auditor/Chartered Accountant/Certified
Public Accountant in Form OAC enclosed with A. D. (M.A. series) Circular No. 9
of 1982." "The account holder is further required to submit such a
certificate to the authorised dealer on an annual basis so as to ensure that the
ownership/beneficial interest of the above persons continues
to be at or above the level of 60 per cent."
By Circular No. 15, dated
August 28, 1982, the Reserve Bank partially relaxed Circular No. 9, dated April
14, 1982, by removing the monetary limit of Rs. 1 lakh on portfolio investment
in shares on repatriation basis. However, the limit of one per cent, of the
paid-up capital of the company was retained.
By Circular No. 27, dated
December 10, 1982, it was prescribed :
"Where permission is
granted by the Reserve Bank for purchase/sale of shares/debentures on stock
exchange in
On May 16, 1983, the
Reserve Bank clarified and modified the "Nonresidents of Indian
Nationality/Origin Portfolio Investment Scheme" in the following manner :
Referring to Circular No. 9 which extended portfolio scheme to overseas companies,
partnership firms, societies and other corporate bodies which were owned to the
extent of at least 60 per cent, by non-residents of Indian nationality/origin
and to overseas trusts in which at least 60 per cent, of the beneficial
interest was irrevocably held by such persons, Circular No. 12, dated May 16,
1983, imposed an overall ceiling of (i) 5 per cent, of the total paid-up equity
capital of the company concerned, and (ii) 5 per cent, of the total paid-up
value of each series of the convertitle debentures issue, as the case may be.
For the purpose of determining and monitoring the 5 per cent, ceiling, the
cut-off date was prescribed as May 2, 1983, the date on which the policy was
announced in Parliament. It was made clear that purchase of equity shares and
convertible debentures in excess of 5 per cent would require prior and specific
approval of the Reserve Bank. The procedure for making applications for
permission was prescribed and it was further provided that where investment in
excess of the 5 per cent, ceiling is to be made on behalf of the nonresident
investor who has not submitted any application to the Reserve Bank earlier in
the prescribed form, the initial application for such investments should be
made in the appropriate form giving details of the equity shares/convertible
debentures to be purchased. Paragraph 3 of Circular No. 12 prescribed the
procedure for monitoring the ceiling of 5 per cent. Authorised dealers through
their link offices were required to submit to the Reserve Bank a consolidated
statement of the total purchases and sales (company wise) of equity
shares/convertible debentures made by their designated branches. The daily
statements were to be serially numbered and submitted to the Controller
positively on the following working day. It was further provided" all
purchases and sale transactions for which a firm commitment has been made to
acquire or transfer equity shares/convertible debentures in the form of the
broker's contract notes issued by recognised stock exchange brokers should be
included in the daily statement irrespective of whether the actual deliveries
have been effected or not. "It was further provided that with a view to
effectively monitor the 5 per cent, ceiling, the Reserve Bank would, as soon as
the aggregate reached the limit of 4 per cent., notify the fact to the link
offices of the authorised dealers in
On September 19, 1983,
another circular (18) was issued by the Reserve Bank of India advising all
authorised dealers in foreign exchange that the facilities made available to
the overseas companies, etc., by Circular No. 9 dated April 14, 1982, were also
available where such overseas bodies were owned even indirectly to the extent
of at least 60 per cent, by such nonresidents of Indian nationality/origin.
What was necessary was that the ultimate ownership of beneficial interest in
the overseas bodies to the extent of at least 60 per cent,
must be in the hands of one or more nonresident individuals of Indian
nationality/origin.
The net result of all the
circulars was that non-resident individuals of Indian nationality/origin as
well as overseas companies, partnership firms, societies, trusts and other
corporate bodies which were owned by or in which the beneficial interest vested
in non-resident individuals of Indian nationality/origin to the extent of not
less than 60 per cent, were entitled to invest, on a repatriation basis, in the
shares of Indian companies to the extent of one per cent, of the paid-up equity
capital of such Indian company provided that the aggregate of such portfolio investment
did not exceed the ceiling of 5 per cent. It was immaterial whether the
investment was made directly or indirectly. What was essential was that 60 per
cent, of the ownership or the beneficial interest should be in the hands of
non-resident individuals of Indian nationality/origin. Curiously enough though
a limit of one per cent, was imposed on the
acquisition of shares by each investor, there was no restriction on the
acquisition of shares to the extent of one per cent, separately by each individual
member of the same family or by each individual company of the same family
(group) of companies. In the absence of any such restriction, any non-resident
determined to destabilise an Indian company could do so by forming a
combination of different individuals and companies each of whom could
separately obtain permission to purchase one per cent, of the shares of an
Indian company. The authority authorised to grant permission could not, for
example, refuse to grant permission to B who has applied for permission in his
own right on the mere ground that permission has been granted to his father; A.
Similarly, permission could not be refused to company, C, in which D, a
non-resident Indian, owns 20 per cent, of the shares and E, another
non-resident Indian, owns 40 per cent, of the shares on the ground that
company, L, in which D owns 60 per cent, of the shares has already been granted
permission. Would it make any difference if D owns 60 per cent, of the shares
in both companies, C and L ? One can well imagine half
a dozen overseas companies in which a dozen non-resident individuals of Indian
origin hold shares in varying proportions but holding in the aggregate more
than 60 per cent, of the shares of the overseas companies applying for
permission to purchase shares in an Indian company. Could permission be refused
to them ? Is the Reserve Bank to concern itself with
the individual identity of the shareholders of the overseas companies or the
nationality or origin of the shareholders ? Is the
Reserve Bank to concern itself only with the colour of the skin, as it were,
and not with the personality of the shareholder of overseas company
? We will revert to this question later. Obviously, the one per cent,
rule was introduced to prevent large scale acquisition of shares of Indian
companies by non-residents and their possible destabilisation. Also, obviously,
the rule was a futile exercise as it was incapable of yielding the desired
result. Quite obviously, therefore, a better solution had to be found and it
was found by the " aggregate of 5 per cent.
" rule. This would automatically limit the total outside holdings and
effectively prevent destabilisation. Of course, it would still be necessary to
satisfy the requirements of the Foreign Exchange Regulation Act, more particularly
the requirement of section 29 of the Act providing for the general or special
permission of the Reserve Bank to purchase the shares in
Two of the principal
questions argued before us were whether the permission contemplated by section
29 was previous permission or whether the permission could be granted ex post
facto and whether the purchase of the shares by the foreign investor of Indian
nationality/origin in this case involved any contravention of the FERA or the
Non-Residents' Investment Scheme. To appreciate how the questions arise, it is
necessary to state here a few facts.
Desiring to take advantage
of the Non-resident Portfolio Investment Scheme and to invest in the shares of
Escorts Ltd., an Indian company, thirteen overseas companies, twelve out of
whose shares were owned 100 per cent, and the thirteenth out of whose shares
was owned 98 per cent, by Caparo Group Ltd., designated the Punjab National
Bank as their banker (authorised dealer) and M/s. Raja Ram Bhasin & Co. as
their brokers for the purpose of such investment. It must be mentioned here
that 61.6 per cent, of shares of Caparo Group Ltd. are held by the Swraj Paul
Family Trust, one hundred per cent, of whose beneficiaries are one Swraj Paul
and the members of his family, all non-resident individuals of Indian origin.
Their designated banker, the Punjab National Bank, E.C.E. House Branch, by
their letter dated March 4, 1983, but despatched on March 9, 1983, and by
another letter dated March 12, 1983, addressed the Controller, Reserve Bank of
India, Exchange Control Department, and requested the Reserve Bank to accord
their approval for opening Non-resident External Accounts in the name of each
of thirteen companies, three named in the first letter and ten named in the
second letter, for the purpose of "conducting investment operations in
India" through the agency of Raja Ram Bhasin and Co., Investment Advisor,
Member of the Delhi Stock & Share Department, Delhi. These letters were
received by the addressee on March 14 and 18. It was mentioned in the letters
that the proposed accounts would be "effected"
by remittances from abroad through normal banking channels and debits and
credits would be allowed only in terms of the scheme contained in the scheme
for investment by non-residents. The first letter was in respect of (1) Caparo
Tea Co. Ltd., U. K., (2) Empire Plantation and Investment Ltd., U.K., and (3)
Assam Frontier Tea Holding PLC, U.K., while the second letter was in regard to
(1) Caparo Investments Ltd., (2) Caparo Properties Ltd., (3) Steel Sales Ltd.,
(4) Atlantic Merchants Ltd., (5) Buchanam Ltd., (6) Seymour Shipping Ltd., (7)
Caparo Group Ltd., (8) Natural Gas Tube Ltd., (9) Single Holdings Ltd. and (10)
Deborne Hotel Turkey Ltd. Forms RPC signed by each of the companies and forms
OAC signed by the auditors of the companies accompanied the two letters. Each
form RPC mentioned that the company was incorporated in
We would like to mention at
this juncture that the letters dated March 4, March 12, and April 23, 1983, as
well as all other subsequent letters written by the Punjab National Bank, E. C.
E. House Branch, to the Reserve Bank are totally silent about a remittance of
£1,30,000 equivalent to Rs. 19,63,000 made by Mr. Swraj Paul to the Punjab
National Bank, Parliament Street Branch, on January 28, 1983, for the purpose
of opening an NRE account in the name of Mr. Swraj Paul. The remittance was
said to have been made pursuant to the discussion of Mr. Swraj Paul with the
chairman of the Punjab National Bank. We have no information as to what those
instructions were. We are told that the cable and the letter relating to the
remittance were handed over to the judges across the bar when the writ petition
was being argued in the High Court. We may further mention here that on January
26, 1983, three of the Caparo companies, namely, Assam Frontier Tea Holding
Public Ltd. Co., Caparo Tea Co. Ltd. and Empire Plantations and Investment
Ltd., addressed three identical letters to Raja Ram Bhasin & Co.
instructing the broker to purchase equity shares of Delhi Cloth Mills Ltd. at
the best market price on a repatriation basis. Each letter mentioned that a
letter addressed to the Punjab National Bank,
The statements filed by
Raja Ram Bhasin & Co. show that prior to March 9, 1983, the date of the
first remittance as disclosed by the Punjab National Bank to the Reserve Bank,
Raja Ram Bhasin & Co. had purchased shares of Escorts Ltd., worth Rs.
33,40,865, from Mangla & Co. We have already mentioned that according to
the correspondence which passed between the Punjab National Bank and the
Reserve Bank, the remittances were made on March 9, 1983, March 24, 1983, April
12, 1983, April 15, 1983, April 28, 1983, and April 28, 1984. In the
correspondence, there is no mention of any remittance having been made prior to
March 9, 1983. We may also notice here that the letter dated March 4, 1983,
from the Punjab National Bank seeking permission for investment in shares by
three of the Caparo Group of companies was actually despatched on 9th and
received by the Reserve Bank on March 14, 1983 only, while the letter dated
March 12, 1983, seeking permission on behalf of the remaining Caparo Group of
companies was received by the Reserve Bank on March 18, 1983. The statements of
purchases of shares made by Raja Ram Bhasin & Co. show that even by March
14, 1983, shares of Escorts Ltd. worth Rs. 3,85,920 had been purchased from
Bharat Bhushan & Co. and shares worth Rs. 45,81,677 had been purchased from
Mangla & Co. Based on the circumstance that shares appeared to have been
purchased even before remittances were received, a seemingly serious complaint
has been made that rupee funds must have been freely used to purchase shares
for the Caparo Group under the Non-Resident Investment Scheme. We do not think
that there is any genuine basis for the complaint. Payments, under the Stock
Exchange Rules, may be made within two weeks after the purchases contracted
for. In the present case, the remittances from abroad started coming in less
than two weeks after the first purchase and there would have been no difficulty
in making payments out of foreign remittances.
The Reserve Bank of India,
having been approached for permission to purchase shares on behalf of the
thirteen Caparo Group of companies by the letters of March 4 and 12, 1983,
wrote to the Punjab National Bank on April 29, 1983, seeking information
regarding "the exact percentage of holding of (i) Mr. Swraj Paul and other
non-resident individuals of Indian origin, (ii) family trusts, and (iii) others
separately in respect of each of the thirteen companies." Information was
also sought as to whether any shares of Indian companies had already been
purchased by or on behalf of their Indian clients. It is not clear why the
Reserve Bank wanted information as to "the exact percentage of
holdings", etc., since the relevant information had already been furnished
in the RPC and OAC forms sent along with the letters dated March 4, 1983, and
March 12, 1983. Theletter dated April 29,1983, is also important for the reason that the
Reserve Bank merely wanted to know whether any shares of Indian companies had
already been purchased but did not give any indication that it wovld be
objectionable to do so with out prior permission of the Reserve Bank. Thereafter,
the Punjab National Bank wrote three letters
to the Reserve Bank on May 6, 1983, May 19, 1983, and May 25, 1983, the purport
of which was that the Swraj Paul Family Trust held 61.6% of the share capital
of Caparo Group Ltd. which in turn held 100 per cent of the share capital of
eleven of the companies and 98% of the share capital of the twelfth company.
The names of the beneficiaries of the trust were given as Shri Swraj Paul, Mrs.
Aruna Paul, Mr. Amber Paul, Mr. Akash Paul, Miss Anjali Paul and Mr. Angad
Paul. In all the three letters it was pointed out that the necessary RPC and
OAC forms had already been submitted. The request for expedition of approval
was reiterated. The Reserve Bank of
On June 1, 1983, the
Assistant Controller, Reserve Bank of India, wrote to the Government of India
informing them about the receipt of applications from the Punjab National Bank
on behalf of the thirteen overseas companies, eleven of which were wholly owned
by Caparo Group Ltd. which in turn was owned by the family trust of Mr. Swraj
Paul to the extent of 61.6%. In the twelfth company, Caparo Properties Ltd.,
Caparo Group Ltd. had a holding of 98 per cent. Caparo Group Ltd. was owned to
the extent of 61.6% by the family trust of Mr. Swraj Paul, the other members of
the family trust being Mrs. Aruna Paul, Mr. Akash Paul, Mr. Amber Paul, Mr.
Angad Paul and Miss Anjali Paul. The Reserve Bank pointed out that it was to be
noticed that even the Caparo Group Ltd. was not directly owned by non-resident
individuals of Indian origin but only indirectly to the extent of 61.6% through
the family trust whose beneficiaries were persons of Indian origin. The Reserve
Bank appeared to be of the view that the investment facilities under the scheme
were intended to be extended to overseas companies, family trusts, etc., owned
predominantly by non-residents of Indian nationality/origin at least to the
extent of 60% and that it was not the intention to open these investment
facilities to overseas companies which were not directly owned by nonresident
individuals of Indian nationality/origin but owned by them indirectly via some
other trust or company. It was observed that if investment facilities were to
be extended to overseas companies indirectly owned by non-residents of Indian
nationality/origin, it would be very difficult to enforce the scheme and the
conditions of the FERA. The Reserve Bank also informed the Government that
their Legal Department supported their view that none of the thirteen overseas
companies was eligible to invest in shares of Indian companies under the
existing policy. They, therefore, proposed to reject the applications of all
the thirteen overseas companies. They requested the Government of India to
confirm by telex. To this the Government of India replied by telex on June 8,
1983, in these words:
"Reference D. O. No. EC. Co. FID(II)294/344-82/83, dated
nil June, 1983, regarding application from thirteen overseas companies for
purchasing shares of Indian companies through the stock exchange with
repatriation rights under the portfolio investment scheme. It is reported that
some purchases have already been made in terms of the above proposal by the
Punjab National Bank. Although it does appear that prior to May 2, 1983, under
the portfolio investment scheme, authorised dealers could without R B I's prior
approval purchase shares through stock exchange on behalf of their non-resident
clients, the circumstances in which some such purchases were already made
before the concerned companies got the necessary approval from the R.B.I, do
not seem to be clear. The RBI is requested to enquire further into the matter
and submit a detailed report to the Government covering all aspects of the
matter including the details of such purchases, the financial status and the
activities of the applicant companies and their dates of incorporation and also
the general legal issues as to whether such purchases on the stock exchange by
overseas non-resident Indian Companies, etc, prior to May 2, 1983, are valid
without the prior specific approval of the RBI. Your report should reach as
quickly as possible in order to enable the Government to take decision."
The importance of May 2, 1983, so frequently mentioned in the telex message is
apparently because May 2,1983, was fixed as the
cut-off date for the introduction of the ceiling of 5 per cent, in shares of
Indian companies by foreign investors of Indian origin by the Circular No. 12,
dated May 16, 1983, issued by the Reserve Bank of India.
In the meanwhile, on May
31, 1983, Punjab National Bank wrote to Escorts Ltd. informing them that the
thirteen overseas companies had been making investments in shares of Escorts
Ltd. in terms of the scheme for investment by overseas corporate bodies
predominantly owned by nonresidents of Indian nationality/origin to an extent
of at least 60 per cent, and that the thirteen overseas companies had designated
them as their banker and M/s. Raja Ram Bhasin & Co. had been designated as
the brokers for the purpose of investment. The brokers had advised the bank
that up to April 28, 1983, 75,000 equity shares of Escorts Ltd. had been
purchased by them for each of the thirteen overseas companies. Out of the
shares so purchased, 35,560 shares purchased by each of twelve the companies
had been lodged by the brokers with Escorts Ltd. in the names of H.C. Bhasin
and Mr. Bharat Bhushan for the purpose of transfer of the shares in the books
of the company. 35,667 shares purchased for the 13th company were also lodged
for the purpose of transfer in the name of Mr. H.C. Bhasin and Mr. Bharat
Bhushan. Escorts Ltd. replied on June 1, 1983, and requested the Punjab National
Bank to furnish information whether the non-resident companies had executed and
handed over applications to be filed with the Reserve Bank of India for prior
permission to purchase the shares of the company through them as the designated
bank and whether any permission had been granted by the Reserve Bank of India
to Punjab National Bank to purchase shares on behalf of the thirteen companies
mentioned in the letter. Escorts Ltd. did not refer in this letter to the
circumstance that H.C. Bhasin and Bharat Bhushan had lodged the shares with
them for transfer in their own names instead of the names of any of the
overseas companies. Escorts Ltd. obviously did not think it strange that the
brokers lodged the shares in their own names instead of their principals, for the simple reason that bye-law 242 of the
Stock Exchange Regulations permit the brokers to do so if they are unable to
complete the formalities before the closing of the books. They now seek to make
a point of it. It is obviously without substance. In fact in their letter to
Punjab National Bank, Escorts Ltd. did not even think it worthwhile mentioning
that when they wrote to the brokers on May 27, 1983, requesting information
whether they were the beneficial owners of the shares and whether the shares
had been purchased on behalf of non-residents of Indian origin with the
requisite permission of the Reserve Bank of India, they had been curtly refused
the information by Mr. H.C. Bhasin and Mr. Bharat Bhushan who had also
questioned their authority to ask for such information and even threatened
legal action if the transfer was not registered. We are unable to fathom the
reason behind the attitude of the brokers. We can but make a guess. It was
probable they were still awaiting the permission of the Reserve Bank of
The committee reported that
it had reasonable ground to believe that the requisite permission of the Reserve
Bank of
On June 9, 1983, the Board
of Directors of Escorts Ltd. considered the committee's report and passed a
resolution refusing to register the transfer of shares. The resolution was in
the following terms :
"The board considered
the report of the share scrutiny and transfer committee of directors. The board
further considered exhaustively all aspects of the matter, all the materials
which were gathered and placed before the board and legal opinions and records
of legal advice which had been secured by the company on the points in issue.
The board further considered whether—having regard to the provisions of the
FERA and the FERA regulations and other relevant laws including the company
law, the Stamp Act, the Public Securities Act and other regulations relating to
the stock exchange and transfer of shares—requirements of law have been
complied with. The board further considered the various statements reported in
the press and made by the non-resident concerned, as also by his associates in
Delhi which are contradictions to the policy of the Government underlying the
liberalized scheme for ' portfolio investment' by eligible non-residents. The
board further considered whether the purchases of the shares in question would
qualify as ' portfolio investment' as envisaged under the RBI scheme. The board
further considered whether it is in the interest of the company and its
shareholders to approve of the proposed transfers and whether it is desirable
in the aforesaid interests to accept the proposed transferees as shareholders.
Upon full discussion of the share scrutiny and transfer committee's report, the
board in acceptance thereof adopted the* same. Further, after a full
examination of the issues, legal as well as factual and the circumstances and
further on account of the reasons contained in the share scrutiny and transfer
committee's report and in the light of the said committee's recommendations and
further on account of the view of the board of directors that it would not be
in the interest of the company or the general body of shareholders to register
the transfer of the shares in question and on account of the board's view that
the transferees in question could not be approved for purposes of admitting
them as members in view of the facts and circumstances taken note of by the
board of directors, the board decided to refuse registration of the shares
under consideration.
Accordingly it was:
Resolved that the transfer
of 2,88,390 equity shares of Rs. 10 each fully paid-up
lodged by Mr. Harish Chander Bhasin and 1,73,947 equity shares of Rs. 10 each
fully paid-up lodged by Mr. Bharat Bhushan as per distinctive Nos. appearing in
the lists marked annexures "A" and "B", respectively,
placed before the directors and initialled by the chairman for the purpose of
identification be and is hereby refused.
Further resolved that Mr.
Charanjit Singh, vice-president and secretary of the company be and is hereby
authorised to give and send notices of the refusal to the: transferors under
section 111(2) of the Companies Act, 1956, and take such other steps as may be
necessary and appropriate in the matter of the above resolution.
The resolution was passed
with all the 13 directors (out of total 15 directors of the compaay) present
and voting for the resolution excepting Mr. D. N. Davar, who did not take part
in the discussion and voting on the resolution. There was no dissenting
vote."
In respect of another block
of shares lodged with Escorts Ltd. on August 19, 22, 1983, for registration in
the names of the thirteen foreign non-resident companies, a similar report was
submitted by the committee on September 29, 1983, and a similar resolution was
passed by the board of directors on the same day.
Escorts Ltd., although they
had already refused to register the transfer of shares, none the less, wrote to
the Punjab National Bank for information on various points as they desired to
make a representation to the Reserve Bank of
More important still is the
fact that Escorts Ltd., having already rejected the registration of the
transfer of shares, wrote to the Reserve Bank on June 14, 1983, June 20, 1983,
and July 23, 1983, purporting to give information regarding various
illegalities committed in the matter of purchase of shares of their company by
the thirteen foreign companies, Caparo Group Ltd., etc. It was stated that the
information was being furnished to the Reserve Bank because it was understood
that the Reserve Bank was holding an enquiry in the matter of the purchase of
shares in Indian companies by the Caparo Group companies. One remarkable
feature about the letters is that for some reason best known to themselves, Escorts Ltd. did not disclose to the Reserve
Bank the circumstance that they had already refused to register the transfer of
shares. In the first letter, it was stated that their information revealed that
Caparo Group Ltd. was the holding company and the remaining twelve companies
were its subsidiaries and that a majority of them were in no financial position
to make such large investments. The Reserve Bank was particularly requested to
consider whether it was ever intended that an overseas company could circumvent
the stipulated ceiling of one per cent, by channelling investment through a dozen
subsidiaries. It was pointed out that a
colourable device of that nature would defeat the very purpose of the ceiling.
The Reserve Bank was also requested to take serious notice of the fact that
while the scheme permitted repatriation benefits to investments up to the
maximum of one per cent, in an Indian company, shares to the tune of over 7 per
cent, had been acquired in the names of thirteen companies though funds were
remitted only by one company. It was also mentioned that the stock brokers and
not the bank purchased the shares and that the stock brokers unauthorisedly
lodged for registration in their own names, the shares purchased on behalf of
nonresidents. The Reserve Bank was requested to enquire into the dates and
rates of the purchases of the shares, whether the shares were purchased on the
floor of the stock exchange, whether the delivery of shares was taken, whether
the bank had a day-to-day record of the transactions and so on. The Reserve
Bank was also requested to seize the scrips and the books of account in the
possession of the stock exchange. The next letter dated June 20, 1983, drew
attention to the circumstances that though 9,75,000 shares were purported to
have been purchased before April 28, 1983, only 4,62,337 shares had been lodged
by May 13, 1983, and, therefore, it appeared that there were forward
transactions and the purchases were not in accordance with the scheme. In their
third letter dated July 23, 1983, Escorts Ltd. asserted that a large amount of
money to the tune of about Rs. 2.61 crores was remitted from overseas to the
Punjab National Bank and was utilised to purchase shares in additien to the
shares purchased in the names of thirteen companies. The provisions of the
Foreign Exchange Regulation Act were violated and the ceilings of one per cent.
and 5 per cent, imposed under the scheme were also
circumvented. Rupee funds to the tune of Rs. 4 crores appeared to have been
unauthorisedly diverted for the purchase of the shares for and on behalf of the
thirteen non-resident companies in the two Indian companies, that is, Escorts
Ltd. and Delhi Cloth and General Mills Ltd. Though the purchases made on behalf
of the thirteen non-resident companies were said to have been purchased before
April 28, 1983, only 4,62,337 shares were lodged with the company for
registration of transfer, leaving a shortfall of 5,12,663 shares. The
non-lodgment of these shares raised a doubt whether those shares had been
purchased in accordance with the scheme. It was pointed out that the share
transfer deeds lodged with Escorts Ltd. bore the date April 28, 1983, and
disclosed consideration of Rs. 65 per share although the highest rate at which
sales of Escorts shares were transacted at the stock exchange up to April 28,
1983, was Rs. 55 only per share. This fact demonstrated that an incorrect
statement had been made that the shares had been purchased prior to April 28,
1983. Further, the share transfer deeds lodged with the companies in regard to
the 9,75,000 shares of Escorts Ltd. and 10,30,000 shares of Delhi Cloth Mills
Ltd. said to have been purchased on behalf of non-resident Indian companies
showed that a total amount of Rs. 6,33,75,000 of non-resident funds was spent
for purchasing the shares of Escorts Ltd. and a sum of Rs. 9,88, 69,020 of
non-resident funds was spent on purchasing shares of Delhi Cloth Mills Ltd.,
making a grand total of Rs. 16,22,44,020. As against this, a sum of Rs. 13
crores only had been remitted from abroad for the purchase of shares. Out of
the Rs. 13 crores, a sum of rupees one crore had been frozen by the Reserve
Bank making only a balance of Rs. 12 crores of non-resident funds available for
purchase of shares. There was thus a shortfall of Rs. 2.61 crores which was
unaccounted. It was also brought to the notice of the Reserve Bank that the
brokers had lodged the shares for registration of the transfers in their names
only and not in the names of the foreign companies. When asked by the company
to disclose the names of the principals, the brokers had refused to do so. The
company, therefore, suggested various steps that should be taken by the Reserve
Bank to detect the several illegalities committed and to prevent the
circumvention of the one per cent, limit imposed by the scheme for acquisition
of shares by any single nonresident individual or company.
To none of these letters
did the Reserve Bank deign a reply or even the courtesy of an acknowledgment.
Though the Reserve Bank did not choose to write or make any further enquiry
from Escorts Ltd., there is no doubt that the Reserve Bank did enquire in its
own way into the allegations made by Escorts Ltd. against the Caparo Group of
companies. It was not as if the Reserve Bank wantonly refused to worry itself
in regard to the allegations against the Caparo Group of companies. The Punjab
National Bank was the designated bank of the Caparo Group of companies and it
was an authorised dealer under the Foreign Exchange Regulation Act, owing a
serious responsibility to the Reserve Bank under the Foreign Exchange Regulation
Act and the portfolio investment scheme. It was, therefore, to the Punjab
National Bank that the Reserve Bank turned for elucidation in the matter.
On June 11,
1983, the Reserve Bank wrote to the Punjab National Bank advising them that
mere submission of an application under section 29(1)(b)
of the Foreign Exchange Regulation Act was not sufficient to enable the
non-resident Indian companies to purchase shares without the general or special
permission of the Reserve Bank. The Reserve Bank's permission had to be
obtained before buying any shares of Indian companies. The contention of the
Punjab National Bank that submission of an application was sufficient to enable
a non-resident company to purchase shares was not accepted as correct and the
bank was told that they had committed a serious irregularity in purchasing
shares. The Punjab National Bank wasalso asked to explain as to how they had
allowed the non-resident external account of Caparo Group Ltd. to be debited in
contravention of the provisions of paragraph 28B.9 of the Exchange Control
Manual. The Punjab National Bank was informed that the applications of all the
companies for approval of opening of non-resident accounts were pending with
them and that until specific permission for purchase of shares was granted, no
payment should be made out of the accounts for purchasing shares on behalf of
any of the thirteen companies. On the same date, another letter was written by
the Reserve Bank of
On July 6, 1983, the
Controller, Foreign Exchange, Reserve Bank, wrote to the Government of India
informing them that the relevant documents had been called for and examined and
the report which was desired by the Government's telex dated June 8, 1983, was
being submitted along with the letter. It was stated that they had taken the
legal opinion of "an eminent jurist and senior counsel", Mr. H.M.
Seervai, which was to the effect that the circular did not grant general
permission to non-residents or their designated banks and that overseas bodies where they were
not directly owned by non-resident individuals were not eligible to invest
under the liberalised scheme. It was, therefore, stated that none of the
thirteen overseas companies was eligible to invest in shares in Indian
companies under the scheme. The question of further action in the matter of
failure of the Punjab National Bank to follow the relevant exchange control
regulations would be taken up separately after a final decision was taken on
the applications, that is, the applications of the overseas companies for
permission to purchase shares. The report of the Reserve Bank which was sent
along with their letter was not produced before the High Court, nor has it been
placed before us. The Government of India, on August 11, 1983, replied to the
Reserve Bank's letter of July 6, 1983, communicating to the latter the opinion
given by the Attorney General and asked the Reserve Bank to dispose of the
applications made by the Punjab National Bank in the light of the opinion of
the Attorney-General. The Government of India also mentioned that they agreed
with the opinion of the Attorney General who had given primary importance of
the intention behind the Government policy which was spelt out in the report of
the working group. By another letter dated September 17,1983,
the Government of India clarified the position and it was pointed out that the
portfolio investment scheme by companies and overseas bodies owned by
nonresidents of Indian nationality/origin was introduced as part of a package
of measures to facilitate remittances and investments by non-residents of
Indian nationality/origin in India in the overall context of the difficulties of
our balance of payments. It was pointed out that in formulating the scheme,
there were three paramount considerations:
(a) as much flexibility as possible should be
available to non-resi dents for bringing foreign exchange into India and the
concern should be the purpose of investments rather than legal entity of the
non-resident in vestor of Indian origin;
(b) it was to be
ensured that the benefits of the scheme should not be available to non-resident
persons or overseas bodies other than those of Indian nationality/origin; and
(c) the investment of
funds under the scheme should not lead to take over of existing companies
through operations in the stock market.
It
was in the context of the first two considerations that it was insisted that
the overseas companies, etc., should be owned by non-residents of Indian
nationality/origin to the extent of at least 60% and it was in the context of
the third consideration that a ceiling of one per cent of paid-up capital for
each investor was imposed. Further to the same considerations, in May, 1983, a
ceiling of 5 per cent on aggregate investment was also imposed. The Government of India pointed out that the
question of direct or indirect ownership should be considered in the context of
these considerations. It was pointed out:
"In many countries
there is no bar on the number of companies an individual can predominantly own
directly or indirectly. A person of Indian origin could, if he wished, set up a
number of companies directly owned by him and invest through each of these
companies up to one per cent of the paid-up capital of a company in
Taking the above
consideration into account, and in order to remove any doubt regarding the
eligibility of companies, it is clarified that overseas bodies, whether owned
directly or indirectly, are eligible to invest under the scheme so long as it
is clear that the ultimate ownership to the extent of at least 60 per cent is
in the hands of non-residents of Indian nationality/origin. Each such applicant
company is eligible to make investment subject to the existing ceiling of one
per cent irrespective of whether the ultimate ownership is in the hands of one
or more individuals.
Since this clarification
merely reflects the original intention of the Government, the investments made
by the applicants before May 2, 1983, but pending for approval should not be
subject to five per cent ceiling. Pending applications may be disposed of
accordingly."
This letter was apparently
delivered personally to Dr. Manmohan Singh, Governor of the Reserve Bank of
"I have discussed this
case with FS and FM. This matter has been approved by CCPA. As such we should
faithfully carry out consequential action. I have discussed with FS, FM and
Principal Secretary to PM the issue of a press note regarding clarification by
the Government regarding the NRI scheme. It has been agreed that the press note
will be issued at 6.30 p.m. by RBI in
We are told that the
letters FS stand for Finance Secretary, FM for Finance Minister and CCPA for
Cabinet Committee on Political Affairs.
As mentioned in the note of
Dr. Manmohan Singh, a press release was issued by the Reserve Bank the same day
to the effect that the Government, having regard to the objectives of the
scheme for investment by non-residents of Indian nationality/origin had
clarified that their original intention was that the facilities of direct and
portfolio investments in shares/debentures of Indian companies and deposits
with public limited companies should be available to the overseas companies,
partnership firms, trusts, societies and other bodies in which the
ownership/beneficial interest was indirectly but ultimately held to the extent
of at least 60 per cent by non-resident individuals of Indian nationality or
origin. It was further stated in the press release that the Government had also
clarified that each overseas body was eligible to invest up to one per cent of
the equity capital under the portfolio investment scheme irrespective of
whether the ultimate ownership/beneficial interest in such body was in the
hands of one or more non-resident individuals of Indian nationality/origin
subject to an overall ceiling of 5 per cent of the total paid up equity capital
if the investment was made after May 2, 1983. The overseas bodies desiring to
make investment under the scheme were required to submit their applications to
the Controller, Reserve Bank of
On September 19, 1983, the
Reserve Bank also issued Circular No. 18 under section 73(3) of the Foreign
Exchange Regulation Act. We have already referred to the Circular earlier. On
the same day (September 19, 1983), the Reserve Bank, by a telex message,
conveyed to the Punjab National Bank their permission to release the money
remitted by the Caparo group of companies from abroad for making payment
against shares of DCM Ltd. and Escorts Ltd. purchased on behalf of the 13
Caparo group of companies provided the shares in question were purchased up to
and inclusive of May 2, 1983. It was also mentioned that the purchase of shares
shall be deemed to have taken place up to and inclusive of May 2, 1983, if firm
purchase commitments as evidenced by brokers' contract notes had been entered
into and the shares had been/ would be taken delivery of pursuant to such firm
commitments at the price mentioned in the relative brokers' contract notes. The
letter granting permission for purchase of shares was stated to follow. A
letter did follow on the same day by which the 13 group of companies were given
the approval of the Reserve Bank "to make investments in and hold shares
of Delhi Cloth and General Mills Ltd. and Escorts Ltd. to the extent of one per
cent, of the paid up capital of the respective companies subject, where the
purchase has been made after May 2, 1983, to an overall ceiling of 5 per cent,
of paid up equity capital of each of the investee companies." Purchases
made up to and inclusive of May 2, 1983, were not subject to to the 5 per cent,
ceiling. Information was requested as to the number and face value of the shares
purchased up to May 2, 1983, as also details of shares, if any, purchased after
May 2, 1983. Permission was also accorded for purchase of shares/debentures of
other Indian companies on behalf of the 13 non-rosident companies, through
stock exchanges in India at the ruling market price subject to the condition
that the shares/debentures would be purchased out of fresh remittances received
from abroad and/or out of the funds held in the applicant companies'
Non-Resident (External) Account to be opened with the banker. Purchases of
equity shares with repatriation benefits could be purchased up to one per cent
of the total paid-up equity capital of the company, subject to the overall
ceiling of 5 per cent. Another condition was that the shares acquired under the
permission should be retained by the non-resident investor company for a
minimum period of one year from the date of their registration with the Indian
company. The permission was to be valid for a period of three years from the
date of the letter.
In the meanwhile, Escorts
Ltd. wrote several frantic letters to the Reserve Bank of
Raja Ram Bhasin & Co.
wrote a further letter on December 27, 1983, with regard to the query whether
shares were purchased from rupee loan raised in
Thereafter, the Punjab
National Bank wrote to the Reserve Bank answering the queries raised by them
and reiterating that they had acted in accordance with the instructions and
guidelines contained in the Reserve Bank's letter dated September 19,1983. All the other points raised by Escorts Ltd. and DCM
Ltd. required answers from the brokers. So they wrote to the brokers and the
brokers replied to them stating that no illegality had been committed. The
comments of the brokers were summarised and it was then added that a sum of Rs.
1,05,30,000 was released to the brokers in accordance
with the directions of the RBI, as conveyed by their telex message and letter
dated September 19, 1983.
Subsequent to the grant of
permission by the Reserve Bank, another attempt was made to have the transfer
of shares registered. The request was turned down once again by Escorts Ltd.
who by their letter dated October 13, 1983, stated that apart from the question
of obtaining the permission of the Reserve Bank, the decision of the board of
directors to refuse to register the transfer of shares was based on other
grounds also which continued to be valid. We may mention here that before the
High Court, all the other grounds mentioned by the board of directors were
abandoned except the ground relating to want of permission of the Reserve Bank.
Before the High Court, a resolution passed by the directors by circulation was
filed and it was to this effect:
"Resolved that it is
not the board's intention to get adjudicated in some other proceeding the
grounds of rejection contained in para 7 of the share scrutiny and transfer
committee of directors report dated June 8, 1983, or in paras 6, 7 and 8 of the
report dated August 29, 1983, and the board hereby resolve not to rely on the
said grounds in any proceeding."
The High Court also
recorded the concession in the following words : (at
pp. 408-412 of 57 Comp Cas):
"In the rejoinder
affidavit filed by petitioner No. 2, it was specifically pleaded that the petitioners do
not want adjudication on the other grounds of refusal of registration of
shares, and, as such, failure to obtain prior permission under section 29 of
the FERA remained the sole ground for rejection. The respondents urge that since the other grounds of refusal to
register the shares are not now pressed and are not required to be adjudicated
in this writ petition, the court should refuse to go into this question. That
would amount to piece-meal adjudication on the validity of the purchase and refusal
to register, which is not permissible even in the case of a suit, which
principle, according to the learned Attorney-General, also applies to writ
petitions mutatis mutandis.
Whether there is a live
issue for adjudication and whether the petitioners have locus standi cannot be
viewed in isolation or in the abstract, divorced from the facts and
circumstances of the case.
In our view, in raising
this contention, certain relevant factors are being overlooked. The Union of
India, the RBI and the PNB and the other respondents dispute the correctness of
the decision taken by the petitioners not to register the transfer of shares
purchased by respondents Nos. 4 to 17. Respondent No. 19 has preferred an
appeal under section 111 of the Companies Act before the Company Law Board and
the same is still pending. Respondents Nos. 20 and 21, the stock-brokers,
continue to insist upon reconsideration of the decision taken by the board of
directors in regard to registration of the shares. D. N. Davar, on behalf of
the financial institutions, has put in a written note on January 6, 1984,
signed by him demanding the board of directors to reconsider its decision.
Further, the petitioner-company has to pay dividend on these shares accruing
from time to time to the holders of these shares. The dividend on these shares
amounting to Rs. 7,50,000 per annum is obviously
payable to those in whose names the shares stand registered in the books of the
company. If the dividend is not paid within the stipulated time, the
petitioner-company and its directors would be exposed to penalties under the
Companies Act. The question of payment of dividend would recur year after year.
In fact, when the question of payment of interim dividend arose, while the
respondent-companies claim to be entitled to the payment of the dividend
because they have purchased the shares, the petitioners object to payment
because the registration of transfer of shares purchased without prior
permission could not be effected and the dividend cannot be paid to persons whose
shares are not registered. When petitioner No. 2 addressed a letter dated
December 2, 1983, to D. N. Davar, Executive Director, IFCI, inviting his
comments on the decision to withhold the interim dividend with respect to
shares purchased by the respondent-companies, he replied through his letter
dated December 17, 1983, inter alia, as follows:
'Since the payment of
dividend in question, as referred to in your letter under reply, pertains to
interim dividend as resolved by the board of directors on July 20, 1983, there
does not appear to be a legal bar in withholding the same according to the
second opinion. However, in view of the conflicting legal opinions on the
issue, we are referring the matter to the Ministry of Law, Department of
Company Affairs, for their clarification. On hearing from them, we shall revert
to you on the subject.'
Thus, the matter was under
reference to the Government of India and the question whether registration of
transfer of shares should be effected or not and who would be entitled to
receive dividend on these shares was alive issue even on December 17,1983, and
was not decided even by the time the writ petition was filed. None of the
respondents has taken back the shares lodged with the petitioner-company for
registration of transfer. Upon the sale of the shares and lodging of
applications for their transfer with the petitioner-company, it had to take a
decision. The company has rejected the request for registration on grounds
which, according to the well considered opinion of their legal advisers, are
valid and justified. The RBI as well as the other respondents and their legal
advisers seem to hold a different view. Of course, as discussed above, that
legal opinion has not been placed before the court; nor is the court entitled
to require them to disclose
it. It must be recorded that the petitioners' learned counsel, Mr. Nariman,
fairly conceded that it was an error on the part of the petitioners to have
referred in petitioner No. 2's affidavit to the legal advice tendered to the
respondents and requested that it may be treated as withdrawn. It was not
pressed at the hearing of the writ petition. Be that as it may, the fact
remains that the respondents held a different
view on this legal issue and have pressed the same before this court. The
question whether prior permission is necessary or not is thus not concluded by
the rejection of transfer of the shares purchased by respondents Nos. 4 to 16.
It would arise from time to time as and when such purchases are made in future.
The petitioner company itself would have to consider the same whenever such
shares are presented for registration. Even the solicitors of respondent No. 18
in their letter dated February 27, 1984, addressed to the petitioners'
solicitors stated:
'...the controversy
regarding transfer of shares has been raging throughout the length and breadth
of the country and various forums including the shareholders' associations,
chambers of commerce and other public bodies have been making observations and
suggestions on such issues... '
They also specifically said
in that letter that they would refer to that letter at the hearing of the writ
petition. This legal issue would arise for decision whenever the action of the
petitioners not to register the shares is questioned by any of the transferors
or transferees of the shares. If the respondents could still insist upon the
registration of the shares and claim that permission granted to the
respondent-companies by respondent No. 2 subsequent to the purchase of shares
is valid, which claim is strongly supported by the stand taken by respondents
Nos. 1 and 2, the petitioners are certainly entitled to seek a declaration in
this behalf. Whether such a declaratory relief in this behalf could be granted
or not will be considered in due course, but certainly it cannot be said that
the petitioners have no cause of action for seeking a declaration.
Notwithstanding the decision taken by the board of directors, the company
continues to be under pressure to transfer the shares. If the stand taken by
the petitioners is incorrect, then they would be bound under the statute as
well as under the directions of the RBI, to register the transfer of shares in
the books of the company even now. While forwarding a copy of
the letter dated September 27, 1983, addressed by the PNB to respondent No.
4-com-pany. Haresh Bhasin (respondent No. 20) by his letter dated
October 8,1983, addressed to the petitioner-company, and sent by registered
post A.D., had requested that the decision of the board of directors dated
August 29, 1983, refusing to register the shares be reviewed. In reply, the
petitioner-company conveyed through its letter dated October 13, 1983, that
notwithstanding the impugned Circular and the letter of the RBI, the refusal to
register continued to hold good for various other reasons. In that letter, the
petitioner-company also disputed the claim that the 13 non-resident companies
had purchased the shares prior to May 2, 1983. The petitioner-company thus
maintained that the permission granted subsequently is not valid and that the
refusal to register the shares for other reasons still holds good. Of course,
at the hearing of the writ petition, having regard to the decision of the
Supreme Court in Bajaj Auto Ltd. v. N. K. Firodia [1971] 41 Comp Cas 1 (SC),
the learned counsel, Mr. Nariman, conceded that the other grounds for not registering the shares
were not being pressed in support of the refusal of registration. It was,
therefore, argued for the respondents that
this letter would indicate that even the petitioners at that stage accepted
that the permission granted under exhibit "B" and exhibit
"C" validated the purchase and no longer stood in the way of
registration of the shares. We are unable to agree with this contention
; firstly, because if under section 29 prior permission was required for
a valid purchase, any such statement made in the letter on behalf of the
petitioner-company cannot validate such transfer so as to entitle the purchaser
to claim registration of shares. Any registration of transfer by the
petitioner-company would still be in contravention of section 19 read with
section 29 of the FERA; secondly, the letter cannot be interpreted to mean that
the stand taken by the company and its board of directors unanimously that the
purchase is invalid for not obtaining prior permission was given up. Further,
even if exhibit "B" and exhibit "C" are construed as a
grant of permission, it would amount to granting permission subsequent to the
purchase. When the letter of the petitioner-company expressly states that
"Notwithstanding grant of permission by the RBI as referred by you",
it could only mean the grant of permission subsequent to the purchase, would
not hold good and that they were not prepared to transfer the shares on the
basis of that permission. The fact that they actually proceeded to challenge
the very permission granted by way of writ petition fully establishes that the
company repudiated its liability to transfer the shares on the strength of the
impugned Circular and letter. While so, it is the case of the petitioners that
D. N. Davar, one of the directors, armed with the authority to speak for all
the financial institutions including the LIC, continued to insist that the writ
petition be withdrawn. Apart from the other pressures exerted on the
petitioner-company and its managing director, already discussed above, at the
meeting of the board of directors of the petitioner-company held on January 6,
1984, D.N. Davar tabled four pages of signed note, inter alia, insisting upon the
board of directors to recall the cheques lodged with the institutions towards
repayment of loans and to withdraw the writ petition filed in the court and not
to take note of the correspondence exchanged between the financial institutions
and the management. The board of directors, however, did not concur with his
proposal; on the contrary, it ratified the filing of the writ petition. Apart
from petitioner No. 2, each of the other nine directors filed an affidavit in
this court supporting the filing of the writ petition. It is also the
allegation of the petitioners that the financial institutions, finding that
notwithstanding the unanimous request made on their behalf by D. N. Davar at
the meeting of the board of directors, the company and its managing director
were refusing to withdraw the writ petition and effect the transfer of shares,
with the ulterior purpose of obtaining registration of shares, requisitioned an
EGM of the petitioner-company, so that they may secure a controlling majority
in the board of directors. The petitioners allege that this action of the LIC
(respondent No. 18) which by itself holds 30% of the shares and along with the
other financial institutions, collectively represented by Davar, holds 52% shares, is mala fide and is calculated to secure the
registration of the shares which were purchased in contravention of the FERA.
In the circumstances referred to above, it cannot be said that the company and
its managing director had no cause of action to file this writ petition or that
there was no longer any live issue to be adjudicated. "
In view of the rejoinder
and the concession made before the High Court, in regard to the refusal of the
company to register the transfer of shares, the only ground which it is
necessary for us to consider is whether the permission granted by the Reserve
Bank was in order.
Escorts Ltd. having refused
permission to register the transfer of shares, one would have thought that it was
thereafter up to the purchasers or the sellers of the shares, if they were so
minded to proceed to take further appropriate action in the matter to have the
transfer of shares registered. However, it was not they that moved it, but it
was the Escorts Ltd. that filed the writ petition out of which the present
appeals arise. They explain that the pressure of circumstances was such that
they had no option except to go to court under article 226 of the Constitution.
It appears that on October 18, 1983, Escorts Ltd. met the representatives of
the financial institutions, the ICICI, the IFC, the IDBI and the UTI. It has to
be mentioned here that 30 per cent, of the shares of Escorts Ltd. are held by
the Life Insurance Corporation, 16 per cent, by the Unit Trust of India and 6
per cent, by the General Insurance Corporation and its subsidiaries. According
to Escorts Ltd., at this meeting, their representatives gave full particulars
of the various illegalities committed by the Caparo Group of companies in the
purchase of shares of Escorts Ltd., but they were repeatedly pressed by the
representatives of the institutions to get their board of directors to
reconsider their earlier refusal to register the transfer of shares. It was
said that Mr. Patel, the chairman of the Unit Trust of India even said that the
financial institutions who owned 52 per cent, of the shares were in a position
to remove the management at will. There were other meetings also with the
representatives of the financial institutions. Mr. Nanda, the chairman of
Escorts Ltd., was requested to meet Mr. Punja, chairman of IDBI, and a director
of Life Insurance Corporation who had just returned from abroad. At this
meeting also, it was said, Mr. Punja insisted that the
transfer of shares purchased by the thirteen Caparo companies should be
registered. Again on November 1, 1983, there was a meeting between the lawyers
of Escorts and the legal advisers of the financial institutions. There was a
further meeting between Mr. Nanda and Mr. Punja on November 9, 1983, when Mr.
Nanda of Escorts Ltd. requested Mr. Punja to expedite the proposal for merger
of Goetze India Ltd. with Escorts Ltd. and the proposal for prepayment of the
outstanding loans of Escorts Ltd. to the financial institutions at the
inter-institutional meeting to be held on the afternoon of 9th. Mr. Nanda was
later informed by Mr. Davar that the proposals of Escorts Ltd. had been
discussed and accepted but the formal clearance would have to await Mr. Punja's
discussion with Mr. Nanda. Thereafter, it was said, Mr. Nanda was informed by
Mr. Punja that Escorts Ltd. must register some shares purchased by the Caparo
Group of companies. In answer, Mr. Nanda informed Mr. Punja that the RBI itself
was enquiring into the purchase of shares by Caparo Group of companies and,
therefore, Mr. Punja should await the outcome of the investigation. On November
10, 1983, Mr. Sen Gupta, the Controller of Capital Issues, telephoned to Mr.
Nanda and insisted that Escorts Ltd. should at least register some shares
purchased by the Caparo Group immediately. ,On
November 12, 1983, Mr. Punja once more insisted that some shares at least
should be registered immediately. On November 16,1983,
Mr. Nanda met Mr. Nadkarni, the chairman of ICICI who informed him that Mr.
Punja was most upset at the refusal of Escorts Ltd. to register the transfer of
shares. Thereafter, in the first week of December, the Unit Trust of India
wrote a letter to Escorts Ltd. to induct their Dy. General Manager as a nominee
director on the board of directors of Escorts Ltd. On December 13, 1983, there
was a meeting between Mr. Nanda and the representatives of financial
institutions when once again there was renewed insistence that the transfer of
shares Should be registered. On December 20, 1983, Mr.
Nanda telephoned and had a discussion with Mr. Punja who, it was said, informed
him that the question of clearance of the proposal of Escorts Ltd. for merger,
for pre-payment of loans and issue of debentures were interlinked with the
question of register of transfer of shares purchased by the Caparo Group of
companies. According to Mr. Nanda, this conversation was contemporaneously
recorded by him in a letter addressed by him to Mr. Punja that very day.
While so, the Telegraph and
the Financial Express published a statement by Mr. Swraj Paul that the fight
was now between the Government and the management of Escorts Ltd. and that he
would consider himself defeated if the Government cleared the proposal of
Escorts for the issue of debentures without first settling the matter of
registration of transfer of the shares purchased by him. Mr. Swraj Paul was
also reported to have said that the Governor of Reserve Bank (Dr. Man Mohan
Singh, a highly respected civil servant of our country) was applying double
standards and was feeding wrong information to the Union Finance Minister. (If
the reported statement is correct, we can only characterise it as saucy, rude
and impudent coming as it does from a foreign national seeking the permission
of the Reserve Bank to invest in shares of Indian companies. Perhaps those are
the ways of the markets in which he operates. People afflicted with double
vision are ready to see double standards in others. We appreciate neither his
conduct nor his statements. Dr. Man Mohan Singh, we presume, could not and did
not think it proper to go to the press as readily as Mr. Swraj Paul and involve
himself in an unsavoury controversy). On December 24,1983,
there was a report of the speech of the Union Finance Minister (Mr. Pranab
Mukherjee), at the Platinum Jubilee Celebration of the Calcutta Stock Exchange
in which he referred to the dominant position held by the financial
institutions in the equity shares of some large private companies and added,
"I have a very effective instrument under my command to end the
uncertainty." According to Escorts Ltd., it was in this factual
background, that they were compelled to file the writ petition in the High
Court of Bombay. One remarkable tactic of Mr. Nanda of Escorts deserves special
mention here. The writ petition was filed on December 29, 1983, and some
interim directions were also sought on the same day. On that very day, Mr.
Nanda also had a meeting with the representatives of the financial institutions
at the office of Mr. Punja at which Mr. Nanda was asked to arrange for the
induction of a representative of the UTI on the board of Escorts and was
further informed that the proposal for merger of Goetze Ltd. may not be
acceptable as it would reduce the holding of the financial institutions from 52
per cent, to 49 per cent, but that the matter was still under consideration.
What is remarkable and what may even be considered dubious conduct on the part
of Mr. Nanda is his failure to inform the representatives of the financial
institutions about the filing of the writ petition that very day.
Writ Petition No. 3063 of
1983, thus filed in the High Court of Bombay was perhaps both a protective and
a pre-emptive strike. The writ petition is at once remarkable for its length
and the number of prayers. The writ petition runs to as many as 172 pages and
innumerable documents running into several volumes are now placed before us.
There were originally thirteen prayers (a) to (m). To these prayers four more
prayers were added subsequently. Prayers (a), (b) and (c) seek declarations
that Circular No. 18, dated September 19, 1983, is illegal and void as contrary
to the provisions of the Foreign Exchange Regulation Act, as arbitrary and
issued for collateral purposes, as constituting an abuse of statutory authority
and as violative of articles 14, 19(1)(c) and 19(1)(g) of the Constitution.
Prayer (d) is for a declaration that the purchases of shares made by and/or on
behalf of the Caparo Group Ltd. are illegal and violative of the Foreign
Exchange Regulation Act, the circulars of the Reserve Bank issued from time to
time and the provisions of the Securities Contracts (Regulation) Act, 1956, and
the bye-laws of the Stock Exchange. Prayers (e), (f), (g), (h), (i) again
relate to Circular No. 18, dated September 19, 1983, and the letter dated
September 19, 1983. Prayer (j) is directed towards securing the relevant
documents. Prayer (k) is to restrain the first respondent (Union of India) from
pressurising the company to register the transfer of shares. Prayer (1) is for
ad-interim reliefs in terms of prayers (j) and (k). Prayer (m) is for costs of
the petition. It will be of interest to notice at this juncture that the
learned single judge before whom the writ petition came up for preliminary
hearing thought fit not to issue a rule nisi in regard to prayer (d). The
learned judge made a speaking order refusing to issue a rule nisi in regard to
prayer (d). There was no appeal against that order by Escorts Ltd. and the
order became final so far as prayer (d) was concerned. The entire cause of
action of the petitioner centres round the purchase of shares made by and on
behalf of Caparo Group Ltd. and if those purchases are left unquestioned, one
is left wondering what survives in the writ petition, particularly in view of
the fact that the board of directors of the company had already refused their
permission to register the transfer of shares. The prayers relating to Circular
No. 18, dated September 19, 1983, and the letter dated September 19, 1983, were
only in aid of prayer (d) which, as we see it, was the main prayer in the writ
petition. But we do not propose to dispose of the case on any such preliminary
ground. Apparently, when the learned single judge refused to issue a rule nisi
in regard to prayer (d), what he meant was that transactions of purchase of
shares would not be allowed to be separately and individually questioned as
that would involve adducing of evidence in regard to each of the transactions
and would be ordinarily outside the province of a court exercising jurisdiction
under article 226 of the Constitution. This becomes clear from what the learned
judge has himself stated. He has referred to the objection to prayer (d) in the
following words:
"It was also submitted
that prayer (d) should not be entertained and if the petitioners wanted to urge
the contentions beyond those restricted to exhibits ' B ' and ' C ', they
should be relegated to an ordinary action or to urge these contentions in the
pending appeal before the Company Law Board."
He has dealt with the
objection and concluded:
"As stated earlier, I
think what is sought for in prayer (d) must be regarded as ordinarily beyond
the function of the writ court but this should not be taken to imply that there
is no warrant in the various complaints made by Escorts and petitioner No. 2 in
connection with this aspect of the matter. Indeed it would be clear that what
had been stated by petitioner No. 2 in his letter dated September 19, 1983, was
substantial and serious but these allegations have not been gone into either by
the Government of India or the Reserve Bank of India."
Exhibit B, we may mention,
is the Circular dated September 19, 1983, and exhibit C is the permission
granted by the Reserve Bank.
Subsequent to the filing of
the writ petition, the Life Insurance Corporation of India (which later on was
impleaded as the 18th respondent in the writ petition) which along with other
financial institutions held as many as 52 per cent of the total number of
shares in the company, issued a requisition dated February 11, 1984 to the
company to hold an extraordinary general meeting for the purpose of removing
nine of the part-time directors of the company and for nominating nine others
in their place. Alleging that the action of the Life Insurance Corporation of
India was mala fide and part of a concerted action by the Union of India, the
Reserve Bank of India and the Caparo Group Ltd. to coerce the company to
register the transfer of shares and to withdraw the writ petition, the writ
petitioners sought to suitably amend the writ petition and to add prayers (ia),
(ib), (ic) and (id) to declare the requisition to hold the meeting arbitrary,
illegal, ultra vires, etc. The writ petition was amended. Paragraphs 149A(1), to (44) were added as also prayers (ia), (ib), (ic)
and (id).
The High Court, after an
elaborate enquiry, summarised their conclusions and granted reliefs in the
following manner:
"Rule nisi is made
absolute as under :
Section 29(1)(b) of FERA is mandatory. No NRI investor is authorised to
purchase shares in an Indian company without prior permission of the RBI under
section 29(1)(b) of the FERA; any purchase of shares
without such prior permission is illegal. Neither the Union of India nor the
RBI is empowered to order otherwise either by issuing directions under section
75 or under section 73(3) of the FERA nor are they
empowered to grant permission after the shares are purchased so as to validate
such purchases or to permit holding of the shares purchased without obtaining
prior permission. The press release dated September 17, 1983 (exhibit 'A'), the
Circular dated September 19, 1983 (exhibit 'B'), and the letter dated September
19, 1983 (exhibit 'C'), cannot operate retrospectively so as to validate the
purchase of shares made by NRI companies which were ineligible on the date of
purchase; nor can they authorise purchase of shares without obtaining prior
permission of the RBI under section 29(1)(b) of the
FERA. In so far as the impugned press release, circular and the letter permit
the respondent-companies to hold the shares purchased without obtaining prior
permission of the RBI, they are ultra vires section 29(1) (b) of the FERA and
the powers vested in the Union of India under section 75 and the RBI under section 73(3) of the FERA. To
that extent, they are void and inoperative both prospectively and
retrospectively. The impugned press release and the Circular, however, amount
to amending the portfolio investment scheme with full repatriation benefits
introduced under Circular No. 9, dated April 14, 1982 (exhibit 'G'), and such
amendment operates only prospectively. A writ of mandamus shall issue
restraining respondents Nos. 1 and 2 from issuing any directions—
(a) to register
transfer of shares purchased by the respondent-com panies (which form the
subject-matter of this writ petition) pursuant to the letter dated September
19, 1983 (exhibit 'C'); and
(b) to further forbear from implementing
the said Circular dated September 19, 1983 (exhibit 'B'), and the said letter
dated September 19, 1983 (exhibit 'C'), with respect to the shares purchased by
the respondent- companies which form the subject-matter of this writ petition.
There
shall be a declaration that the action of respondent No. 18 in issuing the
impugned requisition notice is contrary to the provisions of section 284 of the
Companies Act and ultra vires the powers vested in the LIC under section 6 of
the LIC Act and contrary to the intendment of the provisions of the LIC Act.
The impugned requisition notice offends the principles of natural justice. The
action of the LIC in issuing the impugned requisition notice is an arbitrary
and mala fide action taken for collateral purpose; it is violative of article
14 of the Constitution of India. The Union of India and the RBI, respondents
Nos. 1 and 2, are in no way responsible for the action of the LIC in this
regard. The allegation of mala fides made against them and the Union Finance
Minister are unsubstantiated. The requisition notice and the resolutions passed
at the meeting held in pursuance of the said notice are quashed. A writ of
mandamus shall issue restraining the respondents from taking any steps or
action in pursuance of the resolutions passed in any meeting held pursuant to
that notice or any step or action on or under or in furtherance of the impugned
requisition notice."
From
what has been narrated above, one of the principal questions to be considered
is seen to be whether the Reserve Bank of India had the power or authority to
give ex post facto permission under section 29(1)(b)
of the Foreign Exchange Regulation Act for the purchase of shares in India by a
company not incorporated in India or whether such permission had necessarily to
be "previous" permission.
We
do not propose to refer to any dictionary to find out the meaning of the word
"permission", whether the word is comprehensive enough to include
subsequent permission. We will only refer to what Sir Shah Sulai man, Actg. C.J., said in Shakir Husain v.
Chandoo Lal, AIR 1931 All 567 (headnote):
"Ordinarily, the
difference between the approval and permission is that in the first, the act
holds good until disapproved, while in the other case, it does not become
effective until permission is obtained. But permission subsequently obtained
may all the same validate the previous act."
We have already extracted
section 29(1) and we notice that the expression used is "general or
special permission of the Reserve Bank of
"
In 1973, the old Act was
repealed and replaced by the Foreign Exchange Regulation Act, 1973, the long
title of which reads :
"An Act to consolidate
and amend the law regulating certain payments, dealings in foreign exchange and
securities, transactions indirectly affecting foreign exchange and the import
and export of currency and bullion, for the conservation of the foreign exchange resources of the
country and the proper utilisation thereof in the interests of the economic
development of the country."
We have already referred to
section 76 which emphasises that every permission or licence granted by the
Central Government or the Reserve Bank of
An argument which was
strenuously pressed before us by Shri F.S. Nariman, learned Senior Advocate for
the company, was that the very scheme of the Act shows that the permission
contemplated by section 29(1) could only be previous permission,
notwithstanding the circumstance that the word "previous" does not
qualify the expression "general or special permission" in section
29(1) though it does in several other provisions. According to Sri Nariman, the
Act was designed not merely to attract but also to regulate the inflow of
foreign exchange. That was why, he said, the provisions were very stringent. We
have no hesitation in agreeing with Mr. Nariman that while the inflow of
foreign exchange is welcomed by the Act, the inflow is also subject to
stringent checks as otherwise in no time the economy of the country will be
swamped with foreign money and taken over by giant multinationals. But that
really does not affect the interpretation of the expression
"permission" in section 29(1). The Reserve Bank of
Shri Nariman then suggested
that even if we look at the provisions of section 29 by themselves, it would be
clear that the permission contemplated by section 29 could only be "previous".
He pointed out to us that while sections 29(2) and 29(4) made due provision for
applying for permission to continue to carry on any activity of the nature
mentioned in section 29(1)(a) and continue to hold shares of a company of the
character mentioned in section 29(1)(b) if such activity was carried on and
such shares were held on the date of the commencement of the Act, no such
provision was found for the application for permission to carry on such
activity or to hold such shares if such activity was commenced or if such
shares were acquired after the commencement of the Act but without the previous
permission of the Reserve Bank of India. It was suggested that the very absence
of any prescribed form for the grant of permission for an activity started or
shares acquired subsequent to the commencement of the Act without previous
permission of the Reserve Bank, were clearly indicative of the imperative
nature of the need for previous permission. It was submitted that whatever
argument was possible in regard to the acquisition of shares, it was clear that
no activity of the nature mentioned in section 29(1)(a)
could be commenced without the previous permission of the Reserve Bank. Since
the word "general or special permission" of the Reserve Bank occurring
in section 29(1) qualified both clauses (a) and (b), the expression had to be
given the same meaning with reference to clause (b) as it had to be given with
reference to clause (a) and that was that previous permission was necessary.
The argument is attractive and not altogether without substance but it proceeds
on the assumption, for which there is no basis, that permission required for
carrying on business under section 29(1)(a) must
necessarily be previous permission. We do not think that Parliament intended to
lay down in absolute terms that the permission
contemplated by section 29(1) had necessarily to be previous permission. The
principal object of section 29 is to regulate and not altogether to ban the
carrying on in
It was contended on behalf
of Escorts Ltd. that section 13 of the Foreign Exchange Regulation Act which
enables the Central Government, by a notification in the Gazette, to order that
no person shall, except with the general or special permission of the Reserve
Bank, bring or send into India any gold or silver or any foreign exchange or
Indian currency, would be rendered ineffective if the expression "general
or special permission" occurring in section 13 could be construed to
include subsequent permission. So, it was urged, both in section 13 and
sections 19 and 29, the expression should be construed to exclude subsequent
permission. There is no force in this submission. Section 67 of the Foreign
Exchange Regulation Act provides that the restriction imposed by or under
section 13 is to be deemed to have been imposed under section 11 of the Customs
Act and further makes the provisions of the Customs Act applicable accordingly.
Section 11 of the Customs Act empowers the Central Government to prohibit
absolutely or, subject to conditions, the, import or export of goods of any
specified description. Reading together sections 13 and 67 of the Foreign
Exchange Regulation Act and section 11 of the Customs Act, it is seen that an
order under section 13 of the Foreign Exchange Regulation Act operates as a
prohibition and there can, therefore, be no question of the Reserve Bank
granting subsequent permission to validate the importation of the prohibited
goods and avoid the consequences prescribed by the Customs Act. It is,
therefore, not possible to accept the analogy of section 13 to interpret
sections 19 and 29.
Our attention was drawn to
the very serious nature of the consequences that follow the failure to obtain
the permission of the Reserve Bank, and the circumstance that even the burden
of proof that requisite permission had been obtained, was on the person
prosecuted or proceeded against for contravening a provision of the Act or rule
or direction or order made under the Act, thus ruling out mens rea as an
essential ingredient of an offence. It is true that the consequences of not
obtaining the requisite permission where permission is prescribed are serious
and even severe. It is also true that the burden of proof is on the person
proceeded against and that mensrea may consequently be interpreted as ruled
out. But that cannot lead to the inevitable conclusion that the permission
contemplated by section 29 is necessarily previous permission. Action under
section 50 or under section 56 is not obligatory and in the case of a
prosecution under section 56, the delinquent is further protected by the
requirement that the complaint has to be made by one or other of the officers
specified by section 61(2)(ii) only and even then only
after giving an opportunity to the person accused of the offence of showing
that he had the necessary permission. We presume that when called upon to show
that he had the necessary permission, the person accused of the offence could
satisfy the officer concerned that he had applied for permission as there was a
reasonable prospect of his obtaining the permission. We may further add here
that ordinary prudence would warn a foreign national who is a man of the world,
particularly of the commercial world, to seek and obtain permission before
venturing to invest his money in shares of Indian companies. If not, he would
chance a refusal of permission and risk other consequences. The chance and the
risk, of course, would not be there if everything was clean. Even if permission
is granted, it may be subject to a condition such as withholding of
repatriation benefits, which may not be palatable to him. That is another
chance that he takes when he seeks ex post facto permission. One of the
submissions of Shri Nariman was that Parliament took care to use the word
"confirmation" as distinguished from the word "permission"
where it thought such confirmation was sufficient, as in section 19(5).
Parliament, according to Shri Nariman, could well have made a provision for
confirming transactions coming into existence after the commencement of the
Act, if it was so minded, but, since, it did not do so, but chose the word
"permission", it must follow that section 29 contemplates previous
permission only. We see no true foundation for this submission. A reference to
any dictionary or any book of synonyms will show that every word has different
shades of meaning and different words may have the same meaning. It all depends
upon the context in which the word is used. If it was the intention of
Parliament to comprehend both previous and subsequent permission, the word
"confirmation" would not do at all. While it may be permissible to
construe the word "permission" widely, the word
"confirmation" could never be used to convey the meaning
"previous permission". The word "confirmation" would be
totally misplaced in section 29.
It was also submitted on
behalf of the company that if the word "permission" was construed to
include ex post facto permission, it would really amount to giving
retrospective operation to the permission. The Reserve Bank, it was said, was
not competent to grant permission with retrospective effect. In our view, the
rule against retrospectivity cannot be imported into the situation presented
here. The rule against retrospectivity is a rule of interpretation aimed at
preventing interference with vested rights unless expressly provided or
necessarily implied. To invoke the rule against retrospectivity in a situation
where no vested rights are involved is to give statutory status to a rule of
interpretation forgetting the reason for a rule.
One of the submissions very
strenously urged before us was that the very authority which was primarily
entrusted with the task of administering the Foreign Exchange Regulation Act,
namely, the Reserve Bank, was, itself, of the view that the "permission"
contemplated by section 29(1)(b) of the Foreign Exchange Regulation Act was
"prior permission". Our attention was invited to paragraph 24A.1 of
the Exchange Control Manual where the first three sentences read as follows:
"In terms of section
29(1)(b) of Foreign Exchange Regulation Act, 1973, no
person resident outside
The submission of Shri Nariman
was two-fold. He urged that paragraph 24A.1 was a statutory direction issued
under section 73(3) of the Foreign Exchange Regulation Act and, therefore, had
the force of law and required to be obeyed. Alternately, he urged that it was
the official and contemporary interpretation of the provision of the Act and
was, therefore, entitled to our acceptance. The basis for the first part of the
submission was the statement in the preface to the Exchange Control Manual to
the effect:
"The present edition
of the Manual incorporates all the directions of a standing nature issued to
authorised dealers in the form of circulars up to May 31, 1978. The directions
have been issued under section 73(3) of the Foreign Exchange Regulation Act,
1973, which empowers the Reserve Bank to issue directions necessary or
expedient for the administration of exchange control. Authorised dealers should
hereafter be guided by the provisions contained in this Manual."
There is no force whatever
in this part of the submission. A perusal of the Manual shows that it is a sort
of guide-book for authorised dealers, money changers, etc., and is a compendium
or collection of various statutory directions, administrative instructions,
advisory opinions, comments, notes, explanations, suggestions, etc. For
example, paragraph 24A.1 is styled as "Introduction to Foreign Investment
in
"The subservience of
substance of a transaction to some rigidly prescribed form required to be
meticulously observed savours of archaic and outmoded jurisprudence."
According to Shri Nariman,
even if as found by us, the permission to purchase shares of an Indian company
by a non-resident investor of Indian origin or nationality under section
29(1)(b)of the Foreign Exchange Regulation Act could be obtained after the
purchase, the Reserve Bank ceased to have such power after the formulation of
the portfolio investment scheme since it did not reserve to itself any such
power under the portfolio investment scheme promulgated in exercise of its
powers under section 73(3) of the Foreign Exchange Regulation Act. We do not
see any foundation for this argument in the scheme itself. The scheme does not
talk of any prior or previous permission, nor are we able to understand how a
power possessed by the Reserve Bank under a parliamentary legislation can be so
cut down as to prevent its exercise altogether. It may be open to a subordinate
legislating body to make appropriate rules and regulations to regulate the
exercise of a power which Parliament has vested in it so as to carry out the
purposes of the legislation but it cannot divest itself of the power. We are,
therefore, unable to appreciate how the Reserve Bank, if it has the power under
the Foreign Exchange Regulation Act to grant ex post facto permission, can
divest itself of that power under the scheme. The argument was advanced with particular
reference to the forms prescribed under the scheme. We have already pointed out
that the forms under the scheme cannot abridge the legislation itself.
Before proceeding further,
it is just as well to have a clear picture of the nature of the property in
shares, the law relating to transfer of property in shares under the law and
the effect of the provisions of the Foreign Exchange Regulation Act. For that
purpose, it is desirable that we read together all the relevant statutory
provisions relating to the acquisition, transfer and registration of shares.
Besides referring to the relevant statutory provisions, we will also refer to
the leading cases on the topic.
Section 2(46) of the
Companies Act defines "share" as meaning "share in the share
capital of a company, and includes stock except where a distinction between
stock and shares is expressed or implied." Section 82 of the Companies Act
states : "the shares or other interests of any
member in a company shall be movable property, transferable in the manner
provided by the articles of the company." Section 84 makes a certificate,
under the common seal of the company, specifying any shares held by any member,
prima facie evidence of the title of the member to such shares. Section 87
gives every member of a company holding any equity share capital therein a
right to vote, in respect of such capital, on every resolution placed before
the company, his voting right to be in proportion to his share of the paid-up
equity capital of the company. Section 106 makes provision for ' alteration of
rights of holders of special classes of shares' under certain circumstances.
Section 108(1) prohibits a company from registering a transfer of shares in a
company unless a proper instrument of transfer duly stamped and executed by or
on behalf of the transferor and by or on behalf of the transferee has been
delivered to the company along with the certificate relating to the shares.
Section 108(1A)(a) provides for the presentation of
the instrument of transfer, in the prescribed form, to the prescribed authority
for the purpose of having duly stamped on it the date of such presentation.
Section 108(1A)(b) provides for the delivery of the
duly stamped instrument to the company generally within two months from the
date of such presentation. Sections 108A to 108H impose certain restrictions on
transfer of shares in the company with which we are not concerned for the
purpose of this case. Section 110 provides for application for transfer of
shares. Section 111(1) preserves the power of the company under its articles to
refuse to register the transfer of any shares of the company, and section
111(3) provides for an appeal to the Central Government against such refusal to
register. Section 206 obliges a company not to pay the dividend in respect of
any share except to the registered holder of such share or to his order or to
his bankers or where a share warrant has been issued in respect of the share to
the bearer of such warrant or to his banker. Default in payment of dividend is also
made punishable under section 207. A shareholder along with others, making a
minimum of one hundred members of the company or one-tenth of the total number
of members, has the right to apply to the court under section 397 for relief in
case of oppression and under section 398 for relief in case of mismanagement.
Section 428 defines "contributory" and it includes the holder of any
shares which are fully paid-up. The shareholder, as a contributory, has also
the right to apply for winding-up of the company under section 439. On
winding-up, section 475 enables the court to adjust the rights of the
contributories amongst themselves and to distribute the surplus among the
persons entitled thereto.
We have also to notice here
section 27 of the Securities Contracts (Regulation) Act, 1956, which provides
that it shall be lawful for the holder of any security, whose name appears on
the books of the company issuing the said security to receive and retain any
dividend declared by the company in respect thereof for any year,
notwithstanding that the said security has already been transferred by him for
consideration, unless the transferee who claims the dividend from the
transferor has lodged the security and all other documents relating to the
transfer which may be required by the company with the company for being
registered in his name within fifteen days of the date on which the dividend
became due.
We have to notice further
here that the Sale of Goods Act, 1930, also applies to stocks and shares.
Section 2(7) of the Sale of Goods Act defines "goods" as meaning
"every kind of movable property other than actionable claims and money;
and includes stock and shares, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before sale or under
the contract of sale."
Section 19 prescribes that
where there is a contract for the sale of specific or ascertained goods, the
property in them is transferred to the buyer at such time as the parties to the
contract intend it to be transferred. Intention may be ascertained having
regard to the terms of the contract, the conduct of the parties and the
circumstances of the case. Unless a different intention appears, the rules
contained in sections 20 to 24 are to determine the intention as to the time at
which the property in the goods is to pass to the buyer. Section 20 deals with
specific goods in a deliverable state. Section 21 deals with specific goods to
be put in a deliverable state. Section 22 deals with specific goods in a
deliverable state when the seller has to do anything thereto in order to
ascertain the price. Section 23 deals with sale of unascertained goods and
appropriation and section 24 deals with goods sent on approval or "on sale
or return".
We have referred at the
outset and indeed we have extracted some of the important provisions of the
Foreign Exchange Regulation Act which have relevance to the case before us. We
have seen that while section 19 (1)(b) prescribes that no person shall, except
with the general or special permission of the Reserve Bank, transfer any
security or create or transfer any interest in a security, to or in favour of a
person resident outside India, section 29(1)(b) provides that no person
resident outside India (whether a citizen of India or not) or a company which
is not incorporated under any law in force in India or in which the
non-resident interest is more than 40 per cent, shall except with the general
or special permission of the Reserve Bank purchase the shares in India of any
company carrying on any trade, commerce or industry. The provisions of section
29 are stated to the without prejudice to the provisions of section 47 which
while prohibiting any person from entering into any contract or agreement which
would directly or indirectly evade or avoid in any way the operation of any
provision of the Act or rule or direction or order made there under also
provides that the provisions of the Act requiring that anything for which the
permission of the Central Government or the Reserve Bank is necessary shall not
prevent legal proceedings being brought in India to recover any sum which apart
from the said provisions would be due as debt, damages or otherwise, subject to
the condition that no step shall be taken for the purpose of enforcing any judgment
or order for the payment of any sum, unless the Central Government or the
Reserve Bank, as the case may be, may permit the sum to be paid. We have also
referred earlier to section 19(4) which stipulates that no person shall, except
with the permission of the Reserve Bank, enter the transfer of securities in
any register if he has any ground for suspecting that the transfer involves any
contravention of the provisions of section 19. Sections 48, 50, 56 and 63
prescribe the consequences of non-compliance with the provisions of the Act and
the rules orders and directions issued under the Act and provide for penalties
and prosecutions. The provisions of the Foreign Exchange Regulation Act, to
which we have just now referred, do not appear to stipulate that the purchase
of shares without obtaining the permission of the Reserve Bank shall be void.
On the other hand, legal proceedings arising out of such transactions are
contemplated subject to the condition that no sum may be recovered as debt,
damages or otherwise, unless and until requisite permission is obtained. We
have already held that the permission may be ex post facto. If permission may
be granted ex post facto, quite obviously the transaction cannot be a nullity
and without any effect whatsoever.
In the course of the
submissions, we were referred to Manekji Pestonji Bharucha v. Wadilal Sarabhai
and Co. [1925] 52 IA 92; AIR 1926 PC 38, Bank of India v. Jamsetji A. H.
Chinoy, AIR 1950 PC 90, In re Fry: Chase National Executor and Trustees
Corporation Ltd. v. Fry [1946] 2 All ER 106 (Ch D); [1946] Ch 812, Swiss Bank
Corporation v. Lloyds Bank Ltd. [1981] 2WLR893; [1981]2 A11ER 449 ; [1982] AC
584 (HL), Charanajit Lal Chowdhury v. Union of India, AIR 1951 SC 41, R.
Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Cas 1 (SC) and
Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43
(SC), A. R. Ramiah v. Reserve Bank of India [1970] 1 MLJ 1 and Baliv v. Chopra,
ILR 1971 2 Delhi 637. We have read all of them and we think it is enough if we
refer to some of them.
In Charanjit Lal Chowdhury
v. Union of India, AIR 1951 SC 41 ; 21 Comp Cas 33, Mukherjea J. summarised the
rights of a shareholder in company in the following manner (at p. 58 of 21 Comp
Cas):
"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 incidence 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 the 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 the winding up of the company which
may result in a distribution of the net assets among the shareholders."
It is interesting to notice
that Mukherjea J., in the course of his opinion, expressed the view that a
corporation, which is engaged in the production of a commodity vitally
essential to the community has 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.
In
R. Mathalone v. Bombay Life Assurance Co. Ltd. [1954] 24 Comp Cas 1 (SC), the question of relationship between the transferor
and transferee of shares before registration of the transfer in the books of
the company came to be considered in connection with the right of the
transferee to the "right shares" issued by the company. On the
transfer of shares, transferee became the owner of the beneficial interest
though the legal title was with the transferor, the relationship of trustee and
"cestuique trust" was established and the transferor was bound to
comply with all the reasonable directions that the transferee might give and
that he became a trustee of dividends as also a trustee of the right to vote.
The relationship of trustee and cestui que trust arose by reason of the
circumstance that till the name of the transferee was brought on the register
of shareholders in order to bring about a fair dealing between the transferor
and the transferee, equity clothed the transferor with the status of a
constructive trustee and this obliged him to transfer all the benefits of
property rights annexed to the sold shares of the cestui que trust. The
principle of equity could not be extended to cases where the transferee had not
taken active steps to get his name registered as a member on the register of
the company with due diligence and in the meantime, certain other privileges or
oppprtunities arose for purchase of new shares in consequence of the ownership
of the shares already acquired. The benefit obtained by a transferor as a
constructive trustee in respect of the share sold by him cannot be retained by
him and must go to the beneficiary, but that cannot compel him to make himself
liable for the obligations attaching to the new issues of shares and to make an
application for the new issue by making the necessary payments, unless
specially instructed to do so by the beneficiary.
In
Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakar [1975] 45 Comp Cas 43 (SC), the question
arose this way. The donor gifted certain shares in companies to the appellant
by a registered deed. She also signed several blank transfer forms to enable
the donee to obtain transfer of shares in the register of companies. However,
she died before the shares could be transferred to the appellant in the books
of the companies. The respondent, a nephew of the donor, filed the suit,
claiming the shares on the ground that the gift was incomplete for failure to
comply with the formalities prescribed by the Indian Companies Act, 1913, for
transfer of shares. Noticing that in Maneckji Pestonji Bharucha v. Wadilal
Sarabhai & Co. [1925] 52 IA 92; [1926] ILR 50 Bom 360, a distinction was
made between "the title to get on the register "and" the full
property in the shares in a company", the court expressed the view that
section 6 of the Transfer of Property Act also justified such a splitting up of
a right constituting "property" in shares just as it was well
recognised that rights of ownership of a property might be split up into a
right to the " corpus ' and another to the "usufruct" of the
property and then separately dealt with. On the delivery of the registered deed
of gift together with the share certificate to the donee, the donation of the
right to get the share certificate transferred in the name of the donee became
irrevocable by registration as well as by delivery. Either was sufficient. The
actual transfer in the registers of the companies constituted a mere
enforcement of this right to enable the donee to exercise the rights of the
shareholder. The mere fact that such transfers had to be recorded in accordance
with the company law did not detract from the completeness of what was donated.
Referring to regulation 18 of the First Schedule to the Indian Companies Act of
1913, which prescribed the mode of transfer of shares, it was observed by the
court that there was nothing either in the regulation or elsewhere to indicate
that without strict compliance with some rigidly prescribed form, the
transaction must fail to achieve its purpose. It was said, "the subservience of substance of a transaction to some
rigidly prescribed form required to be meticulously observed savours of archaic
and outmoded jurisprudence". The court referred to the passage in Buckley
on the Companies Acts, 13th edition, p. 813:
"Non-registration of a transfer of shares made by a donor does not render
the gift imperfect", and the passage in Palmer's Company Law, 21st
edition, p. 334: "A transfer is incomplete until registered. Pending
registration, the transferee has only an equitable right to the shares
transferred to him. He does not become the legal owner until his name is
entered on the register in respect of these shares." The two statements of
law were reconciled by the court and it was stated, "the
transferee, under a gift of shares, cannot function as a shareholder recognised
by company law until his name is formally brought upon the register of a
company and he obtains a share certificate as already indicated above. Indeed,
there may be restrictions on transfers of shares either by gift or by sale in
the articles of association". It was pointed out that, "a transfer of
' property ' rights in shares, recognised by the Transfer of Property Act, may
be antecedent to the actual vesting of all or the full rights of ownership of
shares and exercise of the rights of shareholders in accordance with the
provisions of the company law", and that while transfer of property in
general was not the subject-matter of the Companies Act, it deals with
"transfers of shares only because they give certain rights to the legally
recognised shareholders and imposes some obligations upon them with regard to
the companies in which they hold shares. A share certificate not merely
entitles the shareholder whose name is found on it to interest in the share
held but also to participate in certain proceedings relating to the company
concerned."
In In re Fry [1946] 2 All
ER 106 (Ch D), F, a resident of the United States of America desiring to make a
gift to his son of certain shares of an English company, executed a deed of
transfer and sent it to the company for registration. As the Defence (Finance)
Regulations prohibited any transfer of any securities or any interest in
securities held by a non-resident without permission from the treasury, the
company wrote to F that certain forms had to be completed by him and the transferee
and that a licence had to be obtained from the treasury. Before F could apply
and obtain the permission of the treasury, he died. The question arose whether
F's son was entitled to require F's personal representatives to obtain for him
legal and beneficial possession of the shares. It was held that the permission
of the treasury not having been obtained, the company could not register the
transfer and, therefore, the son acquired no legal title to the shares in
question. Nor was there a complete gift of the equitable interest in the shares
to the son because F had not obtained the consent of the treasury and had,
therefore, not done all that was necessary to divest himself of his equitable
interest in favour of his son. The son was, therefore, not entitled to sue the
father's personal representatives to obtain for him legal and beneficial
possession of the shares.
In
Swiss Bank Corporation v. Lloyds Bank Ltd. [1981] 2 WLR 893; [1981] 2 All ER 449 ; [1982] AC
584 (HL) the question was about the consequence of an authorised depository
under section 16(2) of the Exchange Control Act, 1947, parting with a
certificate relating to a foreign currency security without the permission of
the treasury contrary to Bank of England Exchange Control Notice E.C. 7. In the
Court of Appeal, Buckley L. J. observed (at p. 431 of [1980] 2 All ER):
"..........the Bank of
England, we must assume for sufficient reasons, declined to validate the
transfer of custody. It must consequently be treated as having been made in
contravention of section 16(2), which, as I have already mentioned, is conceded
; but an act done in contravention of a statute is not necessarily a nullity.
Whether it is so or not must depend upon the terms and effect of the statute,
and may depend upon the policy of the statute and the nature of the act itself.
By section 34 of the 1947 Act, effect is given to the provisions of Schedule 5
to the Act for the purposes of the enforcement of the Act. Paragraph 1(1) of
Part II of Schedule 5 provides that any person in or resident in the
In my judgment offences
under the Act are clearly mala prohibita, not mala in se; they are not acts the
validity of which the law refuses to coun tenance for any purpose. As such they
are not devoid of any effect; they merely expose the culprits to the penalties
prescribed by the Act none of which, so far as I am aware, has been exacted or
sought to be exacted in this case......... If the legislature had intended that
such a security, if trans ferred from the custody of one authorised depositary
to the custody of another without compliance with all the conditions of any
relevant per mission, should not be treated as being in the custody of the
latter deposi tary, one would, I think, expect to find an express provision to
that effect, for otherwise the consequence of an irregular transfer of custody
is left in doubt."
Earlier we mentioned that
section 111 of the Companies Act preserves the power of the company under its
articles to refuse to register the transfer of any shares of the company. The
nature and extent of the power of the company to refuse to register the
transfer of shares has been explained by this court in Bajaj Auto Ltd. v. N.K.
Firodia [1971] 41 Comp Cas 1, 6, 7 (SC). It was said that even if the articles
of the company provided that the directors might at their absolute and
uncontrolled discretion decline to register any transfer of shares,
such discretion does not mean a bare affirmation or negation of a proposal. Discretion
implies just and proper consideration of the proposal, in the facts and
circumstances of the case. In the exercise of that discretion, the directors
will act for the paramount interest of the company and for the general interest
of the shareholders because the directors are in a fiduciary position both
towards the company and towards every shareholder. The directors are,
therefore, required to act bona fide and not arbitrarily and not for any
collateral motive. " Where the articles permitted the directors to decline
to register the transfer of shares without assigning reasons, the court would
not necessarily draw adverse inference against the directors but will assume
that they acted reasonably and bona fide. Where the directors gave reasons, the
court would consider whether the reasons were legitimate and whether the
directors proceeded on a right or wrong principle. If the articles permitted
the directors not to disclose the reasons, they could be interrogated and asked
to disclose the reasons. If they failed to disclose that reason, adverse
presumption could be drawn against them.
On an overall view of the
several statutory provisions and judicial precedents to which we have referred,
we find that a shareholder has an undoubted interest in a company, an interest
which is represented by his shareholding. Share is movable property, with all
the attributes of such property. The rights of a shareholder are (i) to elect
directors and thus to participate in the management through them ; (ii) to vote
on resolutions at meetings of the company ; (iii) to enjoy the profits of the
company in the shape of dividends ; (iv) to apply to the court for relief in
the case of oppression; (v) to apply to the court for relief in the case of
mismanagement ; (vi) to apply to the court for winding up of the company ;
(vii) to share in the surplus on winding up. A share is transferable but while
a transfer may be effective between transferor and transferee from the date of
transfer, the transfer is truly complete and the transferee becomes a
shareholder in the true and full sense of the term, with all the rights of a
shareholder, only when the transfer is registered in the company's register. A
transfer effective between the transferor and the transferee is not effective
as against the company and persons without notice of the transfer until the
transfer is registered in the company's register. Indeed, until the transfer is
registered in the books of the company, the person whose name is found in the
register alone is entitled to receive the dividends, notwithstanding that he
has already parted with his interest in the shares. However, on the transfer of
shares, the transferee becomes the owner of the beneficial interest though the
legal title continues with the transferor. The relationship of trustee and
"cestuique trust" is established and the transferor is bound to
comply with all the reasonable directions that the transferee may give. He also
becomes a trustee of the dividends as also of the right to vote. The right of
the transferee "to get on the register" must be exercised with due
diligence and the principle of equity which makes the transferor a constructive
trustee does not extend to a case where a transferee takes no active interest
"to get on the register". Where the transfer is
regulated by a statute, as in the case of a transfer to a non-resident which is
regulated by the Foreign Exchange Regulation Act, the permission, if any,
prescribed by the statute must be obtained. In the absence of the
permission, the transfer will not clothe the transferee with the right "to
get on the register" unless and until the requisite permission is
obtained. A transferee who has the right to get on the register, where no
permission is required or where permission has been obtained, may ask the
company to register the transfer and the company who is so asked to register
the transfer of shares may not refuse to register the transfer except for a
bona fide reason, neither arbitrarily nor for any collateral purpose. The
paramount consideration is the interest of the company and the general interest
of the shareholders. On the other hand, where, for instance, the requisite
permission under the Foreign Exchange Regulation Act is not obtained, it is
open to the company and, indeed, it is bound to refuse to register the transfer
of shares of an Indian company in favour of a non-resident. But
once permission is obtained, whether before or after the purchase of the
shares, the company cannot, thereafter, refuse to register the transfer of
shares. Nor is it open to the company or any other authority or
individual to take upon itself or himself, thereafter, the task of deciding
whether the permission was rightly granted by the Reserve Bank. The provisions
of the Foreign Exchange Regulation Act are so structured and woven as to make
it clear that it is for the Reserve Bank alone to consider whether the
requirements of the provisions of the Foreign Exchange Regulation Act and the
various rules, directions and orders issued from time to time have been fulfilled
and whether permission should be granted or not. The consequences of
non-compliance with the provisions of the Act and the rules, orders and
directions issued under the Act are mentioned in sections 48, 50, 56 and 63 of
the Act. There is no provision of the Act which enables an individual or
authority functioning outside the Act to determine for his own or its own
purpose whether the Reserve Bank was right or wrong in granting permission
under section 29(1) of the Act. As we said earlier, under the scheme of the
Act, it is the Reserve Bank that is constituted and entrusted with the task of
regulating and conserving foreign exchange. If one may use such an expression,
it is the "custodian-general" of foreign exchange. The task of
enforcement is left to the Directorate of Enforcement, but it is the Reserve
Bank and the Reserve Bank alone that has to decide whether permission may or
may not be granted under section 29(1) of the Act. The Act makes it its
exclusive privilege and function. No other authority is vested with, any power
nor may it assume to itself the power to decide the question whether permission
may or may not be granted or whether it ought or ought not to have been
granted. The question may not be permitted to be raised either directly or collaterally.
We do not, however, rule out the limited class of cases where the grant of
permission by the Reserve Bank may be questioned by an interested party in a
proceeding under article 226 of the Constitution on the ground that it was mala
fide or that there was no application of the mind or that it was opposed to the
national interest as contemplated by the Act, being in contravention of the
provisions of the Act and the rules, orders and directions issued under the
Act. Once permission is granted by the Reserve Bank, ordinarily it is not open
to anyone to go behind the permission and seek to question it. It is certainly
not open to a company whose shares have been purchased by a non-resident
company to refuse to register the shares even after permission is obtained from
the Reserve Bank on the ground that permission ought not to have been granted
under the Foreign Exchange Regulation Act. It is necessary to remind ourselves
that the permission contemplated by section 29(1) of the Foreign Exchange Regulation
Act is neither intended to nor does it impinge in any
manner on any legal right of the company or any of its shareholders. Conversely
neither the company nor any of its shareholders is clothed with any special
right to question any such permission.
Much was said before us
about the mala fides of the Government of India and the Reserve Bank of
It was argued that, from
time to time, the company had addressed several communications to the Reserve
Bank drawing the latter's attention to several irregularities and illegalities,
which it claimed, had been committed by Mr. Swraj Paul and the Caparo Group of
companies, but to no avail, as the Reserve Bank failed to respond and make any
enquiry into the matter. It was said that the Reserve Bank was guilty of total
non-application of the mind and, therefore, mala fides in law could be
attributed to it. We are unable to agree with this submission. Merely because
the Reserve Bank did not choose to send a reply to the communications received
from the company, it did not follow that the Reserve Bank was not acting bona
fide. While we may say that the Reserve Bank would have done well to
acknowledge the communications received from the company and to reply to them,
we are unable to infer mala fides from their failure to do so. It was not as if
the Reserve Bank ignored the complaints of the company. They did enquire into
the matter in their own way. As already mentioned by us during the course of
the narration of events, the Reserve Bank pursued its enquiry by seeking
information from the Punjab National Bank, who was an authorised dealer
appointed under the provisions of the Foreign Exchange Regulation Act and who,
therefore, could be expected to supply the Reserve Bank with full and accurate
information. At that stage, there was nothing to doubt the bona fides and the
ineptitude of the Punjab National Bank. The company also in its several
communications to the Reserve Bank did not make any allegations against the
Punjab National Bank. In those circumstances, if the Reserve Bank thought it
fit to seek information from the Punjab National Bank and proceeded to act on
the information obtained from the Punjab National Bank, the Reserve Bank cannot
be accused of non-application of mind. The Reserve Bank was entitled to rely on
the Punjab National Bank and the information supplied by that bank as the bank
held a statutory position under the Foreign Exchange Regulation Act. It may be
that the Punjab National Bank did not act with that degree of competence and
diligence as should be expected from it, but at that stage, there was nothing
to provoke any suspicion in the mind of the Reserve Bank. We will revert to the
part played by the Punjab National Bank presently, but there is no reason to
charge the Reserve Bank with want of bona fides and non-application of mind
merely because it placed reliance upon the Punjab National Bank and the
information supplied by it although with the aid of some of the material now
brought out during the hearing, we perceive that the Reserve Bank could have
acted with greater wisdom than to rely on the Punjab National Bank. But that
would really be speaking with "hindsight".
Earlier we had referred to
the failure of the Punjab National Bank to inform the Reserve Bank, as it was
bound to do, about the remittance of £1,30,000
received from Mr. Swraj Paul by their
The result of the
dereliction of duty on the part of the Punjab National Bank is that there had
been no proper monitoring of the purchase of shares by the thirteen Caparo
Group of companies. While we are unable to hold that the Reserve Bank did not
act bona fide or apply its mind to the relevant facts and circumstances which
were required to be considered by it before granting permission, because, it did
bona fide apply its mind to whatever material was then available to it and
supplied to it by the Punjab National Bank, we must hold on the material now
available to us that their implicit reliance on the Punjab National Bank was
entirely misplaced. What further action must be taken on that finding is a
question which we have to consider. We will do so later after considering the
other questions argued before us.
Shri Nariman contended that
there were several circumstances in the record which established that a large
number of shares were purchased with funds which were made available locally
and not funds remitted from abroad and also that the shares were purchased
subsequent to May 2, 1983. The circumstances were: (i) the purchase of shares
commenced before the remittances started; (ii) the price at which the shares
were available in the market showed that funds in excess of what was remitted
must have been utilised for purchasing the shares and this could only have been
with rupee funds; (iii) the company was able to obtain two brokers' notes from
two of the sellers' brokers which showed that the sales were made long
subsequent to May 2, 1983 ; and (iv) out of the total number of shares
purchased on behalf of the thirteen companies, 4,62,000 shares only were lodged
with the company on May 14, 1983, for registering the transfers. 3,68,463
shares were lodged on August 19, 1983, that is, 3½ months, after May 2, 1983,
which was the cut-off date fixed for the imposition of the ceiling of 5 per
cent. 1,44,200 shares were not lodged at all with the
company. The failure to lodge the shares within a reasonable period after April
28, 1983, which was supposed to be the date by which all the purchases had been
made indicated that the purchases must have been made
long afterwards. Every one of these circumstances is capable of some
explanation, adequate or not and we do not have the necessary material to say
on the record now before us. The question will involve a probe into individual
purchases and the adducing of evidence. That would be beyond the scope of the
writ petition in the High Court. It is to be remembered that the High Court
refused to issue a rule nisi in regard to prayer (d), obviously as it was
thought that the court exercising jurisdiction under article 226 of the
Constitution should not explore the evidence to determine the dates of the
various transactions of purchase of shares and whether they were purchased with
foreign exchange or locally available funds. We consider that it is really a
matter for the consideration of the final monitoring authority, namely, the
Reserve Bank. We will later indicate what we propose to do about this aspect of
the matter.
It was submitted that the
thirteen Caparo companies were thirteen companies in name only; they were but
one and that one was an individual, Mr. Swraj Paul. One had only to pierce the
corporate veil to discover Mr. Swraj Paul lurking behind. It was submitted that
thirteen applications were made on behalf of the thirteen companies in order to
circumvent the scheme which prescribed a ceiling of one percent, on behalf of
each non-resident of Indian nationality or origin or each company 60 per cent,
of whose shares were owned by non-residents of Indian nationality/origin. Our
attention was drawn to the picturesque pronouncement of Lord Denning M. R. in
Walletsteiner v. Moir [1974] 1 WLR 991 ; [1974] 3 All ER 217 (CA) and the
decisions of this court in Tata Engineering and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas
458 (SC), CIT v. Sree Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) and Workmen
v. Associated Rubber Ltd, [1986] 59 Comp Cas 134; 157 ITR 77; 67FJR 196. While
it is firmly established ever since Salomon v. A. Salomon and Co. Ltd. [1897] AC 22 (HL) was decided that a company has an
independent and legal personality distinct from the individuals who are its
members, it has since been held that the corporate veil may be lifted, the
corporate personality may be ignored and the individual members recognised for
who they are in certain exceptional circumstances. Pennington in his Company
Law (Fourth Edition) states :
"Four inroads have
been made by the law on the principle of the separate legal personality of
companies. By far the most extensive of these has been made by legislation
imposing taxation. The Government, naturally enough, does not willingly suffer
schemes for the avoidance of taxation which depend for their success on the
employment of the principle of separate legal personailty, and in fact
legislation has gone so far that in certain circumstances taxation can be
heavier if companies are employed by the taxpayer in an attempt to minimise his
tax liability than if he uses other means to give effect to his wishes.
Taxation of companies is a complex subject, and is outside the scope of this book.
The reader who wishes to pursue the subject is referred to the many standard
text books on corporation tax, income tax, capital gains tax and capital
transfer tax.
The other inroads on the
principle of separate corporate personality have been made by two sections of
the Companies Act, 1948, by judicial disregard of the principle where the
protection of public interests is of paramount importance, or where the company
has been formed to evade obligations imposed by the law, and by the courts
implying in certain cases that a company is an agent or trustee for its
members."
In Palmer's Company Law
(Twenty-third Edition), the present position in
In the present case, we do
not think "lifting the veil" is necessary or permissible beyond the
essential requirement of the Foreign Exchange Regulation Act and the portfolio
investment scheme. We have noticed that the object of the Act is to conserve
and regulate the flow of foreign exchange and the object of the scheme is to
attract non-resident investors of Indian nationality or origin to invest in
shares of Indian companies. In the case of individuals, there can be no
difficulty in identifying their nationality or origin. In the case of companies
and other legal personalities, there can be no question of nationality or
ethnicity of such company or legal personality. Which of such non-resident
companies or legal personalities may then be permitted to invest in shares of
Indian companies ? The answer is furnished by the
scheme itself which provides for "lifting the corporate veil" to find
out if at least 60 per cent, of the shares are held by non-residents of Indian
nationality or origin. Lifting the veil is necessary to discover the
nationality or origin of the shareholders and not to find out the individual
identity of each of the shareholders. The corporate veil may be lifted to that
extent only and no more.
The particulars of the
scheme have already been extracted by us. First, a ceiling of one per cent, of
the equity capital of the Indian company was imposed on the purchase of its
shares by any single foreign investor. The obvious object of the imposition of
the ceiling was the prevention of destablisation of Indian companies by foreign
investors purchasing large blocks of shares and attempting to take over the
Indian companies. We have already explained the futility of the imposition of
the one per cent, ceiling since that would not effectively prevent a group of
foreign investors of Indian origin from investing in shares of Indian companies
by each of them purchasing one per cent, of the shares. We also pointed out
that different foreign companies in which several different groups of resident
Indians with one individual common to all together held more than 60 per cent,
of the shares could not be denied the facility of investing in shares of Indian
companies merely because the foreign companies were dominated by the single
common non-resident individual. That would be unfair to the other non-resident
Indian shareholders of the foreign companies who would otherwise be entitled to
the benefit of investment in Indian companies, via the foreign companies in
which they hold shares. Clearly, it was the realisation of the futility of the
one per cent, limit that led to the imposition of the five per cent, aggregate
limit. The five per cent, aggregate limit would effectively prevent any single
foreign investor or a combination of foreign investors from attempting to
destabilise Indian companies by purchasing large blocks of shares. If this is
borne in mind, it will be clear that the lifting of the corporate veil is
necessary and permissible in the present case, only to find out the nationality
or origin of the shareholders of the foreign companies seeking to invest in
shares of Indian companies and not to explore the individual identity of the
shareholders. We do not think that merely because more than 60 per cent, of the
shares of the several foreign companies which have applied for permission are
held by a trust of which Mr. Swraj Paul and the members of his family are the
beneficiaries, the companies can be denied the facility of investing in Indian
companies. In fact, if each of the six beneficiaries of the trust had
separately applied for permission to purchase shares of Indian companies, they
could not have been denied such permission. It cannot, therefore, be said that
there has been any violation of the portfolio investment scheme merely on that
account or that the permission granted is illegal.
We now turn to the case of
Escorts Ltd. against the Life Insurance Corporation of
What does the sequence of
events go to show ? It shows that the financial institutions
which held 52% of the shares of the company and, therefore, had a very big
stake in its working and future were aggrieved that the management did not even
choose to consult them or inform them that a writ petition was proposed to be
filed which would launch and involve the company in difficult and expensive
litigation against the Government and the Reserve Bank. The financial
institutions must have been struck by the duplicity of Mr. Nanda, who was
holding discussions with them, while he was simultaneously launching the
company, of which they were the majority shareholders, into a possibly
trouble-some litigation without even informing them. The financial institutions
were instrumentalities of the State and so was the
Reserve Bank and it must have been thought unwise to launch such a litigation.
The institutions were, therefore, anxious to withdraw the writ petition and
discuss the matter further. As the management was not agreeable to this course,
the Life Insurance Corporation thought that it had no option but to seek
removal of the nonexecutive directors so as to enable the new board to consider
the question whether to reverse the decision to pursue the litigation.
Evidently, the financial institutions wanted to avoid a confrontation with the
Government and the Reserve Bank and adopt a more conciliatory approach. At the
same time, the resolution of the Life Insurance Corporation did not seek
removal of the executive directors, obviously because they did not intend to
disturb the management of the company. It is, therefore, difficult to accuse
the Life Insurance Corporation of
A company is, in some
respects, an institution like a State functioning under its "basic
constitution" consisting of the Companies Act and the memorandum of
association. Carrying the analogy of constitutional law a little further, Gower
describes "the members in general meeting" and the directorate as the
two primary organs of a company and compares them with the legislative and the
executive organs of a Parliamentary democracy where legislative sovereignty
rests with Parliament, while administration is left to the Executive
Government, subject to a measure of control by Parliament through its power to
force a change of Government. Like the Government, the directors will be
answerable to "Parliament" constituted by the general meeting. But in
practice (again like the Government), they will exercise as much control over
Parliament as that exercises over them. Although it would be constitutionally
possible for the company in general meeting to exercise all the powers of the
company, it clearly would not be practicable (except in the case of one or two-man-companies)
for day-to-day administration to be undertaken by such a cumbersome piece of
machinery. So, the modern practice is to confer on the directors the right to
exercise all the company's powers except such as the general law expressly
provides must be exercised in general meeting (Gower's Principles of Modern Company Law). Of course,
powers which are strictly legislative
are not affected by the conferment of powers on the directors as section 31 of
the Companies Act provides that an alteration of an article would require a
special resolution of the company in general meeting. But a perusal of the
provisions of the Companies Act itself make9 it clear that in many ways the
position of the directorate vis-a-vis the company is more powerful than that of
the Government vis-a-vis Parliament. The strict theory of parliamentary
sovereignty would not apply by analogy to a company since under the Companies Act, there are many powers exercisable by the directors with
which the members in general meeting cannot interfere. The most they can do is
to dismiss the directorate and appoint others in their place, or alter the
articles so as to restrict the powers of the directors for the future. Gower
himself recognises that the analogy of the Legislature and the executive in
relation to the members in general meeting and the directors of a company is an oversimplification and states "to some extent a
more exact analogy would be the division of powers between the Federal and the
State Legislature under a Federal Constitution". As already noticed, the
only effective way the members in general meeting can exercise their control
over the directorate in a democratic manner is to alter the articles so as to
restrict the powers of the directors for the future or to dismiss the directorate
and appoint others in their place. The holders of the majority of the stock of
a corporation have the power to appoint, by election, directors of their choice
and the power to regulate them by a resolution for their removal. And, an
injunction cannot be granted to restrain the holding of a general meeting to
remove a director and appoint another.
In Shaw & Sons (
"The only way in which
the general body of the shareholders can control the exercise of powers vested
by the articles in the directors is by altering the articles or, if opportunity
arises under the articles, by refusing to re-elect the directors of whose
action they disapproved."
In Isle of Wight Railway
Co. v. Tahourdin [1884] 25 Ch 320 (Ch D) Cotton L. J. said (at p. 332):
"Then there is a
second object, 'To remove (if deemed necessary or
expedient) any of the present directors, and to elect directors to fill any
vacancy in the board.' The learned judge below thought that too indefinite, but
in my opinion a notice to remove 'any of the present directors' would justify a
resolution for removing all who are directors at the present time; 'any' would
involve 'all.' I think that a notice in that form is quite sufficient for all practical
purposes."
Fry L.J. said (at p. 335):
"The second objection
was, that a requisition to call a meeting 'to remove (if deemed necessary or
expedient) any of the present directors' is too vague. I think that it is not.
It appears to me that there is a reasonably sufficient particularity in that
statement. It is said that each director does not know whether he is attacked
or not. The answer is, all the directors know that
they are laid open to attack. I think that any other form of requisition would
have been embarrassing, because it is obvious that the meeting might think it
fit to remove a director or allow him to remain, according to his behaviour and
demeanour at the meeting with regard to the proposals made at it."
In the same case,
considering the question whether an injunction should be granted to restrain
the holding of a general meeting, one of the purposes of the meeting being the
appointment of a committee to reorganise the management of the company, Cotton
L.J. said (at p. 329):
"It is a very strong
thing indeed to prevent shareholders from holding a meeting of the company,
when such a meeting is the only way in which they can interfere, if the
majority of them think that the course taken by the directors, in a matter
which is intra vires of the directors, is not for the benefit of the
company."
In
Inderwick v. Snell (42 English Reports 83, 85), the deed of settlement of a
company provided for the removal of any director "for negligence,
misconduct in office or any other reasonable cause". Some directors were removed and others were appointed. The
directors who were removed sued for an injunction to prevent the new directors
from acting on the ground that there was no reasonable cause for their removal.
The court negatived the claim for judicial review of the reasons for removal
and made the following interesting observations :
"The argument for the
plaintiffs rested on the allegation that the general cause of removal referred
to in the clause being expressed to be 'reasonable' prevents the power referred
to from being a power to remove at pleasure arbitrarily or capriciously, and
made it requisite that the proceeding for exercising the power should be in its
nature judicial, and that the reasonable cause should be such as a court of
justice would consider good and sufficient. If this argument could be
sustained, all proceedings at such meetings would be subject to the review of
the courts of justice, which would have to inquire whether the cause of removal
which was charged was in their view reasonable, whether the charges were bona
fide brought forward, whether they were substantiated by such evidence as the
nature of the case required, and whether the conclusion was come to upon a due
consideration of the charge and evidence. But the deed is silent as to these
matters and the question is whether any such power of control in the courts of
justice is to be inferred from the words 'reasonable cause' contained in the
27th clause; whether the expression 'reasonable cause' contained in such a deed
of a trading partnership can be held to be such a cause, as upon investigation
in a court of justice must be held to be bona fide founded on sufficient
evidence and just; or whether it ought not to be held to mean such cause as in
the opinion of the shareholders duly assembled shall be deemed reasonable. We
think the latter is the true construction and effect of the deed.
In a moral point of view,
no doubt every charge of a cause of removal ought to be made bona fide,
substantiated by sufficient evidence, and determined on a due consideration of
the charge and evidence ; and those who act on other
principles may be guilty of a moral offence : they may be very unjust, and
those who (being misled by the statements made to them), have no doubt a just
right to complain that they have been led to concur in an unjust act. But the
question is, whether by this deed the shareholders duly assembled at a general
meeting might not, or had not a right to, remove a director for a cause which
they thought reasonable, without its being incumbent upon them to prove to this
or any other court of justice that the charge was true and the decision just,
or that the case was substantiated after a due consideration of the evidence
and charge. We cannot take upon ourselves to say that in the case of a trading
partnership like this, this court has upon such a clause in the deed of
partnership jurisdiction or authority to determine whether, by the unfounded
speech of any supporter of the charge, the shareholders present may not have
been misled or unduly influenced.
All such meetings are
liable to be misled by false or erroneous statements,
and the amount of error or injustice thereby occasioned can rarely, if ever, be
appreciated. This court might inquire whether the meeting was regularly held,
and in cases of fraud clearly proved, might perhaps interfere with the acts
done; but supposing the meeting to be regularly convened and held, the
shareholders assembled at such meeting may exercise the powers given to them by
the deed. The effect of speeches and representations cannot be estimated, and
for those who think themselves aggrieved by such representations, or think the
conclusion unreasonable, it would seem that the only remedy is present defence
by stating the truth and demanding time for investigation and proof, or the
calling of another meeting, at which the whole matter may be reconsidered. The
plaintiffs, objecting to this meeting and considering it illegal, protested
against it, but abstained from attending, and, therefore, made no answer or
defence to, and required no proof of, the charges made against them. The
adoption of this course was unfortunate, but does not afford any grounds for
the interference of this court."
Again in Bemtley-Stevens v.
Jones [1974] 1 WLR 638 ; [1974] 2 All ER 653 (HL), it was held that a
shareholder had a statutory right to move a resolution to remove a director and
that the court was not entitled to grant an injunction restraining him from
calling a meeting to consider such a resolution. A proper remedy of the
director was to apply for a winding-up order on the ground that it was
"just and equitable" for the court to make such an order. The case of
Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 WLR 1289; [1972] 2 All ER 492
(HL), was explained as a case where a winding-up order was sought. In the case
of Ebrahimi v. West-bourne Galleries Ltd. [1972] 2 WLR 1289 ;
[1972] 2 All ER 492 (HL), the absolute right of the general meeting to remove
the directors was recognised and it was pointed out that it would be open to
the director sought to be removed to ask the company court for an order for
winding-up on the ground that it would the "just and equitable" to do
so. The House of Lords said (at p. 500 of [1972] 2 All ER):
"My Lords, this is an expulsion
case, and I must briefly justify the the application in such cases of the just
and equitable clause...The law of companies recognises the right, in many ways,
to remove a director from the board. Section 184 of the Companies Act, 1948,
confers this right on the company in general meeting whatever the articles may
say. Some articles may prescribe other methods, for example, a governing
director may have the power to remove (of In re Wondoflex Textiles P. Ltd.
[1951] VLR 458). And quite apart from removal powers, there are normally
provisions for retirement of directors by rotation so that their re-election
can be opposed and defeated by a majority, or even by a casting vote. In all
these ways a particular director-member may find himself no longer a director,
through removal, or non-re-election: this situtation he must normally accept,
unless he undertakes the burden of proving fraud or mala fides. The just and
equitable provision nevertheless comes to his assistance if he can point to,
and prove, some special underlying obligation of his fellow member(s) in good
faith, or confidence, that so long as the business continues he shall be
entitled to management participation, an obligation so basic that if broken,
the conclusion must be that the association must be dissolved."
Thus, we see that every
shareholder of a company has the right, subject to statutorily prescribed
procedural and numerical requirements, to call an extraordinary general meeting
in accordance with the provisions of the Companies Act. He cannot be restrained
from calling a meeting and he is not bound to disclose the reasons for the
resolutions proposed to be moved at the meeting. Nor are the reasons for the
resolutions subject to judicial review. It is true that under section 173(2) of
the Companies Act, there shall be annexed to the notice of the meeting a
statement setting out all material facts concerning each item of business to be
transacted at the meeting including, in particular, the nature of the concern
or the interest, if any, therein, of every director, the managing agent, if
any, the secretaries and treasurers, if any, and the manager, if any. This is a
duty cast on the management to disclose, in an explanatory note, all material
facts relating to the resolution coming up before the general meeting to enable
the shareholders to form a judgment on the business before them. It does not
require the shareholders calling a meeting to disclose the reasons for the
resolutions which they propose to move at the meeting. The Life Insurance
Corporation of
It was, however, urged by
the learned counsel for the company that the Life Insurance Corporation was an
instrumentality of the State and was, therefore, debarred by article 14 from
acting arbitrarily. It was, therefore, under an obligation to state to the
court its reasons for the resolution once a rule nisi was issued to it. If it
failed to disclose its reasons to the court, the court would presume that it
had no valid reasons to give and its action was, therefore, arbitrary. The
learned counsel relied on the decisions of this court in Sukhdev Singh v.
Bhagatram Sardar Singh Raghu-vanshi [1975] 45 Comp Cas 285; AIR 1975 SC 1331;
Maneka Gandhi v. Union of India AIR 1978 SC 597, Ramana Dayaram Shetty v.
International Airport Authority of India, AIR 1979 SC 1628, and Ajai Hasia v.
Khalid Mujib Sehravardi, AIR 1981 SC 487. The learned Attorney-General, on the
other hand, contended that actions of the State or an instrumentality of the
State which do not properly belong to the field of public law but belong to the
field of private law are not liable to be subjected to judicial review. He
relied on O'Reilly v. Mackman [1982] 3 WLR 1096 ; [1982] 3 All ER 1124 (HL),
Davy v. Spelthorne Borough Council [1983] 3 WLR 742 ; [1983] 3 All ER 278 ;
[1984] AC 262 (HL), I Congreso del Parido [1981] 3 WLR 328 ; [1981] 2 All ER
1064 (HL), Reg. v. East Berkshire Health Authority : Ex parte Walsh [1984] 3
WLR 818 ; [1984] 3 All ER 425 (CA) and Radha Krishna Agarwal v. State of Bihar
[1977] 3 SCR 249; AIR 1977 SC 1496. While we do find considerable force in the
contention of the learned Attorney-General, it may not be necessary for us to
enter into any lengthy discussion of the topic, as we shall presently see. We
also desire to warn ourselves against readily referring to English cases on
questions of constitutional law, administrative law and public law as the law
in India in these branches has forged ahead of the law in England, guided as we
are by our Constitution and uninhibited as we are by the technical rules which
have hampered the development of the English law. While we do not for a moment
doubt that every action of the State or an instrumentality of the state must be
informed by reason and that, in appropriate cases, actions uninformed by reason
may be questioned as arbitrary in proceedings under article 226 or article 32
of the Constitution, we do not construe article 14 as a charter for judicial
review of State actions and to call upon the State to account for its actions
in its manifold activities by stating reasons for such actions.
For example, if the action
of the State is political or sovereign in character, the court will keep away
from it. The court will not debate academic matters or concern itself with the
intricacies of trade and commerce. If the action of the State is related to
contractual obligations or obligations arising out of tort, the court may not
ordinarily examine it unless the action has some public law character attached
to it. Broadly speaking, the court will examine actions of State if they
pertain to the public law domain and refrain from examining them if they
pertain to the private law field. The difficulty will lie in demarcating the
frontier between the public law domain and the private law field. It is
impossible to draw the line with precision and we do not want to attempt it.
The question must be decided in each case with reference to the particular action,
the activity in which the State or the instrumentality of the State is engaged
when performing the action, the public law or private law character of the
action and a host of other relevant circumstances. When the State or an
instrumentality of the State ventures into corporate world and purchases the
shares of a company, it assumes to itself the ordinary role of a shareholder,
and dons the robes of a shareholder, with all the rights available to such
shareholder. There is no reason why the State as a share holder should be
expected to state its reasons when it seeks to change the management, by a
resolution of the company, like any other shareholder.
In the instant case, the
reason for the resolution stares one in the face. The financial institutions who held the majority of the stock were not only not told by
the management about the filing of the writ petition in the High Court but were
deliberately kept in the dark about it. The matter was not even discussed at a
meeting of the directors before the writ petition was filed. It was filed in a
furtive manner even as Mr. Nanda was purporting to hold discussions with Mr.
Punja and others. And that was not all. Mr. Nanda was also unduly exerting
himself in certain matters to the detriment of the majority shareholders. We
will immediately refer to these matters.
One of the circumstances
relied upon to establish the mala fides of the Life Insurance Corporation, a
consideration of which leads us to the conclusion that the boot was on the
other leg was the attitude taken by the Life Insurance Corporation in regard to
(i) the issue of equity-linked-deben-tures; (ii) repayment of loans to Indian
financial institutions ; and (iii) the proposal for
the merger of Goetze with Escorts. It was argued that the facts clearly disclosed
an attempt on the part of the Life Insurance Corporation to exert pressure on
Escorts Ltd. It is impossible to agree with the submission.
In regard to the proposal
for the issue of equity-linked-debentures, the facts are as follows: Escorts
obtained the approval of the Government , under the
MRTP Act to establish a new undertaking to manufacture motor cycles/scooters.
According to Escorts, the proposal for the issue of equity-linked-debentures
was conceived to meet the cost of the new project. According to the Life
Insurance Corporation, the issue was solely motivated by an anxiety to reduce
the percentage of the holdings of the Life Insurance Corporation and other
financial institutions in the equity capital of the company. The barest
scrutiny of the proposal, as it finally emerged from Escorts Ltd., is
sufficient to expose the game of Escorts Ltd. The proposal, as it finally
emerged from Escorts Ltd., was to issue 17,50,000 secured redeemable debentures
of Rs. 100 each and equity shares of the value of Rs. 17.50 crores divided into
87,50,000 equity shares of Rs. 10 each for cash at a premium of Rs. 10 per
share. It was proposed that 20 per cent, of the. new
issue would be offered on preferential basis to existing resident equity
shareholders of Escorts Ltd. and Goetze Ltd. (in accordance with the
amalgamation proposal)
subject to maximum allotment of 100 debentures and 500 equity shares to any single shareholder. The promoters, directors
and their friends and relatives, business associates and employees were to be
offered 15 per cent, of the new issue on a preferential basis, but in their
case there was to be no ceiling on the number of shares which might be allotted
to any one of them. 30 per cent, of the new issue was to be offered to the
public. Having regard to the ceiling of 500 shares proposed to be imposed in
the case of allotment to existing equity shareholders, the Life Insurance
Corporation, notwithstanding the fact that it owned 30 per cent, of the shares
of Escorts Ltd., would be entitled to a meagre 500 shares in the new issue. The
result would be that its holdings would be reduced from 30 per cent, to 18.14
per cent. The holding of all the financial institutions would be reduced from
51.62 to 31.21 per cent. Not merely would it result in the reduction of the
percentage of the holding of the financial institutions in the capital stock of
the company, but it would also result in great financial loss to the
institutions in the following manner : if the existing shareholders were to be
given preferential allotment in the new issue on the basis of their existing
holdings without any ceiling, the Life Insurance Corporation and other
financial institutions would be entitled not to the meagre 500 shares each, but
to some tens of thousands of shares in the new issue. Taking the market value
of the shares into account at Rs. 50 per share, the loss to the financial
institutions would be in the neighbourhood of about Rs. 10 crores. We do not
think that any financial institution with the slightest business acumen could
possibly accept the proposal as it finally emerged from Escorts Ltd. No man of
ordinary prudence would have accepted the proposal. To expect the financial
institutions to agree to the proposal, we must say, was sheer audacity on the
part of those that made the proposal. That was evidently the reason why at all
the initial stages, the details of the proposal were never put to the financial
institutions or before the board of directors. It was urged by Shri Nariman
that Mr. Davar, who represented the financial institutions in the board of
directors also voted in favour of the proposal at earlier stages, and,
therefore, it must be inferred that the later change of attitude on the part of
the financial institutions was not bona fide. We are afraid we cannot agree
with Mr. Nariman. The resolution of the board of directors merely accepted in
principle the issue of convertible debentures to raise finances required by the
company, subject to the approval of financial institutions. At that stage, no details
of the proposals were placed before the board and even then there was the
reservation that it was subject to the approval of the financial institutions.
We think that it was too much for Mr. Nanda and his associates to expect the
financial institutions or for that matter any other shareholder having large
holdings in the company to agree to the proposal as it finally emerged. We
reach the limit when we hear the complaint of Mr. Nanda and his associates that
the refusal of the financial institutions to accept their proposal was mala
fide. It is a clear case of an attempt on the part of Mr. Nanda and his
associates to overreach themselves. We do not think it
is necessary for us to go into any further details in regard to the
equity-linked-debenture issue.
The proposal to merge
Goetze with Escorts Ltd. was also agreed to in principle in the first instance.
However, the share exchange ratio had apparently not been agreed to by the
financial institutions even at that time. This is evident from the letter dated
December 30, 1983, of Mr. Nanda to Mr. Nadharna of ICICI in which he stated:
"The proposals
together with the report of the chartered accountants and the resolution of the
board of directors are with ICICI and IFCI and we understand that the matter
has been discussed in the inter-institutional meeting of the financial
institutions. We have been eagerly waiting and have made several requests to
all the financial institutions to expedite their approval so that the other
processes of the merger including the permission of the High Court followed by
the extraordinary shareholders meeting of both the companies may proceed.
Yesterday's meeting with the chairman and senior executives of the Financial
Institutions, I was informed, for the first time, that the financial
institutions were still examining our request for approval they were primarily
concerned about the 53% (52%) holding of all the investing financial
institutions (LIC, GIC, UTI) post-merger coming down close to 49 per
cent."
It is seen from the letter
that Mr. Nanda was not proceeding on the basis that the financial institutions
had already agreed to the proposal for merger, but was in fact awaiting their
approval. When he learnt the reason for the hesitation of the financial
institutions to agree to the proposal, he wrote a letter on December 30, 1983,
explaining his views and requesting the financial institutions to expedite the
approval of the proposal. It is, therefore, futile for Mr. Nanda to contend
that the proposal for merger of Goetze with Escorts Ltd. was a lever which the
financial institutions were using to exert pressure on him to agree to register
the transfer of shares in favour of the Caparo Group of companies. It is
difficult to understand why anyone holding a majority of the equity capital of
a company should allow himself to be hustled into becoming a minority
shareholder.
The proposal for
pre-payment of institutional loans, though finally agreed to by the
institutions, was not quite as straight as claimed by Escorts. In the first
place, Escorts asked for pre-payment of loans by Indian financial institutions,
but not the foreign currency loan. In the second place, the cost of pre-payment
of institutional loans was to be met by part of the debenture issue which would
entail payment of interest at the rate of 14 per cent, whereas the
institutional loans carried interest at the rate of 10% only. It certainly
could not be said to be in the interests of the company to pay interest at a
higher rate than that payable to Indian financial institutions. Obviously, the
object of pre-payment was to get rid of the directors whom the financial
institutions had a right to nominate. True, Escorts offered to appoint Mr.
Davar as a director even if the financial institutions had no right to nominate
him. But it is one thing to have the right to nominate a director and quite
another thing to be a director on sufferance.
We do not think that it is
necessary to discuss these proposals at greater length than we have done. The
correspondence which passed between the parties and which has been read to us
shows that Mr. Nanda was certainly trying to hustle the financial institutions
into accepting the proposals.
We have discussed the
submissions made to us in broad perspective. We have not referred to the myriad
minutiae which were presented to us, as we consider it unnecessary to do so and
we do not wish to further lengthen an already long judgment. This does not mean
that we have not taken into account all the little submissions and trifling
details which were brought to our notice.
We may now state our
conclusions as follows:
(1) The permission of the Reserve Bank contemplated by the FERA
could be ex post facto and conditional.
(2) The press release (exhibit "A") dated September 17,
1983, the circular (exhibit "B") dated September 19, 1983, and the
letter (exhibit "C") dated September 19, 1983, are all valid.
(3) Under the scheme, any foreign company whose shares were owned
to the extent of more than 60 per cent by persons of Indian nationality or
origin could avail of the facility given by the scheme irrespective of the fact
whether the same group of shareholders figured in the different companies.
(4) Where any of the purchases were made subsequent to May 2, 1983,
they were subject to the 5 per cent ceiling in the aggregate.
(5) The ReserveBank was not guilty of any mala fides in granting
per mission to the Caparo Group of companies. Nor was it guilty of non-
application of mind.
(6) No mala fides
could be attributed to the Union of India either.
(7) There was a total and signal failure on the part of the Punjab
National Bank in the discharge of their duties as authorised dealers under the
FERA and the scheme with the result that there was no monitoring of the
purchases of shares made on behalf of the Caparo Group of companies.
(8) The allegation;of
mala fides against the Life Insurance Corporation of
(9) The notice requisitioning a meeting of the
company by the Life Insurance Corporation was not liable to be questioned on
any of the grounds on which it was sought to be questioned in the writ
petition.
On
our finding that there was no monitoring whatsoever of the purchase of shares
made on behalf of the Caparo Group of companies by the Punjab National Bank and
on our further finding that though the Reserve Bank was not actuated by malice
and was not guilty of non-application of mind, the reliance placed by the
Reserve Bank on the Punjab National Bank was misplaced in the event, the Punjab
National Bank having totally abandoned its duties as authorised dealer, it
follows that the permission granted by the Reserve Bank must be reconsidered by
the Reserve Bank in the light of the failure of the Punjab National Bank to
discharge its duties. Therefore, while allowing the appeals of the Union of
India, the Reserve Bank of India and the Life Insurance Corporation of India
and dismissing the appeal of Escorts Ltd. and setting aside the judgment of the
High Court, we direct the Reserve Bank of India to make a full and detailed
enquiry into the purchase of shares of Escorts Ltd. by the Caparo Group of
companies and consider afresh the question whether permission ought or ought
not to have been granted. If the Reserve Bank of India is satisfied that
permission ought not to have been granted, it may cancel the permission already
granted and take such further action as may be necessary under the FERA if it
considers that there has been any infraction of the FERA or the scheme; if the
Reserve Bank of India is of the view that the permission may be granted subject
to restrictions, it may impose such restrictions and conditions as it may think
fit, in addition to the condition that either the capital or the profits or
both cannot be repatriated. We further direct respondents Nos. 3 to 17, 20 and
21 (in the writ petition), that is the Punjab National Bank, the thirteen
Caparo Group of companies, Mr. Swraj Paul, M/s. Raja Ram Bhasin and Co. and
M/s. Bharat Bhusan and Co., to make available to the Reserve Bank of India each
and every document in their possession pertaining to the remittances made for
the purchase of shares on behalf of thirteen Caparo Group of companies and the
purchase of shares made on their behalf. They are also directed to produce
every document which the Reserve Bank of
We
also direct the Reserve Bank to enquire into the conduct of Punjab National
Bank and take such action as may be necessary including cancellation of the
authorisation granted under section 6 of the Foreign Exchange Regulation Act.
In regard to costs, the Union of India, the Reserve
Bank and the Life Insurance Corporation are certainly entitled to their costs.
We do not see any reason why the company, Escorts Ltd., should be mulcted with
costs. The litigation was launched by Mr. Nanda and he should personally be
made liable for the costs. We also think that the litigation has been
unnecessarily complicated by the failure of Mr. Swraj Paul and Raja Ram Bhasin
& Co. to co-operate by appearing before the court. We think that they
should also be liable for a portion of the costs. So also the Punjab National
Bank. The appeals filed by the Union of India, the Life Insurance Corporation and
the Reserve Bank are allowed with costs payable as follows : Three-fifths of
the taxed costs in each case will be payable by Har Prasad Nanda, one-fifth by
Swraj Paul and one-fifth by the Punjab National Bank. The cross-appeal filed by
Escorts Ltd. and Nanda is dismissed with the costs of the Union of India, the
Reserve Bank and the Life Insurance Corporation. The Union of India, the
Reserve Bank and the Life Insurance Corporation are entitled to their costs in
the High Court, three-fifths payable by Nanda, one-fifth by Swraj Paul and
one-fifth by Punjab National Bank. In modification of our order dated April 4,
1985, in C. M. P. No. 12832 of 1985, we direct Shri H. P. Nanda and Rajan Nanda
to continue as managing directors until the board of directors takes a decision
in the matter.
[1997] 89 Comp Cas
849 (SC)
Supreme
Court of
v.
Union of
S.C. Agrawal and M. K. Mukherjee JJ.
November 9, 1994.
Soli J. Sorabjee, Manmohan
Sarin and Pramod Dayal, for the Appellant.
N.N. Goswami, Anil Katiyar, T.C. Sharma, P.
Chidambaram, C.S. Vaidyanathan, P. P. Singh, K.K. Venugopal, Atishi Dipankar
and Parag Tripathi, for the Respondent.
S.C.
Agrawal J.—Leave granted.
In the past the
telephone directory used to be printed by the department at its own cost for
the purpose of supplying the same to the telephone subscribers. It was an item
of expenditure. Today, the telephone directory has become a source of revenue
for the State. This has become possible by making it a medium for advertising
by industrial and commercial concerns. A section in distinct "yellow
pages" devoted exclusively to advertisements is contained in the
directory. The person who undertakes the printing of the directory procures the
advertisements from private parties and collects the charges for the same. In
return, he supplies a prescribed number of directories free of cost to the
department and also pays to the department a certain amount by way of royalty.
The contract for printing and publishing the telephone directory is normally
awarded by inviting tenders and selecting the best offer from among the tenders
which are so received. This practice has been in vogue for some time. In Sterling
Computers Ltd. v. M and N Publications Ltd. [1993] 1 SCC 445 this court has dealt with the award of such a
contract for printing and publishing of the telephone directories for
By an
advertisement published in various newspapers on April 22, 1993, the Department
of Telecommunications, Telecom District,
"The
tenderer should have the experience in compiling, printing and supply of
telephone directories to large telephone systems with the capacity of more than
50,000 lines. The tenderer should substantiate I, this with documentary proof.
He should also furnish credentials in this field."
The tenderer
was required to remit a sum of Rs. 5,00,000 by way of
non-refundable earnest money deposit. The terms and conditions and
specifications, etc., for the total job were contained in the tender document
which was required to be obtained for the purpose of submitting the tender. The
last date for submission of tender was May 14, 1993.
In the notice
containing the requirements to be fulfilled which was attached to the tender
documents, it was stated:
"The
successful tenderer will also submit copies of telephone directories printed
and supplied by them to the telephone systems of incapacity more than 50,000
lines as credentials of his past experience.
The tenderer should intimate while
submitting the tender the equipment and the list of machines, etc., along with
the locations available with him which he would employ for carrying out this
work, If selected. The tenderer also should forward a
memorandum furnishing details of out-turn that can be given daily and the
actual time required for the completion of the job after the input material is
handed over to him."
Five persons, including appellant
No. 1, New Horizons Ltd. (for short "NHL"), and M & N
Publications Limited ("respondent No. 4" herein) submitted their
tenders. The tenders were opened on May 14, 1993, at 3.30 p.m. The royalty
amount offered by the five tenderers was as under:
|
Name of tenderer |
Agreed amount offered(Rs. in lakhs) |
||
|
|
1993 issue |
1994 issue |
1995 issue |
|
Sesa Seat Information Systems Ltd., Pune-1 |
41 |
121 |
151 |
|
M & N Publications Ltd., Bangalore-52 (respondent No.
4 herein) |
20 |
30 |
45 |
|
New Horizons Ltd., New Delhi-1(appellant No. 1 herein) |
39 |
129.30 |
291.60 |
|
Hyper Media Information Services Pvt. Ltd., Bangalore-10 |
6 |
45 |
72 |
|
Kaljothi Process Pvt. Ltd., Hyderabad-20 |
102 |
138 |
160 |
The offers were considered by the tender evaluation
committee. The offer of respondent No. 4 was accepted. The Assistant General
Manager (OP), Department of Telecommunications,
Telecom District,
(i) NHL is a joint venture
company established by Thomson Press '(India) Limited (TPI), Living Media
(India) Limited (LMI), World Media Limited (WML) and Integrated Information
Pvt. Ltd. (IIPL), a wholly-owned subsidiary of Singapore Telecom wherein 60 per
cent. of shares are held by Mr. Aroon Purie, TPI, LMI,
WML and other companies in the same group and 40 per cent. of
shares are held by IIPL;
(ii) The joint venture has received approval
of the Government of India and is -currently in operation;
(iii) NHL has been
established as an information and database management company with expertise in
database processing, publishing, sales/marketing and the dissemination of
related information; and
(iv) In
addition to its projected
strength, NHL has access to the benefit of the complete resources and strength
of its parent/owning companies, each of which is a recognised market leader.
An overview
of each of the parent companies, namely, TPI, LMI, WML and IIPL, was also given
in the tender offer.
Regarding the
expertise of TPI it was stated that it had been established as a joint venture
with Thomson International Canada in 1964 and is located at
With regard
to LMI it was stated that as India Today group it was first set up in 1962 and
became LMI in 1988. LMI employs approximately 500 people in various
disciplines, viz., editorial, pre-press, production, sales and marketing. Its
current activities include publishing (India Today, Business Today, Computers
Today, Target, journal of Applied Medicine, etc.), distribution (both in house
magazines, diaries and Time International), Music Today (producing and
marketing a wide selection of India's best music) Newstrach (the leading video
news magazine in Hindi- and English) and printing (four regional language
editions with a print order of one million copies per month). A list of machines
and equipment installed at its units at
As regards
WML it was stated that it was established in 1944 in
With regard to IIPL it was
mentioned that it is a wholly-owned subsidiary of Singapore Telecom established
in 1967 to publish the
Referring to
itself (NHL), it was Stated in the tender:
"As a
joint venture in the true sense of the phrase, the company will have access to
expertise in database management, sales and publishing of its parent group
companies. In addition, the equipment, manpower and expertise are available to
NHL. Perhaps even more significant, at this point in the directory/yellow page
cycle, is the unique reputation of its parent companies as market leaders. This
will lend a unique credibility and public recognition to the joint venture, as
well as its products.
A modern,
extremely powerful, computer system is being purchased to install the
integrated directory system developed over the past 25 years by IIPL. The IDS
will ensure efficiency and accuracy of operations. Training of all personnel is
being and will continue to be conducted by experienced managers from
IIPL."
Along with
the tender the appellants submitted the directories of the
In the
counter-affidavit filed on behalf of respondents Nos. 1 to 3 tin the High Court
it was stated that as per the averments in the writ petition TPI and LMI had
printed and bound the telephone directories for respective parties who had been
awarded the contract for Delhi and Bombay and that the appellants did not
produce any evidence to show lat they have in their name undertaken compiling,
printing, binding and apply of telephone directories of large telephone systems
with a capacity more than 50,000 lines and further that the telephone directory
of Delhi 1992 issue was published by Sterling Computers Limited on behalf of
United Data Base (India) Pvt. Ltd. and it was printed and bound at Sevneet
Publications (India) Ltd., Gandhinagar. and the telephone directory of Bombay
1992 issue does not indicate any publisher's or printer's name, it was also
stated that NHL was converted into a joint venture company in 1992 and have no
experience whatsoever in their own name for compiling, printing, binding and supply
of telephone directories of telephone systems of more than 50,000 lines
capacity. It was further stated that the appellants had submitted the
directories of
Before the
High Court it was urged on behalf of the appellants that NHL was fully eligible
and met the criteria as laid down and was competent to compile, print and
supply telephone directories as per the invitation of tender and in this
connection reliance was placed on the experience of the foreign
collaborator/equity-holder and the experience of the major Indian equity
shareholders, viz., TPI and LMI who owned the most well-equipped modern
printing and binding facilities and had executed the work for the parties who
had been awarded contracts earlier for telephone directories for metropolitan
cities of Delhi and Bombay. It was also submitted that these facilities were
available to NHL to execute the contract in question and that all these facts
were clearly brought out in the tender document submitted by it and that the
contract was awarded to respondent No. 4 on extraneous considerations which is
violative of article 14 of the Constitution; It was further submitted that
since the matter involved public revenue the tender of the appellants
containing the highest offer would
not be rejected on the hyper technical plea that NPIL itself has no experience.
The said contentions have been
negatived by the Division Bench of the Delhi High Court in its judgment dated
October 15, 1993, whereby
the writ petition filed by the appellants was dismissed. The High Court has
proceeded on the assumption that the shareholders of NHL have the experience in
compiling and printing the telephone directories but has observed that that it
is not at all the job requirement. According to the High Court it is one thing
to say that the shareholders of a company have vast experience in the
publication of telephone directories with yellow pages and it is entirely
another thing if the company itself has that experience. The approach of the
High Court is that a company is an independent person distinct from its members
and that NHL is carrying on its business independently from that of the
shareholders. The High court has held that the experience of a shareholder
cannot be the experience of the company nor is NHL the agent of its
shareholders. Referring to the principle of lifting of the corporate veil in
modern company law the High Court has observed that so far as NHL is concerned,
it cannot invoke the said principle either as a ground of attack or as a ground
of defence. In the view of the High Court it could not be said that the
authorities had failed in their duty to look behind the façade of corporateness
of NHL and that it was none of their duty and they rightly examined the
experience, etc., of NHL and came to the conclusion that it did not satisfy the
eligibility conditions and that there was no error in the said approach of the
authorities. Dealing with the contention that NHL is a joint venture the High
Court has observed that a joint venture is a one-time grouping of two or more
persons in a business undertaking and unlike a partnership, a joint venture
does not entail a continuing relationship among the parties and on that view
the High Court has held that there is no joint venture as such and there is
only a certain amount of equity participation by a foreign company in NHL. The
High Court rejected the contention urged on behalf of the appellants regarding
the absence of reasons for rejecting the tender of NHL on the ground that the
non-communication of reasons is not fatal in all circumstances and that in the
present case the reasons existed on the record of the authorities that the
tender submitted by NHL was not in conformity with the condition of the tender
and NHL was found ineligible for award of the tender and its offer could not
have been accepted. The High Court further held that since the bid of the
appellants was rejected at the threshold the authorities could not consider the
question of the higher amount of royalty offered by NHL and that a higher bid
could not be a substitute for eligibility conditions.
Shri Soli Sorabjee, learned counsel
appearing for the appellants, has submitted that the High Court was in error in
considering whether NHL fulfilled the condition regarding experience contained
in the tender notice and that the authorities should have taken into
consideration the experience of the constituents of NHL which is a joint
venture company duly approved by the Government of India in which 40 per cent.
Equity is owned by IIPL (a wholly-owned subsidiary of Singapore Telecom) and
the remaining 60 per cent. equity is held by the
Indian group of companies consisting of TPI, LMI, WML and Mr. Aroon Purie, and
that the constituents of NHL had expertise and experience in publishing yellow
page directories as well as telephone directories and had necessary resources
for that purpose. Shri Sorabjee has also submitted that it is a fit case in
which the authorities should have lifted the corporate veil and if they had
done so they would have seen the reality. Shri Sorabjee has emphasised that
there is a difference of more than three and a half crore rupees between the
amount of royalty offered by NHL and that offered by respondent No. 4 to whom
the contract has been awarded.
Shri K.K. Venugopal, learned
counsel appearing for respondent No. 4, has, however, supported the judgment of
the High Court and has submitted that the authorities were justified in not
considering the tender submitted by NHL on the basis that it did not fulfil the
conditions regarding experience contained in the tender notice. Shri Venugopal
has submitted that there is nothing to show that the constituents of NHL had
the necessary experience of supplying telephone directories to large telephone
systems of the capacity of more than 50,000 lines and that no document to prove
that NHL had the necessary experience was submitted by NHL along with the
tender.
At the
outset, we may indicate that in the matter of entering into a contract, the
State does not stand on the same footing as a private person who is free to
enter into a contract with any person he likes. The State, in exercise of its
various functions, is governed by the mandate of article 14 of the Constitution
which excludes arbitrariness in State action and requires the State to act
fairly and reasonably. The action of the State in the matter of award of a
contract has to satisfy this criterion. Moreover, a contract would either
involve expenditure from the State exchequer or augmentation of public revenue
and- consequently the discretion in the matter of selection of the person for
award of the contract has to be exercised keeping in view the public interest
involved in such selection. The decisions of this court, therefore, insist that
while dealing with the public, whether by way of giving jobs or entering into
contracts or issuing quotas or licences or granting other forms of largesse,
the Government cannot act arbitrarily at its sweet will and like a
private individual, deal with any person it pleases, but its action must be in
conformity with the standards or norms which are not arbitrary, irrational or
irrelevant. It is, however recognised that a certain measure of "free play
in the joints" is necessary for
an administrative body functioning in an administrative sphere: See Ramana
Dayaram Shetty v. International Airport Authority of India, AIR 1979 SC 1628;
[1979] 3 SCC 489, 505; [1979] 3 SCR 1014, 1034; Kasturi Lal Lakshmi Reddy v.
State of Jammu and Kashmir, AIR 1980 SC 1992; [1980] 4 SCC 1, 11; [1980] 3 SCR
1338, 1355; Fasih Chaudhary v. Director-General, Doordarshan [1989] 1 SCC 89,
92; [1988] Supp. 3 SCR 282, 286; Sterling Computers Ltd. v. M and N
Publications Ltd. [1993] 1 SCC 445; Union of India v. Hindustan Development
Corporation [1993] 3 SCC 499, 513.
In the recent
decision in Tata Cellular v. Union of India [1994] 6 SCC 651, this court has
examined the scope of judicial review in the field of exercise of contractual
powers by Government bodies and, after noticing' the current mood of judicial
restraint in
"(1) The modern trend
points to judicial restraint in administrative action.
(2) The court does not sit
as a court of appeal but merely reviews the manner in which the decision was
made.
(3) The court does not have
the expertise to correct the administrative decision. If a review of the
administrative decision is permitted it will be substituting its own decision,
without the necessary expertise which itself may be fallible.
(4) The terms of the
invitation to tender cannot be open to judicial scrutiny because the invitation
to tender is in the realm of contract. Normally speaking, the decision to
accept the tender or award the contract is reached by process of negotiations
through several tiers. More often than not, such decisions are made
qualitatively by experts.
(5) The Government must have freedom of
contract. In other words, fair play in the joints is a necessary concomitant
for an administrative body functioning in an administrative sphere or
quasi-administrative sphere. However, the decision must not only be tested by
the application the Wednesbury principle of reasonableness (including its other
facets pointed out above) but must be free from arbitrariness not affected by
bias or actuated by mala fides.
(6) Quashing decisions may
impose heavy administrative burden the administration and lead to increased and
unbudgeted expenditure"
The
"Wednesbury principle of reasonableness" to which reference has been
made in principle Union of India v. Hindustan Development Corporation [1993] 3
SCC 499, aforementioned is contained in Associated Provincial Picture Houses
Ltd. v. Wednesbury Corpn. [1948] 1 KB 223; [1947] 2 All ER
680. In that case, Lord Greene M.R. has held that a decision of a public
authority will be liable to be quashed or otherwise dealt with by an
appropriate order in judicial review proceedings where the court concludes that
the decision is such that no authority properly directing itself on the
relevant law and acting reasonably could have reached it. In Tata Cellular v.
Union of India [1994] 6 SCC 651 this court has mentioned two other facets of
irrationality (at page 680):
"(1) It is open to the court to review the
decision-maker's evaluation of the facts. The court will intervene where the
facts taken as a whole could not logically warrant the conclusion of the
decision-maker. If the weight of facts pointing to one course of action is
overwhelming, then a decision the other way, cannot be
upheld.
(2) A decision would be
regarded as unreasonable if it is partial and unequal in its operation as
between different classes."
The validity
of the action of the tender evaluation committee in not considering the tender
submitted by NHI, has to be considered in the light of the aforementioned
principle 5 as laid down in Tata Cellular v. Union of India [1994] 6 SCC 651.
In other words, what has to be seen is whether the refusal by the tender
evaluation committee to consider the tender of NHL on the ground that the
condition regarding experience as laid down in the tender notice was not
fulfilled can be regarded as arbitrary and, unreasonable.
The-requirement with regard to
experience, as stated in the advertisement dated April 22, 1993, for inviting
tenders, as, noticed earlier, was in the following terms:
"The tenderer
should have experience in compiling, printing and supply of telephone
directories to large telephone systems with the capacity of more than 50,000
lines. The tenderer should substantiate this with documentary proof. He should
also furnish credentials in this field."
The
requirement of experience was/however, differently worded in the notice for
inviting sealed tenders dated April 26, 1993, which was attached to the tender
documents which prescribes the conditions to be fulfilled for submission of tenders
and wherein it was stated as under:
"The
successful tenderer will also submit copies of telephone directories printed
and supplied by them to the telephone systems of capacity more than 50,000
lines as credentials of his past experience."
In the said
notice, the expressions "tenderer" and "successful
tenderer" have been used. While the expression "tenderer" has
been used in paragraphs 5, 7, 11 and 14, the expression "successful
tenderer" is used in paragraphs 7, 9(a), 10 and 12. Since paragraph 10 provides
for execution of the agreement by the successful tenderer, the said expression
is intended to mean the tenderer whose tender has been found suitable for
acceptance. The use of the expression "successful tenderer" instead
of the expression "tenderer" in paragraph 12, therefore, indicates
that the documentary proof, by way of credentials of past experience, has to be
submitted after the tender has been considered and is found suitable for
acceptance by the concerned authorities. This would mean that the past
experience is a matter which is to be considered after the tender has been
examined and evaluated and the tenderer whose tender is found acceptable is
required to submit documentary proof regarding his past experience. In other
words, a tender is not liable to be excluded from consideration on the ground
of non-eligibility on account of lack of past experience. This inference is
strengthened by paragraphs 8 and 11 of the notice dated April 26, 1993. In
paragraph 8, it is provided that a tender is liable for summary rejection if it
is submitted without the demand draft of Rs. 5,00,000.
Similarly, in paragraph 11, it is provided that the tender is liable to be
excluded from consideration if the income-tax clearance certificate is not
furnished with the tender. There is no similar provision for excluding from
consideration a tender on the ground of failure to furnish with the tender the
required material by way pf credentials of past experience. It means that the
matter of, past experience has to be considered after the tender has otherwise
been found to be suitable for acceptance and a tender is not liable to be
rejected at the threshold without consideration on the ground that the tenderer
lacks experience. The decision of the tender evaluation committee to exclude
the tender of NHL from consideration was, therefore, not warranted by the terms
and conditions for submission of tender as contained in the notice for inviting
sealed tenders dated April 26, 1993.
Even if it be
assumed that the requirement regarding experience as set out in the
advertisement dated April 22, 1993, inviting tenders is a condition about the
eligibility for consideration of the tender, though we find no basis for the same, the said
requirement regarding experience cannot be construed to mean that the said
experience should be of the tenderer in his name only. It is possible to
visualise a situation where a person having past experience has entered into a
partnership and the tender has been submitted in the name of the partnership firm
which may not have any past experience in its own name. That does not mean that
the earlier experience of one of the partners of the firm cannot be taken into
consideration. Similarly, a company incorporated under the Companies Act having
past experience may undergo reorganisation as a result of merger or
amalgamation with another company which may have no such past experience and
the tender is submitted in the name of the reorganised company. It could not be
the purport of the requirement about experience that the experience of the
company which has merged into the reorganised company cannot be taken into
consideration because the tender has not been submitted in its name and has
been submitted in the name of the reorganised company which does not have experience
in its name. Conversely there may be a split in a company and persons looking
after a particular field of the business of the company form a new company
after leaving it. The new company, though having persons with experience in the
field, has no experience in its name while the original company having
experience in its name lacks persons with experience. The requirement regarding
experience does not mean that the offer of the original company must be
considered because it has experience in its name though it does not have
experienced persons with it and ignore the offer of the new company because it
does not have experience in its name though it has persons having experience in
the field. While considering the requirement regarding experience it has to be
borne in mind that the said requirement is contained in a document inviting
offers for a commercial transaction. The terms and conditions of such a
document have be construed from the standpoint of a prudent businessman,
businessman enters into a contract whereunder some work is to be performed he
seeks to assure himself about the credentials of the person who is to be
entrusted with the performance of the work. Such credential are to be examined
from a commercial point of view which means, that if the contract is to be
entered into with a company he will look into the background of the company and
the persons who are in control same and their capacity to execute the work. He
would go not by the of the company but by the persons
behind the company. While keeping in view the past experience he would also
take note of the present state of affairs and the equipment and resources at
the disposal of the company. The same has to be the approach of the authorities
while considering the tender received in response to the advertisement issued
on April 22, 1993. This would require that first the terms of the offer must be
examined and if they are found satisfactory the next step would be to consider
the credentials of the tenderer and his ability to perform the work to be
entrusted. For judging the credentials past experience will have to be
considered along with the present state of equipment\and resources available
with the tenderer. Past experience may not be of much help if the machinery and
equipment is outdated. Conversely lack of experience may be made good by
improved technology and better equipment. The advertisement dated April 22,
1993, when read with the notice for inviting tenders dated April 26, 1993, does
not preclude adoption of this course of action. If the tender evaluation
committee had adopted this approach and had examined the tender of NHL in this
perspective it would have found the NHL, being a joint venture, has access to
the benefit of the resources and strength of its parent/owning companies as
well as to the experience in database management, sales and publishing of its
parent group companies because after reorganisation of the company in 1992, 60
per cent. of the share capital of NHL is owned by the Indian group of
companies, namely, TPI, LMI, WML, etc. and Mr. Aroon Purie and 40 per cent, of
the share capital is owned by IIPL a wholly owned subsidiary of Singapore
Telecom which was established in 1967 and is having long experience in
publishing the Singapore telephone directory with yellow pages and other
directories. Moreover, in the tender it was specifically stated that IIPL will
be providing its unique integrated directory management system along with the
expertise of its managers and that the managers will be actively involved in the
project both out of
The
expression "joint venture" is more frequently used in the
As noticed
earlier, in its tender NHL had stated that it is a joint venture company
established by TPI, LMI, WML and IIPL wherein TPI, LMI and WML and other
companies in the same group as well as Mr. Aroon Purie own 60 per cent. shares and IIPL owns 40 per cent. shares.
It was also stated that the joint venture has received the approval of the
Government of India and is currently in operation and that the promoter will increase their capital/contribution
commensurate with the project need and that the company has been established as
an information and database management company with expertise in database
processing, publishing, sales/marketing and the dissemination of related
information. In the tender it is also stated that as a joint venture in the
true sense of the phrase, the
company will have access to expertise in database management, sales and
publishing of its parent group companies. It would thus appear that the Indian
group of companies (TPI, LMI and WML) and the Singapore-based company (IIPL)
have pooled together their resources in the sense that TPI, LMI and WML have
made available their equipment and
organisation at various places in the country while IIPL has made available its
wide experience in the field as well as the expertise of its managerial staff.
All the constituents of NHL have thus contributed to the resources of the
company (NHL). This shows that NHL is an association, of companies jointly
undertaking a commercial enterprise wherein they will all contribute assets and will share risks and have a community of
interest. We are, therefore, of the view that NHL has been constituted as a
joint venture by the group of Indian companies and IIPL, the Singapore-based
company, and it would not be correct to say that IIPL which has a substantial
stake in the success of the venture, having 40 per cent. of
shareholding, is a mere shareholder in NHL.
Once it is
held that NHL is a joint venture, as claimed by it in the tender, the
experience of its various constituents, namely, TPI, LMI and WML as well as
IIPL, had to be taken into consideration if the tender evaluation committee had
adopted the approach of a prudent businessman.
The conclusion would not be
different even if the matter is approached purely from the legal standpoint. It
cannot be disputed that, in law, a company is a legal entity distinct from its
members. It was so laid down by the House of Lords in 1897 in the leading case
of Salomon v. Salomon and Co. Ltd. [1897] AC 22 (HL). Ever
since this decision has been followed by the courts in
"When
the notion of legal entity is used to defeat public convenience, justify wrong,
protect fraud, or defend crime, the law will regard the corporation as an
association of persons."
In
a number of decisions, departing from the narrow legalistic view, courts have
taken note of the realities of the situation.
In Scottish Co-op.
Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1; [1959] AC 324, 343, a
case under section 210 of the Companies Act,: 1948, Viscount Simonds has quoted
with approval, the following observations of Lord President Cooper (at page 9
of 29 Comp Cas):
"In my
view, the section warrants the court in looking at the business realities of a
situation and does hot confine them to a narrow legalistic view."
Similarly in
Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies [1955] 1 All ER 725;
[1955] 1 WLR 352 (HL), it was argued that the subsidiary companies were
separate legal entities each under the control of its own board of directors,
that in law the board of the appellant-company could not assign any duties to
anyone in relation to the management of the subsidiary companies, and that,
therefore, the agreement cannot be construed as entitling them to assign any
such duties to the respondent. The argument was rejected by Lord Reid with the
observation: "This is too technical an argument." The learned Law Lord
vent on to hold (at page 738):
"This is
an agreement in re mercatoria and it must be construed in the light of the
facts and realities of the situation."
In DHN Food
Distributors Ltd. v. London Borough of Tower Hamlets [1976] 3 All ER 462;
[1976] 1 WLR 852, the Court of Appeal was dealing with three companies, out of
which one was the holding company and the other two were its subsidiaries.
After quoting the views of Prof. Gower that "there is evidence of a
general tendency to ignore the separate legal entities of various companies
within a group, and to look instead at the economic entity of the whole
group'', Lord Denning M.R. has observed (at page 467): "This group is
virtually the same as a partnership in which all the three companies are partners.
They should not be treated separately so as to be defeated on a technical
point." In the same case, Goff L.J. has said (at page 468): "This is
a case in which one is entitled to look at the realities of the situation and
to pierce the corporate veil." The observations of Shaw L.J. were to the
following effect (at page 473):
"Why
then should this relationship be ignored in a situation in which to do so does
not prevent abuse but would on the contrary result in what appears to be a
denial of justice ?".
In this case,
the holding company was held entitled to compensation for disturbance from
premises in its occupation on account of compulsory purchase of the property
which belonged to one of the subsidiaries and in which the holding company had
no interest. This was a case in which the court lifted the corporate veil so as
to confer a benefit on the company.
It may,
however, be stated that the existing state of the law in
This court in
Juggilal Kamlapat v. CIT [1969] 73 ITR 702, 710; [1969] 1 SCR 988, 995; AIR
1969 SC 932, has laid down that "in certain exceptional cases the court is
entitled to lift the veil of corporate entity and to pay regard to the economic
realities behind the legal facade."
In State of
"It is
high time to reiterate that, in the expanding horizon of modern jurisprudence,
the lifting of the corporate veil is permissible. Its frontiers are unlimited. It
must, however, depend primarily on the realities of the situation…The horizon
of the doctrine of lifting of the corporate veil is expanding."
There are
cases where the court company and its place of registration and for this
purpose the test laid down is the place of the central management and control. (See De Beers Consolidated Mines Ltd. v. Howe [1906] AC 455;
[1904-07] All ER Rep 1256). Similarly the court has looked at the
corporators in order to determine the character of the corporation as an enemy
alien or as a British resident (See Daimler Co. Ltd. v. Continental Tyre and
Rubber Co. Ltd. [1916] 2 AC 507; [1916-17] All ER Rep 191). According to
Professor Gower this does not involve breach of the principle laid down in
Salomon v. Salomon and Co. Ltd. [1897] AC 22 (HL); [1895-99] All ER Rep 33 (See
Gower's Principles of Modern Company Law, 4th edition, page 136).
After making
a special study of this branch of the law, a learned scholar has discerned four
different attitudes towards the company in judicial pronouncements. According
to him these categories, in progressive order, are (i) peeping behind the veil;
(ii) penetrating the veil; (iii) extending the veil; and (iv)
ignoring the veil. The decisions relating to determination of residence or enemy status of
a company have been placed by him in the category of "peeping behind the
veil" where the court peeps behind the veil and concludes from the
shareholders or from the people in control of the company, something about the
nature of the company (See S. Ottolenghi From Peeping Behind the Corporate Veil
to Ignoring it Completely [1990] 53 Mod L Rev 338, 340.
This court
has adopted a similar approach and in some cases it has seen through the
corporate veil. In Central Inland Water Transport Corpn.
Ltd. v. Brojo Nath Ganguly [1986] 60 Comp Cas 797,
841, the court was considering the question whether the appellant-company was
an agency or instrumentality of the State for the purpose of article 12 of the
Constitution. It was said:
"For the
purposes of article 12 one must necessarily see through the corporate veil to
ascertain whether behind that veil is the face of an instrumentality or agency
of the State."
So also in State of
"The veil of corporate personality, even though
not lifted sometimes, is becoming more and more transparent in modern company
jurisprudence."
Seeing through the veil covering the face of NHL it
will be found that as a result of reorganisation in 1992 the company is
functioning as a joint venture wherein the Indian group (TPI, LMI and WML) and
Mr. Aroon Purie hold 60 per cent. share and the
Singapore-based company (TIPL) holds 40 per cent. shares.
Both the groups have contributed towards the resources of the joint venture in
the form of machines, equipment and expertise in the field. The company is in
the nature of a partnership between the Indian group of companies and the
Singapore-based company who have jointly undertaken this commercial enterprise
wherein they will contribute to the assets and share the risks. In respect of
such a joint venture company the experience of the company can only mean the
experience of the constituents of the joint venture, i.e., the Indian group of
companies (TPI, LMI and WML) and the Singapore-based company (IIPL).
On behalf of
the respondent reliance has been placed on the decision of the Delhi High Court
in Paharpur Cooling Towers Ltd. v. Bangaigaon Refinery and Petro-Chemicals Ltd. [1994] 28 DRJ 425, wherein it has
been A held that the expression "tenderer should possess such
experience" would mean the experience of the tenderer itself and not that
of its collaborator. It has been pointed out that SLP(C) No. 1484 of 1994 filed
against the said judgment has been dismissed by this court by order dated
January 28, 1994. It has been urged that on the same logic the experience of a
shareholder would not be included within the expression "experience of the
tenderer". We fail to appreciate the relevance of this judgment. There can
be no comparison between a collaborator who has no stake in the business of the
company and a constituent of a company, such as NHL, constituted as a joint
venture, wherein the constituents in the joint venture have a substantial stake
in the success of the venture.
Thus the approach from the legal
standpoint also leads to the conclusion that for the purpose of considering
whether NHL has the experience as contemplated by the advertisement for
inviting tenders dated April 22, 1993, the experience of the constituents of
NHL, i.e., the Indian group of companies (TPI, LMI and WML) and the
Singapore-based company, (IIPL) has to be taken into consideration. As per the
tender of NHL, one of its Indian constituents (LMI) had printed and bound the
telephone directories of Delhi and Bombay for the years 1992 and its
Singapore-based constituent (IIPL) has 25 years' experience in printing the
telephone directories with "yellow pages" in Singapore. The said
experience has been ignored by the tender evaluation committee on an erroneous
view that the said experience was not in the name NHL and that NHL did not
fulfil the conditions about eligibility for the award of the contract. In
proceeding on that basis the tender evaluation committee has misguided itself
about the true legal position as well as the terms and conditions prescribed
for submission of tenders contained in the notice for inviting tenders dated
April 26, 1993. The non-consideration of the tender submitted by NHL has
resulted in acceptance of the tender of respondent No. 4. The total amount of
royalty offered by respondent No. 4 for three years was, Rs. 95 lakhs whereas
NHL had offered Rs. 459.90 lakhs, i.e., nearly five times the amount offered by
respondent No. 4. Having regard to this large margin in the amount of royalty
offered by NHL and that offered by respondent No. 4, it must be held that the
decision of the tender evaluation committee to refuse to consider the tender of
NHL and to accept the tender of respondent No. 4 suffers from the vice of
arbitrariness and irrationality and is liable to be quashed.
We have been informed that while
the matter was pending in the High Court and in this court the telephone
directory for the year 1993 has been printed and supplied to the department by
respondent No. 4 as per terms of the contract. In so far as the directory for
the year 1994 is concerned we find that, as per the terms of the contract, the
process for preparation of the telephone directory has already commenced. We
can not lose sight of the fact that as a result of quashing of the contract in
respect of the directory for 1994 fresh steps will have to be taken to award a
fresh contract and the said process would take some time and thereafter the
contractor will require time to print and publish the telephone directory. It
would, therefore, not be feasible to bring out the directory for 1994 before
the close of the year. As a result, the department would suffer loss of revenue
which it would otherwise earn by way of royalty from respondent No. 4 for the
directory for the year 1994. In so far as the contract in respect of the year
1995 is concerned there is sufficient time for the department to award a fresh
contract if the contract awarded to respondent No. 4 is cancelled and the new
contractor will have sufficient time at his disposal to print and deliver the
directory as per the time schedule, Moreover, in respect of the directory for
the year 1995 the amount of royalty that is payable by respondent No. 4 is Rs.
45 lakhs and the amount of royalty offered by NHL for the directory for the
said year was Rs. 291.6 lakhs. Keeping in view the circumstances referred to
above, the course that commends itself to us is that, while maintaining the
contract awarded to respondent No. 4 in respect of the directories for the
years 1993 and 1994, the said contract may be set aside insofar as it relates
to the directory for the year 1995 and fresh tenders may be invited for award
of the contract for the directory for the year 1995. The appeal filed against
the judgment and order of the Delhi High Court dismissing the writ petition of
the appellants must, therefore, be allowed in the above terms. The other appeal
has been filed by the appellants against the order of the Delhi High Court
dismissing C.M. No. 6120 of 1993 which was an application for an interim relief
during the pendency of the writ petition in the High Court. In view of the
final order that is being passed in the writ petition, the application for
interim relief has become infructuous and the appeal against the order
dismissing C.M. No. 6120 of 1993 must, therefore, be dismissed as infructuous.
In the result, the appeal against the judgment and order of the Delhi High Court dated October 15, 1993, in C.W.P. No. 3837 of 1993 is allowed the said judgment is set aside and Writ Petition No. 3837 of 1993 filed by the appellant is disposed of with the direction that the award of the contract for printing and publishing the telephone directories for Hyderabad for the years 1993, 1994 and 1995 is set aside to the extent it relates to the directory for the year 1995. The appeal filed against the order of the Delhi High Court dated October 15, 1993, dismissing C.M. No. 6120 of 1993 for interim relief is dismissed as infructuous. No order as to costs.