[1986] 59 COMP. CAS. 134 (SC)
SUPREME COURT OF
Workmen of Associated Rubber
Industry Ltd.
v.
Associated Rubber Industry Ltd.
O. CHINNAPPA REDDY AND V. KHALID, JJ.
CIVIL APPEAL NO. 1429 OF 1975.
AUGUST 19, 1985
M.K. Ramamurthy, J. Ramamurthy, for the Appellants.
G.B.
Pai, D.N. Mishra and Ms. Meera Mathur, for the Respondents.
Chinnappa
Reddy, J.—The
workmen of the Associated Rubber Industry Ltd., Bhavnagar, are the appellants
in this appeal filed pursuant to a certificate
under article 133(1) of the Constitution granted by the High Court of Gujarat.
The Associated Rubber
Industry Ltd. had purchased, some years back, shares of INARCO Ltd. by
investing a sum of Rs. 4,50,000. They were getting annual dividends in respect
of these shares and the amount so received was shown in the profit and loss
account of the company year after year. It was taken into account for the
purpose of calculating the bonus payable to the workmen of the company. Some
time in the course of the year 1968, the company transferred the shares of
INARCO Ltd. held by it to Aril Bhavnagar Ltd. (subsequently changed to Aril Holdings
Ltd.), a subsidiary company wholly owned by the Associated Rubber Industry Ltd.
Aril Holdings Ltd. had no other capital except the shares of INARCO Ltd.
transferred to it by the Associated Rubber Industry Ltd. It had no other
business or source of income whatsoever except receiving the dividend on the
shares of INARCO Ltd. The dividend income from the shares of INARCO Ltd. was
not transferred to the Associated Rubber Industry Ltd. and, therefore, it did
not find place in the profit and loss account of the company with the result
that the available surplus for the purposes of payment of bonus to the workmen
of the company became reduced. The net result of the exercise was that bonus at
the rate of 4% only was paid to the workers for the year 1969 instead of at the
rate of 16% to which they would have otherwise been entitled. We may mention
here that Aril Holdings Ltd. was itself wound up in the year 1971 and
amalgamated with the Associated Rubber Industry Ltd.
The workmen of the
Associated Rubber Industry Ltd.,
It is true that in law the
Associated Rubber Industry Ltd. and Aril Holdings Ltd. were distinct legal
entities having separate existence. But, in our view, that was not an end of
the matter. It is the duty of the court, in every case where ingenuity is
expended to avoid taxing and welfare legislations, to get behind the
smoke-screen and discover the true state of affairs. The court is not to be
satisfied with form and leave well alone the substance of a transaction. In CIT
v. Sri Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC), the judicial approach to
such problems was stated as follows (p. 616):
"It is true that from
the juristic point of view, the company is a legal personality entirely
distinct from its members and the company is capable of enjoying rights and
being subjected to duties which are not the same as those enjoyed or borne by
its members. But 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. For example, the court has power to disregard the corporate
entity if it is used for tax evasion or to circumvent tax obligation. For
instance, in Apthorpe v. Peter Schoen-hofen Brewing Co. [1899] 4 TC 41, the
Income-tax Commissioners had found as a fact that all the property of the New
York company, except its land, had been transferred to an English company, and that
the New York company had only been kept in being to hold the land, since aliens
were not allowed to do so under New York law. All but three of the
More recently, we have
pointed out in McDowell & Co. Ltd. v. Commercial Tax Officer [1985] 3 SCC 230 ; [1985] 154 ITR 148
(SC) at p. 161:
"It
is up to the court to take stock to determine the nature of the new and
sophisticated legal devices to avoid tax and consider whether the situation created by the devices could be related to the
existing legislation with the aid of 'emerging' techniques of interpretation as
was done in Ramsay's case [1981] 2 WLR 449 ; [1982] AC 300, Burmah Oil [1982]
Simon's Tax Cases 30 and Dawson's case [1984] 1 All ER 530 ; 2 WLR 226 (HL), to
expose the devices for what they really are and to refuse to give judicial
benediction."
In that case, the court
also had occasion to refer to the following observations of Lord Brightman in
Furniss v.
"The fact that the
court accepted that each step in a transaction was a genuine step producing its
intended legal result did not confine the court to considering each step in
isolation for the purpose of assessing the fiscal results."
Avoidance of welfare
legislation is as common as avoidance of taxation and the approach in
considering problems arising out of such avoidance has necessarily to be the
same.
If we now look at the facts
of the case, what do we find ? A new company is created wholly owned by the
principal company, with no assets of its own except those transferred to it by
the principal company, with no business or income of its own except receiving
dividends from shares transferred to it by the principal company and serving no
purpose whatsoever except to reduce the gross profits of the principal company.
These facts speak for themselves. There cannot be direct evidence that the
second company was formed as a device to reduce the gross profits of the
principal company for whatever purpose. An obvious purpose that is served and
which stares one in the face is to reduce the amount to be paid by way of bonus
to workmen. It is such an obvious device that no further evidence, direct or
circumstantial, is necessary. It was argued that in 1971, the Aril Holdings
Ltd. was wound up and amalgamated with the Associated Rubber Industry Ltd. and
that this circumstance showed that the initial creation of Aril Holdings Ltd.
was not a device of avoidance. But the learned counsel for the company was
unable to explain why in the first instance Aril Holdings Ltd. was created and
why later it was wound up. Probably, after Aril Holdings Ltd. was created, some
unforeseen difficulties arose which have not been brought to light before us
and it became necessary to wind it up and amalgamate it with the Associated
Rubber Industry Ltd. We are, therefore, satisfied that the amount of dividend
from INARCO Ltd. received by the Aril Holdings Ltd. should be taken into
account in assessing the gross profit of the Associated Rubber Industry Ltd.
for the purpose of calculating the rate of bonus payable to the workmen of the
Associated Rubber Industry Ltd. The appeal is allowed with costs and it is
declared-that the workmen of the Associated Rubber Industry Ltd., Bhavnagar,
are entitled to be paid bonus at the rate of 16% for the year 1969.
Appeal
allowed.
[1983]
54 COMP. CAS. 66 (
v.
Shri Shital Prasad Jain
RAJINDAR
SACHAR AND J.D. JAIN JJ.
FEBRUARY
19, 1981
K.K. Jain, D. K. Aggarwal and Pramod Dayal for the Petitioner.
C.N.
Murthy, R. Vasudevan, Mrs. Shyamala Pappu and Y.P. Narula for Respondent.
J.D. Jain J.—The facts giving rise to the above-mentioned cross-appeals
against the order of the single judge dated 16th November, 1979, succinctly are
that in December, 1976, the plaintiff, PNB Finance Limited (a public limited
company), instituted a suit for the recovery of Rs. 19,55,890.37 against Shital
Prasad Jain (defendant No. 1), his son, Mukul Jain (defendant No. 2), Rajadhani
Vanijya Ltd. (defendant No. 3), Poorvanchal Projects Ltd. (defendant No. 4),
(both defendants No. 3&4 being public limited companies) and Emjay Overseas
(Private) Limited (defendant No. 5) on the averments that defendant No. 1 had
been the Financial Adviser of the plaintiff from 1st February, 1972, to 11th
June, 1975. Pursuant to a request made by defendant No. 1 on 7th November,
1974, a loan of Rs. 5,00,000 (rupees five lakhs only) was given to him on 23rd
December, 1974, at 16% per annum as interest. Defendant No. 1 executed a
promissory note on the same day in consideration of his having obtained the
loan. Thereafter, on the request of defendant No. 1, vide letter dated 15th
January, 1975, the plaintiff advanced another loan of Rs. 10,00,000 (rupees ten
lakhs only) on 29th January, 1975. It was represented by defendant No. 1 that
he would utilise the said amount for the purchase of immovable property in
(i) the loan amount of Rs. 10,00,000 would carry interest @ 16%
per annum payable quarterly on the last day of each quarter;
(ii) the loan would be repaid in twelve monthly instalments
commencing from April, 1975 ; and
(iii) the loan would be secured by deposit of
the title deed of the property as soon as the property was registered in the
name of defendant No. 1.
A pro-note with regard to
the same was also executed by defendant No. 1 on the aforesaid date, viz., 29th
January, 1975. He did not pay anything either towards the principal amount or
towards interest, instead he diverted the amount of both the loans to defendants
Nos. 2 to 5. A part of the loan was also diverted to M/s. Dabri & Company,
a sole proprietary concern of one Kundanmal Dabriwalla of
An application, being .A.
No. 2897/76, was also made by the plaintiff under Or. 38, rr. 1 and 5 and O.
39, rr. 1 and 2 read with s. 151 of the Code of Civil Procedure (hereinafter
referred to as "the Code") praying for attachment before judgment/ad
interim injunction restraining the defendants from transferring, alienating or disposing
of the whole or part of the aforesaid properties, as also some properties and
amounts held by defendant No. 1 in some banks, etc., detailed therein. The
application was resisted by defendants 2 to 5, who put in separate replies
categorically denying that the loan amounts were diverted by defendant No. 1 as
alleged or that they had purchased properties out of the amount of the loans in
question. While it was denied that defendant No. 4 had acquired any immovable
property whatsoever it was admitted that defendant No. 3 had purchased the
property known as 10, Panchsheel Marg, New Delhi, and that defendant No. 5 had
purchased the flats bearing Nos. 101 and 102, situated at 27, Barakhamba Road,
New Delhi. However, they asserted that the said properties had been purchased
by defendants 3 and 5 out of their own funds and being bodies corporate they
were the owner of the same in their own right. Further, all these defendants
took up the stand that there is no privity of contract between the plaintiff
and any of them and such suit against them was not at all maintainable and was
misconceived.
Faced with this situation,
the plaintiff came forth with some details in the rejoinders to the replies
filed by defendants 2 to 5. It was contended that as per information available
with the plaintiff, out of Rs. 5,00,000 taken on loan on 23rd December, 1974,
defendant No. 1 transferred a sum of Rs. 3,10,000 to defendant No. 2 on that
very day and certain amounts were paid to M/s. Dabri & Company
subsequently. Further, the entire amount of Rs. 10,00,000 received by defendant
No. 1 as loan from the plaintiff on 29th January, 1975, was diverted to
defendant No. 2 partly on the same day and partly on the next following day.
They refuted the assertion
of the defendants that defendants 3 & 5 had paid for the properties purchased by them respectively out of the funds
belonging to them (the plaintiff) and reaffirmed that the same had been
purchased out of the loan amounts advanced by the plaintiff-company to
defendant No. 1 which had been diverted directly or indirectly by him to other
defendants. The plaintiff further asserted that defendants 3 and 4 had been
floated by defendants 1 and 2 and were also controlled by them, they holding a
majority of shares in both these companies along with their family members,
close relatives and friends. It was specifically pointed out that Rajdhani
Vanijya Limited, defendant No. 3, was incorporated on February 2, 1975, with an
authorised capital of Rs. 10,00,000 and defendant No. 1 and his wife, Smt.
Pramod Jain, together held about 410 out of the total 500 shares of Rs. 10 each
issued initially and as far as the plaintiff was aware there was no public
issue of defendant No. 3 so far. As for the purchase of property bearing No.
10, Panchsheel Marg, New Delhi, it was alleged that the transaction of purchase
with respect to the same was completed on or before February 14, 1975, i.e.,
soon after the loan of Rs. 10,00,000 was received by defendant No. 1 and
defendant No. 3 was floated by him. It was pointed out that defendant No. 3
could not possibly purchase such a big property on the basis of a subscribed
capital of Rs. 5,000 only at the relevant time. Similarly, it was alleged that
defendant No. 4 was incorporated on April 22, 1975, with an initial subscribed
and paid-up capital of Rs. 5,000 only. The majority of shares in the said
company were held by defendants 1 and 2 and Smt. Pramod Jain, wife of defendant
No. 1. It was asserted that so far as the plaintiff was aware, there had been
no public issue of defendant No. 4 either. Further, according to the plaintiff,
defendant No. 4 had advanced sums totalling Rs. 6,00,000 to defendant No. 5
towards the acquisition of the above-mentioned two flats, viz., 101 and 102 in
'New Delhi House', 27, Barakhamba Road, New Delhi. As for defendant No. 5, the
plaintiff alleged that the paid-up capital thereof was only Rs. 7,000 which
again was held by defendants 1 and 2 and their close relatives and friends,
although its authorised capital was Rs. 5,00,000. Thus, the plaintiff
reiterated that the properties in question had been purchased by defendants 3
to 5 out of the amounts advanced by the plaintiff to defendant No. 1, which
were ultimately diverted to those defendants.
Thereupon, defendant No. 2
with the leave of the court filed detailed counter-affidavits on behalf of
himself and defendants 3 and 5 in his capacity as secretary of the former and
director of the latter. While admitting that on December 23, 1974, he received
two cheques, one for Rs. 40,00,000 and the other for Rs. 2,50,000 from
defendant No. 1, he asserted that the former cheque was in repayment of the
amount due and owing by defendant No. 1 to him and that the other amount of Rs.
2,50,000 was duly repaid by him by means of three account payee cheques
mentioned therein and as such no amount remained outstanding between him and
defendant No. 1 as on December 31, 1974. Similarly, while admitting that he had
received certain amounts aggregating Rs. 6,70,000 from defendant No. 1 on
different dates during January, 1975, up to January 29, 1975, he asserted that
the same stood squared up finally by payments made by him to defendant No. 1,
the major payment being of Rs. 6,00,000, vide cheque dated January 29, 1975.
Subsequently, he received one single cheque for Rs. 20,00,000 from defendant
No. 1 and he repaid the same through various account payee cheques issued in
favour of defendant No. 1, as per details given in the affidavit, the last
payment being of Rs. 7,75,000, vide cheque dated July 14, 1975. This defendant
further affirmed that his grandfather, late Shri Ram Sarup Jain, had gifted Rs.
3,00,000 to him in or about 1954 and he owned wealth/assets worth several lakhs
of rupees because of accretions thereto and appreciation of the gifted amount
and income from his own business. Thus, according to him, the investments made
by him in the shares of defendants 3 and 5 were financed out of his own
resources without having anything to do with defendant No. 1. As for defendant
No. 3, he swore that the issued, subscribed and paid-up capital of the said
company was Rs. 10,50,000 and the company had invested in purchasing property
bearing No. 10, Panchsheel Marg, out of its own share capital. However, a
public issue of the capital was not made as the shares of the company were not
sought to be listed on the stock exchange in line with numerous public limited
companies carrying on business in that manner. Thus, the initial capital of Rs.
5,000 for mere incorporation of the company had no bearing on the subject. He
further clarified that purchase of the property 10, Panchsheel Marg, was
completed only on July 16, 1975, although an agreement to purchase the same had
been entered into by one Rajendra Prasad Jain, a promoter of defendant No. 3,
in February, 1975, on payment of Rs. 25,000 as earnest money, which had been
arranged by him, He further asserted that the defendant-company was
receiving rent of the said property and being a distinct legal entity was its
exclusive owner. Similarly, on behalf of defendant No. 5, he swore that the
paid-up share capital of defendant No. 5 was Rs. 6,00,000 as the same had been
increased by issue of further shares during the financial year 1974-75, i.e.,
the year in which defendant No. 4 also purchased the aforesaid flats at an
investment of Rs. 6,00,000. He asserted that there was no borrowing by
defendant No. 5 except a deposit of Rs. 10,000 from a director/shareholder. He
further clarified that defendant No. 1 did not hold any share in the capital of
defendant No. 5 and was not a member thereof even at the time of the
institution of the suit. He filed a copy of the balance-sheet of defendant No.
5 as on October 31, 1975, in support of this contention.
Upon these facts the
learned counsel for the plaintiff has canvassed with considerable fervour that
defendants Nos. 3 to 5 were dummy companies having been created by defendant
No. 1 in collusion with defendant No 2 and other close relations and friends to
have a corporate facade and to take the properties in question which had, in
fact, been purchased by him, although in the names of defendants Nos. 3 and 5,
out of the loan amounts, beyond the reach of the plaintiff. It is contended
that an intent to divert on the part of defendant No. 1 is writ large, in that,
he did not purchase any property in his own name, as given out by him while
applying for the loan of Rs. 10,00,000 to the plaintiff and instead he devised
the scheme of purchasing properties in the names of defendants Nos. 3 and 5
surreptitiously by diverting the loan amount to them directly or indirectly. He
has pointed out that notwithstanding the specific averment made by the
plaintiff to that effect, defendants Nos. 3 to 5 have not come out with
detailed particulars of their shareholding, capital investment and the like
even though the entire information bearing on the subject was within their
special knowledge. In particular, he has pointed out that defendant No. 3 has
deliberately suppressed the information with regard to its share capital, i.e.,
how and when it was raised and the fact whether defendants Nos. 1 and 2 had any
interest or share therein at the relevant time, i.e., purchase of property No.
10, Panchsheel Marg. Thus, the bald assertion of defendant No. 3 and for that
matter of defendant No. 5 that the aforesaid properties were purchased and
owned by them as body corporate does not lead us anywhere. He has, therefore,
urged that this court, as indeed he did submit before the learned single judge,
to tear off the corporate veil and go behind the corporate personality to the individual
members. He has emphasised that the veil of incorporation does not mean that
the internal affairs of the company are completely concealed from view and the
court should be reluctant to lift the veil by having a dogmatic approach to the
problem, viz., that a company being a distinct juristic person is capable of
owning or owns property in its own right. Reliance in this context has been
placed by him on some decisions of the Supreme Court as well as the English
Courts. In CIT v. Sree Meenakshi Mills Ltd. [1967] 63 ITR 609, Ramaswamy J.,
speaking for the court, observed that (p. 615):
"It is well
established that in a matter of this description the income-tax authorities are
entitled to pierce the veil of corporate entity and to look at the reality of
the transaction. It is true that from the juristic point of view the company is
a legal personality entirely distinct from its members and the company is
capable of enjoying rights and being subjected to duties which are not the same
as those enjoyed or borne by its members. But 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. For example, the court has power to
disregard the corporate entity if it is used for tax evasion or to circumvent
tax obligation."
Similarly, his Lordship
observed in Juggi Lal Kamlapat v. CIT [1969] 73 ITR 702, 710 (SC) that:
"From a juristic point
of view the company is a legal personality distinct from its members...But...the
court is entitled to lift the mask of corporate entity if (the conception) is
used for tax evasion, or to circumvent tax obligation or to perpetrate a
fraud."
Both these cases, no doubt,
relate to tax assessment as noticed by the learned single judge. However, there
is a catena of English decisions to warrant the conclusion that the doctrine of
lifting the corporate veil or cracking open the corporate shell, as it is very
often said, is not confined only to cases of tax evasion and the court would be
well within its right and indeed be justified in lifting even the curtain
rather than the veil and see what goes on behind it, concealed from the public
gaze. Surely, the courts will refuse to allow the corporate entity principle to
be used as an instrument of fraud.
In Gilford Motor Co. Ltd.
v. Home [1933] Ch 935, Home, a former employee of the plaintiff had covenanted
not to solicit its customers. However, shortly afterwards he attempted to evade
this obligation by forming a company which undertook the soliciting by carrying
on parallel business for the sale of spare parts of Gilford vehicles. An
injunction was sought by the plaintiff against Home as well as his newly formed
company on the ground that the latter was merely a creature of the former and
he was committing breaches of the covenant by the agency of the
defendant-company. The Court of Appeal granted an injunction against both him
and the company, notwithstanding, that it was not a party to the covenant.
Observed Lord Hanworth M.R. that:
"I have not any doubt
on the evidence I have had before me that the defendant-company was the channel
through which the defendant Home was carrying on his business. of course, in
law the defendant-company is a separate entity from the defendant Home, but I
cannot help feeling quite convinced that at any rate one of the reasons for the
creation of that company was the fear of Mr. Home that he might commit breaches
of the covenant in carrying on the business, as, for instance, in sending out
circulars as he was doing, and that he might possibly avoid that liability if
he did it through the defendant-company."
The company was described
in the judgment as "a devise, a cloak or sham" for enabling Home to
continue to commit breaches of the agreement.
In Wallersteiner v. Moir [1974]
3 All ER 217 ; [1974] 1 WLR 991, the plaintiff, Dr. Wallersteiner, had issued a
writ for libel against the defendant who had earlier issued a circular to the
shareholders of the company stating that manoeuvres of the plaintiff look
distinctly fraudulent and represent the culmination of a series of unlawful
activities in the company's affairs since control of it was acquired by him,
i.e., the plaintiff. Lord Denning M. R., while dealing with the subject or
corporate veil, observed that (at p. 1013 of [1974] 1 WLR):
"It is plain that Dr.
Wallersteiner used many companies, trusts, or other legal entities as if they
belonged to him. He was in control of them as much as any 'one-man company' is
under the control of the one man who owns all the shares and is the chairman
and managing director. He made contracts of enormous magnitude on their behalf
on a sheet of note paper without reference to anyone else...Mr. Browne
Wilkinson, as amicus curiae, suggested that all these various concerns were
used by Dr. Wallersteiner as a facade: so that each could be treated as his
alter ego. Each was in reality Dr. Wallersteiner wearing another hat. Mr.
Lincoln for Dr. Wallersteiner repudiated this suggestion. It was quite wrong,
he said, to pierce the corporate veil. The principle enunciated in Salomon v.
Salomon Co. Ltd. [1897] AC 22, was sacrosanct. If we were to treat each of
these concerns as being Dr. Wallersteiner himself under another hat, we should
not, he said, be lifting a corner of the corporate veil We should be sending it
up in flames.
I am prepared to accept
that the English concerns—those governed by English company law or its
counterparts in Nassau or Nigeria—were distinct legal entities....Even so, I am quite clear that they
were just the puppets of Dr. Wallersteiner. He controlled their every movement.
Each danced to his bidding. He pulled the strings. No one else got within reach
of them. Transformed into legal language, they were his agents to do as he
commanded. He was the principal behind them. I am of the opinion that the court
should pull aside the corporate veil and treat
these concerns as being his creatures—for whose doings he should be, and is,
responsible. At any rate, it was up to him to show that any one else had a say
in their affairs and he never did so." (emphasis supplied)
Yet another judicial
decision which illustrates that the court may lift the veil to prevent the
corporators from perpetrating a fraud is Jones v. Lipman [1962] 1 WLR 832,
where the first defendant attempted to avoid completing the sale of the house
to the plaintiff by conveying it to a company (defendant No. 2 in the case)
formed for the purpose. In an action for specific performance of the contract,
the court treated the company as a mere sham and ordered both the defendant and
his company specifically to perform the contract with the plaintiff. Russell
J., adverting to Gilford Motor Co. Ltd. v. Home [1933] Ch 935 (CA) observed (at
p. 836):
"Those comments on the
relationship between the individual and the company apply even more forcibly to
the present case. The defendant-company is the creature of the first defendant,
a device and a sham, a mask which he holds before his face in an attempt to avoid recognition
by the eye of equity. The Gilford's case
[1933] Ch 935 (CA) illustrates that an equitable remedy is rightly to be
granted directly against the creature in such circumstances."
The subject of lifting the
veil and looking behind the company as legal persona has been dealt with at
some length in Palmer's Company Law, Vol. I, 22nd Edn., at pp. 160 to 162 and
it is stated that, generally speaking, the courts are more inclined, in
appropriate circumstances, to "lift the veil" of corporateness where
questions of control are in issue than where a question of ownership arises.
However, certain instances have been stated in which the veil of corporateness
was lifted. Some of these are as follows :
"3. In certain matters
pertaining to the law of taxation, particularly where the question of the
"controlling interest" is in issue.
9. The courts have further
shown themselves willing to 'lift the veil' where the device of incorporation
is used for some illegal or improper purpose."
In the same para, certain judicial
instances have been cited which include the case of Jones v. Lipman [1962] 1
WLR 832. It will be thus seen that the doctrine of piercing the corporate veil
is not confined to cases of tax assessment, etc., only and the court may invoke
this doctrine, wherever necessary, in the interest of justice to prevent the
corporate entity from being used as an instrument of fraud. In other words, the
fundamental principle of corporate personality itself may be disregarded having
regard to the exigencies of the situation and for the ends of justice.
Coming to the case in hand,
we find that despite the specific allegation of fraud and diversion of funds by
defendant No. 1 to defendants Nos. 2 to 5, these defendants do not appear to
have divulgee-all the essential facts truly and in a straightforward manner. No
doubt defendant No. 2 has given sufficient details of the various amounts
received by him from defendant No. 1 during the relevant period and he has also
furnished the particulars of repayments made by him during that period, thus
indicating that no part of the loans in question could be said to be
outstanding against him but he is singularly silent with regard to the affairs
of defendants Nos. 3 and 5 in which he holds an important position, vis-a-vis,
defendant No. 1. His bald assertion that the issued, subscribed and paid-up
capital of defendant No. 3 was Rs. 10,50,000 and that the investment in
property bearing No. 10, Panchsheel Marg, New Delhi, was financed out of its
share capital, does not lead one anywhere inasmuch as it does not disclose what
interest defendant No. 1 and his other close relatives had in the shareholding
of defendant No. 3 at the relevant time. Further, the mere fact that defendant
No. 1 has ceased to be a member/shareholder of defendant No. 3 is of no
consequence. We are left guessing as to what was the shareholding and when he
did walk out of defendant No. 3. The learned counsel for the defendants
contended with considerable fervour that it was for the plaintiff to place on
the record some material to justify an inference of diversion of loans in
question by defendant No. 1 to other defendants but barring the bald assertion
made in the rejoinder or even the plaint to that effect, nothing has come on
the record to countenance this plea. Hence, no obligation was cast upon the
defendants to supply the necessary material. We do not think that the
defendants can derive any benefit by relying upon the abstract doctrine of onus
of proof. As explained by the learned counsel for the appellant, they (the
appellant) could possibly not have any access to the records and accounts of
the defendants and as such it was for them (the defendants) to furnish the
requisite information to the court in order to substantiate their contention
that defendant No. 1 had not diverted the loans in question, wholly or partly,
to anyone of them. As observed by the Supreme Court in Gopal Krishnaji Ketkar
v.Mohamed Haji Latif, AIR 1968 SC 1413, 1416 :
"Even if the burden of
proof does not lie on a party the court may draw an adverse interference if he
withholds important documents in his possession which can throw light on the
facts at issue. It is not, in our opinion, a sound practice for those desiring
to rely upon a certain state of facts to withhold from the court the best
evidence which is in their possession which could throw light upon the issues
in controversy and to rely upon the abstract doctrine of onus of proof."
We are, therefore, of the
view that the counter-affidavits filed by the defendants, being vague and
evasive, an inference may be well warranted that the relevant information, if
furnished, would not have supported their case. It is also noticed that the
entire share capital of defendants Nos. 3 and 5 has been apparently invested in
the purchase of the aforesaid properties and it is nobody's case that they have
any other business activity. Prima facie, therefore, it would appear that these
companies were formed by defendants Nos. 1 and 2, etc., for the purchase of the
properties in question and the allegation of diversion of funds made by the
plaintiff cannot be brushed aside lightly at this stage. It is, of course, a
different matter that the defendants may satisfy the court about the bona fide
nature of the dealings and transactions in question at the trial. Hence, we
consider it to be a fit case to grant and do grant ad interim relief to the
plaintiff by restraining defendants Nos. 3 and 5 from in any manner alienating,
transferring, disposing of or encumbering the properties in question, viz., 10
Panchsheel Marg, New Delhi, and flats Nos. 101 & 102 in 'New Delhi House'
at 27, B arakhamba Road, New Delhi, till the disposal of the suit.
This brings us to the
cross-appeal filed by Shri S.P. Jain, defendant No. 1. Having regard to his
overall conduct as reflected by various circumstances adverted to above and the
fact that he did not even consider it necessary to file a reply to I. A. No.
2897/76, we consider that the order of attachment before judgment of various
assets, ostensibly held by him, by the learned single judge is perfectly
justified. Strangely enough his counsel, Shri C. N. Murthy, made a categorical
statement on 6th April, 1977, that he did not wish to file a reply to the said
application. Subsequently, an application was moved by defendant No. 1, being
LA. No. 669/78, to file a reply to LA. No. 2897/76 but the same was disallowed
by the court, vide order dated 10th March, 1978, for valid reasons. Hence, we
find no merit in this cross-appeal.
Consequently, we allow
F.A.O. (OS) No. 9/80 and order as above, with costs.
[1996]
86 COMP. CAS 371 (BOM)
BSN (
v.
Janardan Mohandas Rajan Pillai
S.M.
JHUNJHUNUWALA J.
CHAMBER SUMMONS NO. 1071 OF 1992 IN SUIT NO. 3389 OF 1992.
JANUARY
22, 1993
J.I. Mehta, Mrs. Zia Mody, G.E. Vahanvati,
Dr. D.Y. Chandrachud, I.M. Chagla, S.J. Shah, D.J. Khambatta, R.J. Gagrat, V.N.
Kulkarni and Mrs. R.D. Chandrachud for Defendant.
Ram
Jethmalani, F.S. Nariman, A.P. Chinoy, N.H. Seervai and
Jhunjhunuwala
J.—By this
chamber summons, defendants Nos. 1 and 2 who are directors of Britannia
Industries Ltd., the seventh defendant, in the suit seek that:
(i) the names of plaintiffs Nos. 1 and
2 be struck out and/or deleted from the cause title of the plaint filed in the
suit;
(ii) the portions of the pleadings put
forth in the plaint as more particularly mentioned in the schedule to the
chamber summons be struck out and/or deleted; and
(iii) the verification clause of the plaint
filed be struck out and plaint be returned as defective.
The first plaintiff is a company,
incorporated under the laws of the
According
to the plaintiffs, as averred in the plaint filed, defendants Nos. 1 to 6 who
were at all material times directors of the seventh defendant company are
interested and/or concerned in or with defendants Nos. 9, 10 and 11. Defendants
Nos. 1 to 6 are directors of the seventh defendant company arranged for:
(i) all transactions of export of
cashew and soya meal by the seventh defendant to be routed only through
defendants Nos. 9, 10 and 11;
(ii) a sum of as much as approximately
Rs. 25 crores to be advanced and made available to themselves by the seventh
defendant in the guise of providing six months unsecured interest
free/concessional rate credit only to defendants Nos. 9, 10 and 11;
(iii) the profit that would have normally
been earned by the seventh defendant on all such transactions to be diverted to
themselves through defendants Nos. 9, 10 and 11.
It
is further averred that defendants Nos. 1 to 6 have illegally, wilfully and
fraudulently suppressed and failed to disclose their interest and concern in or
with defendants Nos. 9, 10 and 11 and the transactions undertaken by the
seventh defendant with defendants Nos. 9, 10 and 11 and as a consequence of
non-disclosure of interest, defendants Nos. 1 to 6 have vacated their office as
directors of the seventh defendant-company under the provisions of the
Companies Act, 1956. It is also averred that since defendants Nos. 1 to 6 and
12 have caused wrongful loss to the seventh defendant and have caused wrongful
gains for themselves by or under the contracts and/or arrangements between the
seventh defendant on the one hand and defendants Nos. 9, 10 and 11 on the other
hand, defendants Nos. 1 to 6 and 12 be ordered and decreed to pay the sum of US
dollar 8 million equivalent to Rs. 25 crores to the seventh defendant.
The
plaintiffs have filed the suit, inter alia, praying for a declaration that
defendants Nos. 1 to 6 have vacated their office as directors of the seventh
defendant-company; for an order restraining defendants Nos. 1 to 6 from acting
as directors of the seventh defendant company; for an order directing
defendants Nos. 1 to 6 and 12 to furnish particulars and accounts of the
transactions undertaken by the seventh defendant with defendants Nos. 9, 10 and
11; for accounts of the loss caused by defendants Nos. 1 to 6 and 12 to the
seventh defendant and the wrongful gains that they have allegedly secured for
themselves; for an order and decree against defendants Nos. 1 to 6 and 12 for
payment of such amounts as compensation and damages as may be ascertained; for
an order and decree against defendants Nos. 1 to 6 and 12 for payment of the
sum of US dollar 8 million equivalent to Rs. 25 crores to the seventh
defendant; for interim and ad interim reliefs specified in the plaint filed.
It
may be mentioned here that on behalf of plaintiffs Nos. 1 and 2, the plaint
filed has been signed by one R.A. Shah who is a practising solicitor of this
court and a partner in the firm of Crawford Bayley and Co., solicitors and
advocates for the plaintiffs in the suit. The plaint filed has been verified by
the said R.A. Shah in his capacity as constituted attorney of plaintiffs Nos. 1
and 2. Even the vakalatnama filed in the suit has been signed by the said R.A.
Shah on behalf of plaintiffs Nos. 1 and 2 and accepted by him as partner in the
said firm of Crawford Bayley and Co. The plaint filed has been countersigned by
the said firm of Crawford Bayley and Co., as advocates for the plaintiffs
through the said R.A. Shah as partner therein. It may also be stated that
though according to the plaintiffs, the first plaintiff controls 50% interest
in 38.15% of the issued capital of the seventh defendant company through ABIL
and ABIH, neither the first plaintiff nor the second plaintiff is a
shareholder/member of the seventh defendant company and the second plaintiff,
without being a shareholder, is a nominee of the first plaintiff on the board
of directors of the seventh defendant company.
In
the facts of the case the following points arise for consideration:
(i) Whether the names of plaintiffs
Nos. 1 and 2 are liable to be struck out and/or deleted from the cause title of
the plaint under the provisions of Order 1, rule 10 of the Code of Civil
Procedure, 1908;
(ii) Whether the portions of the
pleadings in the plaint as more particularly set out in the schedule to the
chamber summons are liable to be struck out under the provisions of Order 6,
rule 16 of the Code of Civil Procedure, 1908;
(iii) Whether the plaint filed has been
properly and validly signed on behalf of plaintiffs Nos. 1 and 2. If not, the
effect thereof;
(iv) Whether the plaint filed has been
properly and validly verified. If not, the effect thereof.
Before
proceeding to consider the abovementioned points, it may be mentioned here that
initially the first plaintiff on the one hand and plaintiffs Nos. 2 and 3 on
the other hand, intended to appear in the proceedings of this chamber summons
through separate set of learned counsel. Mr. Ram Jethmalani, learned counsel,
has mentioned his appearance for and on behalf of the first plaintiff whereas
Mr. Nariman, learned counsel, has mentioned his appearance for and on behalf of
plaintiffs Nos. 2 and 3. However, in view of the objection taken on behalf of
defendants Nos. 1 to 7 and 12 to the effect that where more persons than one
joined as co-plaintiff in a suit, each of the plaintiffs has not got an
individual right of engaging his own advocate or counsel and conducting the
case independently of the other plaintiffs, Mr. Ram Jethmalani, while conceding
the said proposition, made a statement to the effect that his appearance along
with Mr. Nariman, Mr. Chinoy, Mr. Seervai and Mr. Diwan be recorded to show
cause for and on behalf of all the plaintiffs.
Mr.
Mehta on behalf of defendants Nos. 1 and 2, Mr. Vahanvati on behalf of
defendants Nos. 3, 4, 5, 6 and 12 and Mr. Chagla on behalf of the seventh
defendant have submitted that plaintiffs Nos. 1 and 2 not being shareholders of
the seventh defendant company and their names admittedly not being entered on
the register of members of the seventh defendant company as holders of shares, have
no locus standi to file and/or maintain the suit and as such, their names are
liable to be struck out and/or deleted from the cause title of the plaint filed
in the suit under the provisions of Order 1, rule 10(2) of the Code of Civil
Procedure, 1908. It is further submitted that the second plaintiff in his
capacity merely as director of the seventh defendant company is not entitled to
institute and/or maintain the suit, he, in that capacity having no locus standi
to do so. Initially, Mr. Ram Jethmalani and later on Mr. Chinoy on behalf of
the plaintiffs have submitted that the joinder of the present three plaintiffs
is perfectly in accord with Order 1, rule 1 of the Code of Civil Procedure,
1908. On behalf of the plaintiffs, it is further submitted that it is not
denied by either of the defendants that the third plaintiff has a cause of
action. It is not denied that the plaint does disclose a cause of action and
the defendants have not sought any relief under Order VII, rule 11 of the Civil
Procedure Code. It is further submitted on behalf of the plaintiffs that once
the cause of action is admitted, it may inhere in the first plaintiff as in
their submissions, the first plaintiff is a substantial shareholder by reason
of having 50% interest in 38.15% of the issued capital of the seventh defendant
company, the remaining half being vested in the first defendant and his
nominees. It is further submitted that a derivative action has been held to lie
at the instance of the beneficial owner of shares. In the submission of Mr.
Chinoy, it is a corollary of the principle that when the wrong is done to the
company and its assets are in jeopardy and the company is or is likely to be
damnified, somebody else can protect the company's interest, if the company is
in the control of the wrongdoers. That somebody should not be a busybody or a
mere interloper. He may be a formal shareholder, he may be a real owner of
shares, though technically not on the register of shareholders, or he may be a
director, who is not a party to the wrongdoing. Mr. Chinoy has further
submitted that the cause of action in the suit substantially rests on the
breach of the statutory provisions of sections 299 and 295 of the Companies
Act, 1956, by defendants Nos. 1 to 6 and so long as the person suing has some
interest, the civil remedy is available to him. It is further submitted that
section 153 of the Companies Act, 1956, does not prevent a company from
choosing to recognise equitable interest. It certainly does not constitute a
bar on the court's power to recognise equitable interest in shares. Mr. Chinoy
further submitted that a director is bound to protect the interest of the
company. His acquiescence in wrong doing lands him in personal liability. A
director, to save himself from personal liability, must take all steps
including taking legal action. When a company director files a suit, he is not
enforcing a right, he is performing a duty. It is also submitted that Order 1,
rule 10 of the Civil Procedure Code has nothing to do with cause of action or
want of it. The rule is a part of Order 1, the heading of which is
"parties to suit". This expression is not synonymous with a plaintiff
who has no cause of action or a plaintiff wrongly suing. The expression
"improperly joined" in Order 1, rule 10(2) refers to the joinder of a
plaintiff in breach of Order 1, rule 1. Hence, in the submission of Mr. Chinoy,
Order 1, rule 10(2) applies not where a plaintiff's suit is to be dismissed but
where a plaintiff has to be dismissed from the suit. It is further submitted
that on any view being taken both plaintiffs Nos. 1 and 2 are necessary and
proper parties, and they have been properly joined in the suit as the
plaintiffs.
Order
1, rule 1 and Order 1, rule 10(2) of the Civil Procedure Code,
read
as under:
Order
1, rule 1:
"All persons may
be joined in one suit as the plaintiffs where—
(a) any right to relief in respect of, or
arising out of, the same act or transaction or series of acts or transactions
is alleged to exist in such persons, whether jointly, severally or in the
alternative; and
(b) if such persons brought separate suits, any
common question of law or fact would arise."
Order
1, rule 10(2):
"The court may
at any stage of the proceedings, either upon or without the application of
either party, and on such terms as may appear to the court to be just, order
that the name of any party improperly joined, whether as plaintiff or
defendant, be struck out, and that the name of any person who ought to have
been joined, whether as plaintiff or defendant, or whose presence before the
court may be necessary in order to enable the court effectually and completely
to adjudicate upon and settle all the questions involved in the suit, be
added."
Under
Order 1, rule 1, two or more persons may be joined as the plaintiffs in a suit
if the right to relief alleged to exist in each plaintiff arises from the same
act or transaction and there is a common question of law or of fact, (emphasis supplied)
Therefore, before a person can be joined as a plaintiff in a suit, it is
necessary that a right to relief claimed therein must exist in favour of such
person. Under Order 1, rule 10(2) of the Civil Procedure Code, the court can at
any stage of the proceedings order that the name of any party improperly
joined, whether as the plaintiff or the defendant, be struck out. The
impropriety referred to in this rule is in introducing a party who has no right
to relief claimed in the suit. The court, under this rule, has jurisdiction to
strike out the name of any person whose presence in the suit is likely to cause
embarrassment. Defendants Nos. 1 and 2 are not seeking dismissal of the suit in
the chamber summons. They are only seeking that the names of plaintiffs Nos. 1
and 2 who are improperly joined, having no right to the reliefs claimed in the
suit, be struck out. As held by the Madras High Court in the case of Jujishti
Panda v. Lakshmana Dola Behara, AIR 1933 Mad 435, under Order 1, rule 10(2), it
is the plaintiffs who are dismissed from the suit and not that the suit is
dismissed against them. If plaintiffs Nos. 1 and 2 have a right to the reliefs
claimed in the suit, their names from the cause title cannot be struck out.
However, if plaintiffs Nos. 1 and 2 have no right to the reliefs claimed in the
suit, their names have got to be struck out from the cause title at this stage
since it can be done at any stage of the proceedings. Order XIV, rules 1 and 2
of the Civil Procedure Code do not and cannot render statutory provisions and
wordings contained in Order 1, rule 10 and Order VI, rule 16 of the Civil
Procedure Code nugatory. In the case of Dhartipakar Madan Lal Agarwal v. Shri
Rajiv Gandhi, AIR 1987 SC 1577, it has been held by the Supreme Court that
pleadings can be struck out at any time under Order VI, rule 16 of the Civil
Procedure Code.
This
leads us to consider as to whether the first plaintiff and/or the second
plaintiff are the shareholders and/or members of the seventh defendant company
having right to the reliefs claimed in the suit.
Under
section 2(27) and section 41 of the Companies Act, 1956 (for short, "the
said Act"), a member is defined. Section 2(27) provides as follows:
" 'member', in
relation to a company, does not include a bearer of a share-warrant of the
company issued in pursuance of section 114."
Section
41 provides as follows:
"(1) The subscribers of the memorandum of a company
shall be deemed to have agreed to become members of the company, and on its
registration, shall be entered as members in its register of members.
(2) Every other person who agrees in writing to
become a member of a company and whose name is entered in its register of members,
shall be a member of the company."
Under
Indian company law, the word "member" is synonymously used with the
word "shareholder". Therefore, it is only a person who is on the
register of members of the company who is a member/shareholder of the company.
Neither the first plaintiff nor the second plaintiff is a person who is on the
register of members of the seventh defendant company. Hence, plaintiffs Nos. 1
and 2 are not shareholders/members of the seventh defendant company. Further,
under the said Act, certain rights are given only to members, e.g., the right
to vote, apply for winding up, get notice of annual general meetings, to remain
present at the annual general meeting, to receive dividend, to apply for
investigation of company affairs, to inspection and to form part of quorum.
Plaintiffs Nos. 1 and 2 not being members cannot exercise any of the aforesaid
rights nor any other rights conferred only on members by the said Act. It is
now well settled law that no claims by one whose name is not on the register of
members of a company be made against the company. In the case of Howrah Trading
Co. Ltd. v. CIT [1959] 29 Comp Cas 282; [1959] 36 ITR 215; AIR 1959 SC 775, it
has been held by the apex court that the words "member",
"shareholder" and "holder" of a share have been used
interchangeably under the provisions of the Indian Companies Act, 1913. It is
further held that the words "holder of a share" are really equal to
the word "shareholder" and the expression "holder of a share"
denotes, in so far as the company is concerned, only a person who, as a
shareholder, has his name entered on the register of members. The Supreme Court
in the case of Balkrishan Gupta v. Swadeshi Polytex Ltd., AIR 1985 SC 520;
[1985] 58 Comp Cas 563 has further held that even if a receiver is appointed of
shares he has no right to vote and only the member on the register has the
right to vote. It has also been held that ownership of a share denotes the
relation between a person and any right that is vested in him. As held by the
Supreme Court in the case of Narandas Karsondas v. S.A. Kamtam, AIR 1977 SC
774, in India, there is no distinction between legal and equitable estates. The
law of India knows nothing of that distinction between legal and equitable
property in the sense in which it was understood when equity was administered
by the Court of Chancery in England. Relying upon Rani Chhatra Kumari v. Mohan
Bikram Shah, AIR 1931 PC 196, it has been held that under the Indian laws,
there can be but one owner that is, legal owner. In Killick Nixon Ltd. v. Bank
of India [1985] 57 Comp Cas 831, a Division Bench of this court has held that
under section 41(2) of the said Act, a person whose name is entered in the
register of members shall be a member of the company. The contentions of the
plaintiffs that the court can take cognisance of a trust as per Dharwar Bank v.
Mahomed Hayat [1931] 1 Comp Cas 199 (Bom); 33 BLR 250 is contrary to section
153 of the said Act which has an overriding effect because of section 9 of the
said Act. In any event, there is no trust qua plaintiffs Nos. 1 and 2. No such
trust can be said to have arisen or exist under the Indian law in favour of
plaintiffs Nos. 1 and 2. The only exception was given by the Supreme Court in
the case of World Wide-Agencies Pvt. Ltd. v. Margaret T. Desor [1990] 67 Comp
Cas 607; AIR 1990 SC 737 where, under section 397 a legal representative whose
name was not on the register of members but whose name ought to have been
brought was considered to be a person who could apply under section 397 of the
said Act. In that case letters of administration were obtained, the company's
articles recognised interest and title of legal representatives and the court
held that a right has devolved on legal representatives. In the instant case,
plaintiffs Nos. 1 and 2 have no such right in law either to be on the register
of members or to be brought on the register of members of the seventh defendant
company. Neither the courts in India nor in UK have allowed a non-member to
maintain a derivative action. Plaintiffs Nos. 1 and 2 also do not fit into the
exceptions laid down in Bhajekar v. Shinkar, AIR 1934 Bom 243; 36 BLR 483 and
Satyavart Sidhantalankar v. Arya Samaj, Bombay [1947] 17 Comp Cas 21 (Bom); 48
BLR 341.
A
member as defined under section 41 of the said Act can maintain an action
against the company,—
(i) to
enforce a personal right, e.g., the right to vote at or to attend a meeting;
(ii) a representative action under Order
1, rule 8 of the Civil Procedure Code, on behalf of himself and other
shareholders. Such action can be maintained if the same is a derivative action.
In such a derivative action a shareholder can seek reliefs in favour of the
company. Such action, therefore, is not to enforce a personal right of the
shareholder.
The
question then is, what is a derivative action and who can maintain it. In Foss
v. Harbottle [1843] 2 Hare 461, it has been held that it is the company which
has a right to maintain an action in its corporate name. It has further been
held that the court will not interfere in the internal management of the
company. This principal rule is subject only to limited exceptions as laid down
therein. None of the exceptions apply to the facts of the instant case. In
Mozley v. Alston [1847] 1 Ph 790, it was held that a suit in which injury was
alleged to be suffered by a corporation could not be sustained by individual
members unless at least it was shown that the company could not or would not
institute proceedings in their corporate character. Further held that a shareholder
could not ask the court to injunct directors from acting as such. In Pender v.
Lushington [1877] 6 Ch 70, it was held that "member" means
"member for the time being of the company . . . and it means prima facie a
registered shareholder or stock holder. . . so that a member is a man who is on
the register . . . The result appears to me to be manifest, that the company
has no right whatever to enter into the question of the beneficial ownership of
shares". In the said case, it was held that a meeting of the company
should be called to decide whether or not the company's name should be used as
the plaintiffs. In MacDougall v. Gardiner [1875] 1 Ch 13, it was held that
"if the thing complained of is a thing which in substance the majority of
the company are entitled to do or if something has been done irregularly which
the majority of the company are entitled to do legally . . . there can be no
use in having a litigation about it, the ultimate end of which is only that a
meeting has to be called and then ultimately the majority gets its
wishes". It was further held that "nothing connected with internal
disputes between the shareholders is to be made the subject of a bill by some
one shareholder on behalf of himself and others unless there be something
illegal, oppressive, or fraudulent—unless there is something ultra vires on the
part of the company qua the company or on the part of the majority of the
company so that they are not fit persons to determine; but that every
litigation must be in the name of the company, if the company really desire it
... and it is the company, as a company, which has to determine whether it will
make anything that is wrong to the company a subject-matter of litigation, or
whether it will take steps to prevent the wrong from being done". Further
held that "there may be a great many wrongs committed in a company—there
may be claims against directors. . . there may be a variety of things which a
company may well be entitled to complain of but which as a matter of good sense
they do not think it right to make the subject of litigation ; and it is the
company as a company which has to determine whether it will make anything that
is wrong to the company a subject-matter of litigation, or whether it will take
steps itself to prevent the wrong from being done." In Prudential
Assurance Co. Ltd. v. Newman Industries Ltd. [1982] Ch 204, it was held that
the trial judge "ought to have determined as a preliminary issue whether
the plaintiffs were entitled to sue on behalf of Newman by bringing a derivative
action. It cannot have been right to have subjected the company to a 30-day
action ... in order to enable him to decide whether the plaintiffs were
entitled in law to subject the company to a 30-day action. Such an approach
defeats the whole purpose of the rule in Foss v. Harbottle [1843] 2 Hare 461;
[1843] 67 ER 189 and sanctions the very mischief that the rule is designed to
prevent. By the time a derivative action is concluded, the rule in Foss v.
Harbottle [1843] 2 Hare 461; [1843] 67 ER 189 can have little, if any, role to
play".
In
view of the well-settled position in law, it is only the seventh defendant
company which is entitled to maintain an action for the wrong allegedly done to
it and plaintiffs Nos. 1 and 2 have no locus standi to maintain the above suit.
The only exception to the aforesaid rule which permits a shareholder to
maintain an action for the wrong alleged to have been done to the seventh
defendant company is if the shareholder can show that wrongdoers are in control
of the seventh defendant company and the seventh defendant company would hence
be unable to maintain any action. In the facts of the present case, the seventh
defendant had at the board of directors' meeting held on 30th November, 1992,
decided to take all necessary steps required to ascertain any alleged loss
caused to the seventh defendant and furthermore to recover such loss. Neither
in the plaint nor in the affidavit-in-reply to the chamber summons filed by the
plaintiff, it is contended that wrongdoers are in control of the seventh
defendant company. Since plaintiffs Nos. 1 and 2 are not shareholders of the
seventh defendant, they are not entitled to maintain the suit which can at the
highest be maintained only by a shareholder if the same falls within the exceptions
to the rule in Foss v. Harbottle [1843] 2 Hare 461; [1843] 67 ER 189.
On
behalf of the plaintiffs, Mr. Chinoy has fairly conceded that there is no
Indian or English authority which allows a non-shareholder/member to maintain a
derivative action. However, efforts were made to justify the action of
plaintiffs Nos. 1 and 2 by relying on the judgments of American courts where in
some American States "double" or "triple" derivative
actions have been permitted. Reliance has been placed on HFG Company v. Pioneer
Pub. Co. 162 F2d 536 (State of Illinois); Goldstein v. Groesbreck 142 F2d 422
(State of New York); U.S. Lines Inc. 96 F2d 148 (State of New York) and Kaufman
v. Wolfson 151 NYS 2d 530 (State of New York) which are all State decisions
where State substantive law does not prohibit a non-member from maintaining
such an action. Under Indian law, it is settled that only a member on the
register of members can sue and, therefore, the American cases relied upon by
the plaintiffs can have no application. In the case of Joseph Kuruvilla
Vellukunnel v. Reserve Bank of India, AIR 1962 SC 1371; 32 Comp Cas 514, the
apex court of our country has held as under (at page 1397):
"The aid of
American concepts, laws and precedents in the interpretation of our laws is not
always without its dangers and they have therefore to be relied upon with some
caution if not with hesitation because of the difference in the nature of those
laws and of the institutions to which they apply."
Under
section 153 of the said Act, "no notice of any trust, express, implied or
constructive, shall be entered on the register of members. . ." Under
section 153B of the said Act, it is provided that where shares are held in
trust by any person, a declaration shall be made in the manner prescribed and a
copy thereof sent by the trustee to the company concerned. Under section
187C(1) of the said Act, a person whose name is entered on the register of
members but who does not hold the beneficial interest in those shares shall
make a declaration to the company specifying the name and particulars of the
person who holds the beneficial interest in such shares. Also a person holding
a beneficial interest in the shares of a company shall make a declaration to
the company under subsection 187C(2) of the said Act within 30 days after
becoming such beneficial owner. In the instant case, the first plaintiff which
claims to be the beneficial owner of shares in the seventh defendant company,
has not made any declaration either under section 153B or under section 187C(2)
of the said Act nor has ABIL which is registered as the holder of 38.15% shares
of the seventh defendant company, made any declaration as required by section
187C(1) of the said Act. It may also be stated that the claim of the plaintiffs
that the first plaintiff is the real owner of the shares standing in the name
of ABIL is directly counter to section 4(1) of the Benami Transactions
(Prohibition) Act, 1988, which reads as under:
"4. Prohibition
of the right to recover property held benami—(1) No suit, claim or action to
enforce any right in respect of any property held benami against the person in
whose name the property is held or against any other person shall lie by or on
behalf of a person claiming to be the real owner of such property."
Mr.
Chinoy, learned counsel for the plaintiffs, submitted that in the facts of the
case, all that was required was to lift the corporate veil of the seventh
defendant company to find out who the real or de facto shareholders of the
seventh defendant company were. However, in view of the fact that neither the
first plaintiff nor the second plaintiff are shareholders of the seventh
defendant company, reliance placed by Mr. Chinoy on the averments made
particularly in paragraphs 2, 4, 9 and 12(a) of the affidavit of Nicolas Moulin
filed in reply to the chamber summons cannot give locus standi to plaintiffs
Nos. 1 and 2 to maintain the present suit inasmuch as a suit similar in nature
to the present one can only be maintained by a shareholder of the seventh defendant
company. As per the pattern of shareholding in the seventh defendant company
given by the plaintiffs in the plaint filed as well as in the affidavit of the
said Nicolas Moulin, ABIL holds directly or indirectly through Nat West 38.15%
of the issued capital of the seventh defendant company which is a distinct
company with a separate corporate identity. In the case of Salomon v. Salomon
and Co. [1897] AC 22, it is settled that a company is a distinct and separate
entity and courts would lift the corporate veil only in exceptional
circumstances. The judgment in Salomon v. Salomon and Co. [1897] AC 22 still
holds the field and has been followed by the Supreme Court in Tata Engineering
and Locomotive Co. Ltd. v. State of Bihar [1964] 34 Comp Cas 458; AIR 1965 SC
40. In para 24 thereof, the Supreme Court has stated as under (at page 468 of
34 Comp Cas):
"The true legal
position in regard to the character of a Corporation or a company which owes
its incorporation to a statutory authority, is not in doubt or dispute. The
Corporation in law is equal to a natural person and has a legal entity of its
own. The entity of the Corporation is entirely separate from that of its
shareholders; it bears its own name and has a seal of its own; its assets are
separate and distinct from those of its members; it can sue and be sued
exclusively for its own purpose; its creditors cannot obtain satisfaction from
the assets of its members; the liability of the members or shareholders is
limited to the capital invested by them, similarly the creditors of the members
have no right to the assets of the Corporation. This position has been
well-established ever since the decision in the case of Salomon v. Salomon and
Co. [1897] AC 22 was pronounced in 1897; and indeed, it has always been the
well recognised principle of common law. However, in the course of time, the
doctrine that the Corporation or a company has a legal and separate entity of
its own has been subjected to certain exceptions by the application of the
fiction that the veil of the Corporation can be lifted and its face examined in
substance. The doctrine of the lifting of the veil thus marks a change in the
attitude that law had originally adopted towards the concept of the separate
entity or personality of the Corporation. As a result of the impact of the
complexity of economic factors, judicial decisions have sometimes recognised
exceptions to the rule about the juristic personality of the Corporation. It
may be that in course of time these exceptions may grow in number and to meet
the requirements of different economic problems, the theory about the
personality of the Corporation may be confined more and more."
In
support of his submission that this court should "remove the corporate
veil", Mr. Chinoy has put reliance on the case of State of U.P. v.
Renusagar Power Co., AIR 1988 SC 1737; [1991] 70 Comp Cas 127 wherein the
Supreme Court observed that the doctrine of lifting the corporate veil is
expanding in the context of modern jurisprudence. In para 63 thereof, it has
been observed as under (at page 159 of 70 Comp Cas):
"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 aim of
the legislation is to do justice to all the parties. The horizon of the
doctrine of lifting of the corporate veil is expanding. Here, indubitably, we
are of the opinion that it is correct that Renusagar was brought into existence
by Hindalco in order to fulfil the condition of industrial licence of Hindalco
through production of aluminium. It is also manifest from the facts that the
model of the setting up of power station through the agency of Renusagar was
adopted by Hindalco to avoid complications in case of take over of the power
station by the State or the Electricity Board. As the facts make it abundantly
clear that all the steps for establishing and expanding the power station were
taken by Hindalco, Renusagar is a wholly owned subsidiary of Hindalco and is
completely controlled by Hindalco. Even the day-to-day affairs of Renusagar are
controlled by Hindalco. Renusagar has, at no point of time, indicated any
independent volition. Whenever felt necessary, the State or the Board have
themselves lifted the corporate veil and have treated Renusagar and Hindalco as
one concern and the generation in Renusagar as the own source of generation of
Hindalco. In the impugned order the profits of Renusagar have been treated as the
profits of Hindalco."
In
that case, the court held on the facts that the holding company and the
subsidiary were to be treated as one and the same because the subsidiary was
created to generate and supply energy and power to the holding company in order
to enable it to maintain its production commitment to the State and, therefore,
generation of power was considered for the purpose of excise to be the holding
company's own source of supply and not supply from a separate entity. It was
there held that there was no separate or independant existence and all
day-to-day affairs were controlled. The same is not the situation as regards
ABIH, ABIL/Nat West and the first plaintiff in the instant case. Mr. Mehta,
learned counsel appearing for defendants Nos. 1 and 2, has justifiably put
reliance on the case of LIC of India v. Escorts Ltd. [1986] 59 Comp Cas 548;
AIR 1986 SC 1370, wherein tests are laid down as to when a court will pierce
the corporate veil, i.e., where the defendant has to be further probed into. The
corporate veil is lifted against an entity if the entity is hiding behind the
veil so as to escape liability or penalty. None of the tests laid down in
Escorts Ltd.'s case, AIR 1986 SC 1370 apply to the instant case wherein the
first plaintiff is seeking to get locus standi to maintain the present suit by
asking this court to lift not only its own corporate veil but also the
corporate veil of ABH, ABIL, Nat West. The Supreme Court in Escorts Ltd.'s
case, AIR 1986 SC 1370 has cited with approval Pennington on Company Law
wherein he has stated (at page 1417):
"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 personality, 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."
The
Delhi High Court in the case of Carrasco Investments Ltd. v. Special Director,
Enforcement Directorate, [1994] 79 Comp Cas 631; [1992] 2 Comp LJ 339, on which
reliance has been placed by Mr. Vahanvati, learned counsel appearing for
defendants Nos. 3 to 6 and 12, considered a case wherein there was an agreement
for purchase by one foreign company of the shares of another foreign company to
indirectly acquire control of 38.7% of the share capital of an Indian company.
It was contended that this arrangement actually amounted to indirectly
purchasing the shares of the Indian company. It was held (at page 653 of Comp
Cas):
"We do not find
it permissible or even necessary to tear the corporate veil of the R.G. Shaw
companies to hold that in acquiring the shares of the R.G. Shaw companies,
Carrasco in fact acquired the shares of Shaw Wallace. We are supported in this
view by a decision of the Supreme Court in LIC v. Escorts Ltd. [1986] 59 Comp
Cas 548 ; AIR 1986 SC 1370."
The
doctrine of the lifting of a corporate veil cannot be applied to a plaintiff
who is not a shareholder of a company but claims that if the veil of the
corporate personality of the plaintiff is lifted, the real holder will emerge.
The corporate veil is lifted when in defence proceedings, such as for the
evasion of tax, an entity relies on its corporate personality as a shield to
cover its wrong doings. The submission made on behalf of the plaintiffs that
the corporate veil of the first plaintiff be lifted has no legal foundation and
cannot be accepted.
The
second plaintiff is a non-proprietary director of the seventh defendant and can
have no right beyond those conferred on him by statute, viz., the said Act. A
non-proprietary director cannot:—
(a) apply
for the winding up of the company under section 439 of the said Act;
(b) sue
for oppression, mismanagement under sections 397 and 398 of the said Act.
He
has no right to receive notice of annual general meetings unless he is a
member. He cannot form part of a quorum and he has no right to vote. He has no
right to apply to the Central Government for investigation of the affairs of
the company. He has no right to dividends declared. He acts as a delegate of
the board and not in his own rights. He is not entitled to inspection of
minutes book of a general meeting of the company. He is not an agent or a
trustee of the shareholders. A non-proprietary director has the following
rights under the said Act:
(a) to
be heard prior to his removal;
(b) to
receive notice of board meetings;
(c) to
be given notice of the resolution proposed to be passed by circulation; and
(d) to
inspect books of account.
A
non-proprietary director is entitled to sue the company only in certain cases.
In Pulbrook v. Richmond Consolidated Mining Co. [1878] 9 Ch 610, it was held
that where a director who is improperly and without cause excluded by his
brother directors from the board, he is entitled to an order restraining such
directors from so excluding him. The second plaintiff is not attempting to
enforce any of his individual statutory rights. Like any other employee of a
company a non-shareholder director owes duties to the company but has no right
to exercise any of the powers which a shareholder who is a proprietor of the
company can exercise. The case of Jackson v. Minster Bank Ltd, [1885] 15 LR Ir
356 relied upon by Mr. Chinoy is an Irish case. The case of Jackson (supra) and
also the case of Joint Stock Discount Co. v. Brown [1869] LR Eq. Cases 381 also
relied upon by Mr. Chinoy are contrary to settled Indian law and as such, have
neither persuasive nor binding effect. These cases even do not hold that a
non-shareholder director can maintain a derivative action on behalf of the
company. Even the articles of association of a company constitute contract
between the company and its members but do not confer any rights on a person
other than a member. The articles of association do not confer any rights on a
non-proprietary director of the company.
Mr.
Chinoy submitted that a declaratory decree in the suit can be passed without
the plaintiffs establishing a cause of action in the strict sense of the term.
In support of his submission, Mr. Chinoy has relied upon the case of Guaranty
Trust Company of New York v. Hannay and Co. [1915] 2 KB 536 as also on the case
of Vemareddi Ramaraghava Reddy v. Konduru Seshu Reddy, AIR 1967 SC 436 and on
the case of Supreme General Films Exchange Ltd. v. His Highness Maharaja Sir
Brijnaih Singhji Deo of Maihar, AIR 1975 SC 1810. These cases do lay down that
the declarations can be granted even though no consequential relief is capable
of being granted to the plaintiff. That does not mean that without any cause of
action, a plaintiff can file a suit to get a declaratory decree therein. In the
case of Guaranty Trust Co. of New York [1915] 2 KB 536, a declaration that a
particular tax was not leviable or illegal was held capable of being granted
although the plaintiff did not seek consequential reliefs therein. In the case
of Vemareddi Ramaraghava Reddy, AIR 1967 SC 436, a worshipper was allowed to
sue for a declaration that a compromise decree entered into on behalf of a
deity was void as not binding though he did not ask for the property
transferred thereunder to be transferred back to him as that right would only
be with the deity. In the case of Supreme General Films Exchange Ltd., AIR 1975
SC 1810, the plaintiff had filed a suit claiming a declaration that a lease
executed in favour of the defendant therein in respect of a theatre by its former
owners was void and ineffective against the plaintiff's rights under decrees
obtained in other suits in execution whereof the said theatre was attached. The
Supreme Court on the facts held that the plaintiff possessed sufficient legal
interest in the theatre as a mortgagee as well as an assignee of a decree
holder who had got the property attached before he filed his suit, so as to
enable him to sue for the declarations he sought.
In
the facts, I hold that plaintiffs Nos. 1 and 2 have no right to the reliefs
claimed in the suit and their names are liable to be struck out from the cause
title even at this stage.
Order
VI, rule 16 of the Civil Procedure Code reads as under:
"Striking out
pleadings:
The court may at any
stage of the proceedings order to be struck out or amended any matter in any
pleading—
(a) which
may be unnecessary, scandalous, frivolous or vexatious, or
(b) which
may tend to prejudice, embarrass or delay the fair trial of the suit, or
(c) which
is otherwise an abuse of the process of the court."
Thus,
at any stage of the proceedings, the court has power to strike out any matter
in any pleading which in the opinion of the court is unnecessary, scandalous,
frivolous or vexatious or which tends to prejudice, embarrass or delay the fair
trial of the suit or which is otherwise an abuse of the process of the court.
A
suit is always based on a cause of action. "A cause of action" means
every fact, which, if traversed, it would be necessary for the plaintiff to prove
in order to support his right to a judgment of the court. In other words, it is
a bundle of facts which taken with the law applicable to them gives the
plaintiff a right to relief against the defendant. In the plaint, the
plaintiffs were required to state only such facts which constitute the
"cause of action" for the reliefs claimed therein. The plaintiffs
have claimed the relief of declaration that defendants Nos. 1 to 6 have vacated
their office as directors of the seventh defendant company since, according to
the plaintiffs, defendants Nos. 1 and 2 in violation of section 299 of the said
Act have not disclosed their interest or concern in the contracts or
arrangements between the seventh defendant company on the one hand and
defendants Nos. 9, 10 and 11 on the other hand and have also prayed for order
and injunction against defendants Nos. 1 to 6 to restrain them from acting as
directors of the seventh defendant company. Since, according to the plaintiffs,
defendants Nos. 1 to 6 and 12 have caused wrongful loss to the seventh
defendant and wrongful gains to themselves through the instrumentality of
defendants Nos. 9, 10 and 11, the plaintiffs have also sought the reliefs of
accounts and ascertainment of loss and/or damages caused and decree against defendants
Nos. 1 to 6 and 12 for payment thereof to the seventh defendant. The plaintiffs
have, however, made several statements in the plaint relating and/or anywise
pertaining to "shareholders agreement relating to ABI Holdings Ltd., dated
December 21, 1989" (for short, 'the shareholders agreement'), and
otherwise which do not anywise constitute cause of action in respect of the
reliefs claimed in the suit. As a matter of fact, a separate suit in respect
thereof has already been instituted abroad in a court of law which is pending.
The statements and averments made by the plaintiff as more particularly
mentioned in the schedule annexed to the chamber summons do not constitute
cause of action formulated in the plaint nor do the same support the cause of
action set out in the plaint filed nor would the same form part of evidence in
chief which the plaintiffs would be bound to lead for the purpose of obtaining
the reliefs asked for nor are the same necessary or relevant or germane to the
reliefs sought in the suit. Such statements and averments are irrelevant,
unnecessary, scandalous, frivolous and tend to prejudice or embarrass the
contesting defendants and as such are liable to be struck out from the plaint
at this stage under the provisions of Order VI, rule 16 of the Civil Procedure
Code.
In
the case of P.D. Shamdasani v. Central Bank of India Ltd. (No. 2), AIR 1944 Bom
197, Coyajee J. of our court formulated the following test for considering an
application of this kind, —
"(a) Whether the allegations made constitute the
cause of action formulated in the plaint?
(b) Whether
the allegations made support the cause of action in the pleading?
(c) Whether the allegation or the statement
could form part of the evidence-in-chief which the plaintiff would be bound to
lead for the purpose of obtaining the relief asked for?" (emphasis supplied)
In
the said case, it was held that the words complained of being both scandalous
and irrelevant the only order that could be passed would be of expunging such
pleadings. The said judgment has in terms been followed by Dhanuka J. in his
judgment delivered on 20th and 23rd April, 1992, in Arbitration Petition No.
210 of 1989 in Award No. 160 of 1989 in the matter of Oil and Natural Gas
Commission v. Offshore Enterprises Inc. In R.R. Tewari v. Vijaiyalaxmi, AIR
1986 All 325, it is held that Order VI, rule 16(b) of the Civil Procedure Code
permits striking out of pleadings which may, inter alia, embarrass the fair
trial of the suit. The said position is reiterated in the case of Dhartipakar
Madan Lal Agarwal v. Shri Rajiv Gandhi, AIR 1987 SC 1577. It is held that those
paras in the petition which do not disclose any cause of action, are liable to
be struck off under Order VI, rule 16 as the court is empowered at any stage of
the proceedings to strike out or delete a pleading which is unnecessary,
scandalous, frivolous or vexatious or which may tend to prejudice, embarrass or
delay the fair trial of the petition or suit. In Knowles v. Roberts [1888] 38
Ch 263, it was held that (at page 270):
"It seems to me
that the rule that the court is not to dictate to parties how they should frame
their case, is one that ought always to be preserved sacred but that rule is,
of course, subject to this modification and limitation, that the parties must
not offend against the rules of pleading which have been laid down by the law;
and if a party introduces a pleading which is unnecessary and it tends to
prejudice, embarrass and delay the trial of the action, it then becomes a
pleading which is beyond his right ... It becomes, therefore, the duty of the
judge who has to apply the rule (Order XIX, rule 27-Rules of Supreme Court,
1883), to apply his power in a fit case; and a fit case will be that which
fulfils the definition of the rule and in which there are no other
circumstances which make it inappropriate and inconvenient or unjust to apply
the power."
The
cases cited by the plaintiffs relate to Order VII, rule 11 of the Civil Procedure
Code where the entire plaint (and not part) is required to be rejected as
disclosing no cause of action. Order VII, rule 11 cannot, therefore, be
extrapolated to apply to Order I, rule 10 or Order VI, rule 16. In the case of
Millington v. Loring [1880] 6 QB 190, on the facts, it has been held that the
facts alleged in the plaint were "material facts" and as such were
properly pleadable. It has been further held that the statements neither being
scandalous nor tending to prejudice or embarrass the fair trial of the action
could not be struck out. The case of Dyson v. Attorney-General [1911] 1 KB 410
also relied upon by Mr. Chinoy deals with striking out pleadings as disclosing
no cause of action. The provisions of the Rules of Supreme Court, 1883, mentioned
in Dyson's case are equivalent to Order VII, rule 11 of the Civil Procedure
Code. It was in this context that the court had taken the view that it could
not dismiss an action because it thinks that the plaintiff would not succeed
and cannot be driven from the judgment seat in this manner. In the instant
case, no relief under Order VII, rule 11 of the Civil Procedure Code has been
claimed in the chamber summons and as such, the ratio laid down in Dyson's case
has no applicability. Reliance has also been placed by Mr. Chinoy on the
Division Bench judgment of this court in the case of Bomi Munchershaw Mistri v.
Kesharwani Co-operative Housing Society Ltd. [1988] 3 Bom CR 238 which also
deals with a case where the entire plaint was sought to be struck off. Although
this prayer was brought under Order VI, rule 16 (because earlier an identical
application was brought under Order VII, rule 11 — which was dismissed), the
court said that it would not take the plaint off the record unless the cause of
action was incontestably bad. In this context Dyson's case was cited. In the
same context, Bomi, Mistri's case followed Williams and Humbert Ltd. v. W.
& H. Trade Marks (Jersey) Ltd. [1986] 1 All ER 129 (HL), which squarely
deals with RSC Ord. 18, r. 19 (English equivalent of Order VII, rule 1 of the
Civil Procedure Code) and, therefore, has no application. In the case of
Purshottam Vishindas Raheja v. Life Insurance Corporation of India, AIR 1982
Bom 523, on which reliance has also been placed by Mr. Chinoy, it has been held
that under Order VII, rule 11 of the Civil Procedure Code the entire plaint has
to be dismissed. It is not applicable to the facts of the instant case. In
Varajlal Bhaishanker v. Ramdat Harikrishna [1901] ILR 26 Bom 259, relied upon
by Mr. Chinoy, it was held that misjoinder of two different plaintiffs to sue
two different defendants for two different assaults was not permissible since
they had not the same cause of action. This also has no application to the
facts of the instant case. On behalf of the plaintiffs, reliance has also been
placed on the case of Manohar Lal v. Roshan Lal, AIR 1938 Lah 799, where the
court held that after the full trial a necessary party cannot be dismissed as a
plaintiff under Order I, rule 10 of the Civil Procedure Code but that his claim
should be dismissed. This case, on the contrary, supports defendants Nos. 1 and
2 as it shows that different considerations arise prior to the suit being heard
as against after the trial begins.
As
mentioned hereinabove, the plaint has been signed by the said Mr. R.A. Shah for
and on behalf of plaintiffs Nos. 1 and 2. The said Mr. R.A. Shah is a
practising solicitor of this court and is a partner in the firm of Crawford
Bayley and Co., solicitors and advocates for the plaintiffs. The plaint is
verified also by the said Mr. R.A. Shah in his capacity as constituted attorney
of plaintiffs Nos. 1 and 2. It may also be mentioned here that the vakalatnama
filed in the suit has been signed by the said R. A. Shah for and on behalf of
plaintiffs Nos. 1 and 2 and as aforesaid, the said vakalatnama has also been
accepted by the said Mr. R.A. Shah in his capacity as the partner in the said
firm of Crawford Bayley and Co. Although under the provisions of the Code of
Civil Procedure as applicable to this court, the solicitors and/or advocates
practising in this court can be appointed as power of attorney holders, yet the
question which arises for consideration is should an advocate or solicitor sign
the vakalatnama, plaint and verify the plaint for and on behalf of the same
plaintiffs for whom he also appears in the suit in which the plaint and the
vakalatnama are filed. Recently, this question has been extensively considered
by Dhanuka J. in his well considered judgment in the case of Oil and Natural
Gas Commission v. Offshore Enterprises Inc. delivered on 18th December, 1992
(Arbitration Petition No. 210 of 1989 in Award No. 66 of 1989). As held by
Dhanuka J., advocates in their personal capacity are enjoined to act with
complete impartiality and detachment and not entitled to identify themselves
with their clients or cause personally. The paramount duty of an advocate is to
assist the court in its task of administering justice. It is further held that
in the event of there being any conflict between interest and duty, the
advocate must yield in favour of his duty to assist the cause of fair and
impartial justice. On the other hand, a constituted attorney is entitled to
identify himself with the donor of the power of attorney and act in the same
manner as the suitor-litigant is entitled to act. Construing the provisions of
the Civil Procedure Code harmoniously and in a manner so as to prevent
confusion, anomaly and misunderstanding, Dhanuka J. has held that the law does
not permit the combination of the two capacities in the same cause. On the
contrary, the law prohibits such combination and rightly so. In my view, an
advocate cannot act in a dual capacity and cannot be a mixture of two
characters. Since the vakalatnama as also the plaint have been signed by the
said Mr. R.A. Shah for and on behalf of plaintiffs Nos. 1 and 2, in the facts
stated hereinabove, in my view, neither the vakalatnama nor the plaint filed in
the suit have been properly signed by plaintiffs Nos. 1 and 2.
In
the case of Raj Kumar Dhar v. Colonel A. Stuart Lewis, AIR 1958 Cal 104, it has
been held that verification of pleadings is an important matter which may have
serious consequences. The object of verification is to fix responsibility on
the party verifying and to prevent false pleadings being recklessly filed or
false allegations being recklessly made. It must have some sanctity and for
that purpose the rule makes provisions by insisting upon the competency of the
person verifying where he is somebody other than the actual party concerned by
requiring him to prove to the satisfaction of the court his acquaintance with
the facts of the case. This is all the more imperative where the competency of
the person verifying is challenged by the other side. It has further been held
that where the plaint contains serious allegations of fraud against the
defendants and the verification is sought to be made by an agent under a power
of attorney by merely putting on record the power of attorney, it is wholly
insufficient for the purpose, as the plaintiff's agent simpliciter holding an
authority to sign the verification under the power of attorney would be
incompetent to verify the plaint. It has further been held that in the
circumstances the plaintiff should be required to verify the plaint himself so
that he may accept full responsibility for it under the law. In the case of
Consolidated Foods Corporation v. Brandon and Co. Pvt. Ltd. [1960] 62 BLR 799,
the aforesaid position has been reiterated. In my view, the present
verification of the plaint is contrary to the provisions of Order 6, rule 15 of
the Code of Civil Procedure. However, it would be proper in the facts of the
case to give an opportunity to the plaintiffs to have the plaint verified in
accordance with law and in conformity with the provisions of Order 6, rule 15
of the Code of Civil Procedure if the plaintiffs so desire.
On
behalf of the plaintiffs, it is submitted that there has been delay on the part
of defendants Nos. 1 and 2 in taking out the present chamber summons, which
delay has been deliberately caused to avoid the hearing of the notice of motion
which the plaintiffs had taken out in the suit. It is also submitted that the
chamber summons is not maintainable and is liable to be dismissed. I find no
substance in either of the submissions made on behalf of the plaintiffs. As
aforesaid, the chamber summons of the nature taken out on behalf of defendants
Nos. 1 and 2 can in law be taken out at any stage of the proceedings of the
suit. Order 1, rule 10(2) and Order 6, rule 16 of the Code of Civil Procedure,
1908, enable defendants Nos. 1 and 2 to maintain the present chamber summons if
on the merits the case for the reliefs claimed therein is made out by
defendants Nos. 1 and 2. In the facts stated hereinabove there is no doubt that
defendants Nos. 1 and 2 have made out a case for maintaining the present
chamber summons.
Besides
the authorities referred to hereinabove, other authorities have also been cited
at the Bar by learned counsel appearing in the proceedings of this chamber
summons. Since the other authorities cited by learned counsel are not found to
be relevant for the proceedings of the present chamber summons, the same have
not been referred to by me in this order.
It
is not possible to part with this order without appreciating the efforts made
by all learned counsel appearing in placing in meticulous and forthright manner
relevant facts and law before the court for its consideration. The written
submissions submitted have also been of great assistance to the court.
In
the result, the chamber summons is made absolute in terms of prayers (a) and
(c). So far as prayer (b) is concerned, liberty is granted to the plaintiffs to
cure the defects by reverifying the plaint in accordance with the law and
provisions of Order 6, rule 15 of the Code of Civil Procedure, 1908, within a
period of two weeks failing which the prothonotary and senior master of this
court is directed to return the plaint to the learned advocates for the plaintiffs
as defective.
In
the circumstances of the case, there shall be no order as to costs of the
chamber summons.
Mr.
Diwan, learned counsel also appearing for the plaintiffs, applies for stay of
operation of this order for a period of two weeks. Since there is no merit in
the application, the same is rejected.
[1981]
51 COMP. CAS. 184 (MP)
High Court OF Madhya Pradesh
v.
Special Area Development
Authority, M.P.
G.P. SINGH AND K.K. DUBE, JJ.
Miscellaneous Petition No. 555 of 1977
APRIL 15, 1978
V.S. Dabir for the Petitioner.
Y.S. Dharmadhikari and S.L.
Saxena for the Respondent.
G.P. Singh, J.—The petitioner, Bharat Aluminum Company Ltd., is a
Government company incorporated under the Companies Act, 1956. The respondent
No. 1, Special Area Development Authority for the Korba Special Area, is
constituted under s. 65 of the Madhya Pradesh Nagar Tatha Gram Nivesh
Adhiniyam, 1973 (M. P. Act No. 23 of 1973). The petitioner-company is an
industrial unit in the Korba Special Area. By notice, dated 15th April, 1977,
the respondent, development authority, made a demand of Rs. 13,22,100 as
property tax for the year 1976-77 from the petitioner-company. By another
notice, dated 16th July, 1977, the development authority demanded Rs.
13,65,673.50 as property tax from the petitioner-company for the year 1977-78.
The petitioner, by this petition under art. 226 of the Constitution, challenges
the legality of the aforesaid two demand notices.
Before referring to the
contentions raised by the learned counsel for the petitioner, it is necessary
to have in mind the relevant statutory provisions. The Madhya Pradesh Nagar
Tatha Gram Nivesh Adhiniyam, 1973, which shall for brevity be referred to as
the 1973 Adhiniyam, bears a long title which admirably shows its purposes. The
long title is: " An Act to make provision for planning and development and
use of land; to make better provision for the preparation of development plans
and zoning plans with a view to ensuring that town planning schemes are made in
a proper manner and their execution is made effective; to constitute town and
country planning authority for proper implementation of town and country
development plan; to provide for the development and administration of special
areas through special area development authority; to make provision for the
compulsory acquisition of land required for the purpose of the development
plans and for purposes connected with the matters aforesaid". Chapter VIII
of the 1973 Adhiniyam, which consists of ss. 64 to 71, bears the title
"Special Areas". Under s. 64, the State Govt. is empowered to declare
any area as a special area by issuing a notification. The notification defines
the limits of the area declared as a special area. Section 65 provides that for
every special area there shall be a special area development authority which
consists of a chairman and such other members as the Government may determine
from time to time. The chairman and the members of the development authority
are appointed by the Government. The development authority for the Korba
Special Area, with which we are concerned in this petition, consists of a
chairman and 10 members. Every special area development authority, as indicated
in s. 66, is a body corporate with perpetual succession and a common seal and
has power to acquire, hold and dispose of property, both movable and immovable,
and to contract and sue and be sued in its name. The functions of the
development authority are laid down in s. 68. We are concerned in this case
with cls. (v) and (vi) of s. 68 which enjoin upon the development authority to
provide for the municipal services and municipal management of the special
area. Clauses (v) and (vi) of s. 68 read as follows:
"68. Functions.—The
functions of the Special Area Development Authority shall be—...
(v) to provide for the municipal services as specified in sections 66,
67 and 68 of the Madhya Pradesh Municipal Corporation Act, 1956 (No. 23 of
1956) or sections 123 and 124 of the Madhya Pradesh Municipalities Act, 1961
(No. 37 of 1961), as the case may be—
(a) where the municipal corporation or municipal council existed in
such area prior to its designation as special area under section 64, according to
the municipal law by which such special area was governed; and
(b) where no municipal corporation or municipal council existed in
such area prior to its designation as special area under section 64, according
to such of the aforesaid Acts as the State Government may direct;
(vi) to provide for the
municipal management of the special area in the same manner as is done by a
municipal corporation under the Madhya Pradesh Municipal Corporation Act, 1956
(No. 23 of 1956), or by a municipal council of the first class constituted
under section 4 of the Madhya Pradesh Municipalities Act, 1961 (No. 36 of
1961), as the case may be,—
(a) where the municipal corporation or municipal council existed in
such area prior to its designation as special area under section 64, according
to the municipal law by which such special area was governed; and
(b) where no municipal corporation or municipal
council existed in such area prior to its designation as special area under
section 64, according to such of the aforesaid Acts as the State Government may
direct".
These
clauses in s. 68 in the present shape were first inserted by Ordinance No. 26
of 1975 which came into force on 27th February, 1976 [see Notification No.
84-XXXII-76, dated 7th January, 1976, published in M. P. Rajpatra, dated
February 27, 1976: [1976] M. P. Law Times, Part II, p. 86]. The Ordinance was
later replaced by the Madhya Pradesh Nagar Tatha Gram Nivesh (Sanshodan)
Adhiniyam, 1976 (Act No. 6 of 1976). Sub-section (4) of s. 64 of the 1973
Adhiniyam provides that the municipal corporation, municipal council, notified
area committee or a panchayat shall cease to exercise the power and perform the
functions in relation to the special area which the development authority is
competent to perform under the Adhiniyam with effect from the date the
development authority undertakes the functions under cl. (v) or cl. (vi) of s.
68. The development authority has also been conferred powers for the purpose of
municipal administration and taxation by cls. (c) and (d) of s. 69. Clauses (c)
and (d) of s. 69 read as follows:
"69.
Powers.—The Special Area Development Authority shall—...
(c) For the purpose of
municipal administration have the powers which a municipal corporation or a
municipal council has, as the case may be, under the Madhya Pradesh Municipal
Corporation Act, 1956 (No. 23 of 1956), or the Madhya Pradesh Municipalities
Act, 1961 (No. 37 of 1961),—
(a) where the municipal corporation or municipal
council existed in such area prior to its designation as special area under
section 64, according to the municipal law by which such special area was
governed, and
(b) where no municipal corporation or municipal
council existed in such area prior to its designation as special area under section
64, according to such of the aforesaid Acts as the State Government may direct;
(d) for the purpose of taxation have the powers
which a municipal corporation or a municipal council has, as the case may be,
under the Madhya Pradesh Municipal Corporation Act, 1956 (No. 23 of 1956), or
the Madhya Pradesh Municipalities Act, 1961 (No. 37 of 1961),—
(a) where the municipal corporation or municipal
council existed in such area prior to its designation as special area under
section 64, according to the municipal law by which such special area was
governed; and
(b) where no municipal corporation or municipal
council existed in such area prior to its designation as special area under
section 64, according to such of the aforesaid Acts as the State Government may
direct".
Clauses (c) and (d) of s.
69 like cls. (v) and (vi) of s. 68 were inserted in the present shape by
Ordinance No. 26 of 1975, which came into force on 27th February, 1976. The
Ordinance, as earlier stated, was replaced by Act No. 6 of 1976.
There was no municipal
corporation or municipal council in the Korba Special Area prior to the
constitution of the development authority. The Government, therefore, was
required to direct whether the Madhya Pradesh Municipal Corporation Act, 1956,
or the Madhya Pradesh Municipalities Act, 1961, shall apply to the Korba
Special Area for purposes of cls. (v) and (vi) of s. 68 and cls. (c) and (d) of
s. 69. The State Government's power of making this direction is contained in
sub-cl. (b) of these clauses. This direction was first issued under all these
clauses of ss. 68 and 69 by notification, dated 28th January, 1976, published
in the Govt. Gazette, dated 27th February, 1976, and the development authority,
Korba, was directed to exercise the powers and perform the functions of a class
I Municipality constituted under the Madhya Pradesh Municipalities Act, 1961.
This notification became effective from 27th February, 1976, from which date
Ordinance No. 26 of 1975 was made effective. By another notification, dated 15th
March, 1977, published in the Govt. Gazette, dated 15th July, 1977, the
development authority, Korba, was directed under the aforesaid clauses of ss.
68 and 69 to exercise the powers and perform the functions under the Madhya
Pradesh Municipal Corporation Act, 1956.
We now turn to the relevant
provisions of the Municipalities Act and the Municipal Corporation Act. Section
127(1)(i) of the Municipalities Act empowers a municipal council to impose, in
the whole or any part of the municipality, "a tax payable by the owners of
houses, buildings or lands situated within the limits of Municipality with
reference to annual letting value of the house, building or land called
property tax". The corresponding provision in the Municipal Corporation
Act is s. 132(1)(a). It says that "the Corporation shall impose a tax
payable by the owners of buildings or lands situated within the city with
reference to the gross annual letting value of the buildings or land called the
property tax". The procedure for the imposition of taxes is contained in
s. 129 of the Municipalities Act and s. 133 of the Municipal Corporation Act.
In 1964, the State
Legislature enacted the Madhya Pradesh Nagaria Sthawar Sampatti Kar Adhiniyam,
1964. This Adhiniyam applied to the whole of Madhya Pradesh. It was also
applied to urban areas. By s. 36 of the Adhiniyam, the local authorities were
prohibited from recovering the property tax from 24th November, 1970.
In the beginning of 1976,
the Government decided to abolish octroi tax and to impose in its place a tax
on the entry of goods. To compensate the municipal councils and the municipal
corporations for the loss from the abolition of the octroi tax, the Government
decided to confer powers on them for levying property tax. For levying entry
tax in place of octroi tax, the Madhya Pradesh Sthaniya Kshetra Me Mai Ke
Pravesh Par Kar Adhyadesh, 1976 (No. 6 of 1976), was promulgated. For
conferring powers on municipal councils and municipal corporations to levy
property tax, Ordinance No. 4 of 1976 was promulgated. Both these Ordinances
were published in the Madhya Pradesh Gazette, dated 30th April, 1976, and it is
from that date that they came into force. Ordinance No. 4 of 1976 inserted
certain provisions in the Municipalities Act and the Municipal Corporation Act.
This Ordinance was replaced by Act No. 50 of 1976.
The provisions inserted in
the Municipalities Act and the Municipal Corporation Act, with which we are
concerned here, were deemed to have come into force by s. 1(2) of Act No. 50 of
1976 from 1st April, 1976. Section 127A was inserted in the Municipalities Act
for the imposition of property tax. Section 127A, in so far as it is relevant,
reads as follows :
"127A.(1)
Notwithstanding anything contained in this Chapter, as and from the financial
year 1976-77, there shall be charged, levied and paid for each financial year a
tax on the lands or buildings or both situate in a municipality other than
Class IV municipality at the rate specified in the table below :—
Table
|
|
|
(i) where the annual letting 6 per centum of the annual
letting value exceeds Rs. 1,800 but does not exceed Rs. 6,000 |
6
per centum of the annual letting value. |
|
(ii) where the annual letting value exceeds
Rs. 6,000 but does not exceed Rs. 12,000 |
81/3
per centum of the annual letting value. |
|
(iii) where the annual letting value exceeds Rs. 12,000
but does exceed Rs. 18,000 |
10
per centum of the annual letting value. |
|
(iv) where the annual letting value exceeds Rs. 18,000
but does not exceed Rs. 24,000 |
15
per centum of the annual letting value. |
|
(v) where the annual
letting value exceeds Rs. 24,000 |
20
per centum of the annual letting value. |
(2) The property tax levied under sub-section
(1) shall not be leviable in respect of the following properties, namely :—
(a) buildings and lands owned by or vesting in—
(i) the Union
Government;
(ii) the State
Government;
(iii) the
Council".
Similar to s. 127A of the
Municipalities Act, ss. 135 and 136 were inserted in the Municipal Corporation
Act. These sections are as follows :
"135. Notwithstanding
anything contained in this Chapter, as and from the financial year 1976-77, there
shall be charged, levied and paid for each financial year, a tax on the lands
or buildings or both situate within the city at the rates specified in the
table below:
|
Table |
|
|
(i)
where the annual value exceeds Rs. 1,800, but does not exceed Rs. 6,000 |
6
per centum of the total annual value. |
|
(ii)
where the annual value exceeds Rs. 6,000, but does not exceed Rs. 12,000 |
81/8
per centum of the total annual value. |
|
(iii)
where the annual value exceeds Rs. 12,000, but does not exceed Rs. 18,000 |
10
per centum of the total annual value. |
|
(iv)
where the annual value exceeds Rs. 18,000, but does not exceed Rs. 24,000 |
15
per centum of the total annual value. |
|
(v)
where the annual value exceeds Rs. 24,000 |
20
per centum of the total annual value". |
"136. The property tax
levied under s. 135 shall not be leviable in respect of the following
properties, namely :
(a) buildings and lands owned by or vesting in—
(i) the Union
Government;
(ii) the State Government;
(iii) the
Corporation".
The first contention raised
by the learned counsel for the petitioner is that under cl. (d) of s. 69 of the
1973 Adhiniyam, the development authority could only draw upon those powers of
taxation which the Municipal Corporation or the Municipal Council had under the
Madhya Pradesh Municipal Corporation Act, 1956, or the Madhya Pradesh
Municipalities Act, 1961, as these Acts stood on 27th February, 1976, when cl.
(d) was inserted in the present shape in s. 69 of the Adhiniyam. It is
submitted that the provisions conferring powers of taxation under the aforesaid
two Acts must be taken to have been incorporated in s. 69(d) of the 1973
Adhiniyam and any subsequent change in those powers by an amendment of the Acts
could not be available to the development authority. In this connection, it is
pointed out that s. 127A and s. 135 directly imposing property tax were
inserted in the Municipalities Act and the Municipal Corporation Act
respectively from 1st April, 1976, i.e., subsequent to the insertion of cl. (d)
in s. 69 of the 1973 Adhiniyam. On this ground, it is contended that the
development authority was incompetent to exercise the powers of the
Municipality or the Municipal Corporation under s. 127A of the Municipalities
Act or s. 135 of the Municipal Corporation Act. It is true that in case of
legislation by incorporation, the incorporated provisions of an earlier Act
become part and parcel of the incorporating Act and modifications made in the
earlier Act subsequent to incorporation have no effect in the application of
the incorporating Act. There are, however, exceptions to this rule which have
been pointed out by the Supreme Court in State of M.P. v. M.V. Narasimhan, AIR
1975 SC 1835, 1841. After considering various authorities, the Supreme Court
laid down the following propositions :
"Where a subsequent
Act incorporates provisions of a previous Act, then the borrowed provisions
become an integral and independent part of the subsequent Act and are totally
unaffected by any repeal or amendment in the previous Act. This principle,
however, will not apply in the following cases :
(a) where the subsequent Act and the previous Act
are supplemental to. each other; (b) where the two Acts are in pari materia;
(c) where the amendment in the previous Act, if not imported into the
subsequent Act also, would render the subsequent Act wholly unworkable and
ineffectual; and (d) where the amendment of the previous Act, either expressly
or by necessary intendment, applies the said provisions to the subsequent
Act".
It has also been said that
the normal rule does not apply when a statute instead of referring to a
particular previous statute refers to the law on the subject generally. In such
cases, the reference is construed to mean that the law is as it reads
thereafter including amendments subsequent to the time of adoption [see
Sutherland Statutory Construction, Vol. 2 (3rd Edn.), p. 550, and Supplement
(1956), p. 119]. A distinction has further been drawn between a mere reference
or citation of one statute into another and incorporation. In the former case,
a modification, repeal or-re-enactment of the statute that is referred will
have also the effect for the statute in which it is referred; but in the latter
case any change in the incorporated statute by way of amendment or repeal has
no repercussion on the incorporating statute [see Collector of Customs, Madras
v. Nathella Sampathu Chetty, AIR 1962 SC 316, 336—see further s. 13, M. P. General
Clauses Act, 1957, corresponding to s. 8, General Clauses Act, 1897].
We have earlier referred to
the provisions of ss. 64, 68 and 69 of the 1973 Adhiniyam. The development
authority has to provide for municipal services and municipal management of the
special area for which it is constituted in the same manner as is done by a
Municipal Corporation under the Municipal Corporation Act or by a Municipal
Council under the Municipalities Act. This duty is imposed under cls. (v) and
(vi) of s. 68 of the Adhiniyam. For the purpose of municipal administration,
the development authority has been conferred powers which a Municipal
Corporation or a Municipality has under the Municipal Corporation Act or the
Municipalities Act. This power is conferred by cl. (c) of s. 69 of the
Adhiniyam. Further, the development authority under cl. (d) of s, 69 has for
the purposes of taxation "the powers which a municipal corporation or a
municipal council has, as the case may be," under the Municipal
Corporation Act or the Municipalities Act. We have earlier noted that once the
development authority undertakes the functions of municipal services and
municipal management under cls. (v) and (vi) of s. 68 for a special area, the
Municipal Corporation, the Municipal Council, Notified Area Committee or the
Panchayat, as the case may be, having normally jurisdiction in that area ceases
to exercise for the special area the powers and perform the functions and
duties which the development authority is competent to exercise and perform [see
s. 64(4) of the 1973 Adhiniyam]. Having regard to the object of the Adhiniyam
and the provisions contained in ss. 64, 68, and 69, we are of opinion that the
Municipalities Act, the Municipal Corporation Act and the 1973 Adhiniyam are
supplemental to each other. Therefore, the case falls within exception (a)
formulated by the Supreme Court in Narasimhan's case, AIR 1975 SC 1835. It can
also be said that no specific provision of the Municipal Corporation Act or the
Municipalities Act is incorporated in ss. 68 and 69 of the 1973 Adhiniyan and
the reference therein is to these Acts in general. This is, therefore, not a
case of incorporation, but a case of mere reference coming within the rule in
Nathella Sampathu Chetty's case, AIR 1962 SC 316. For these reasons, we are of
opinion that the general rule that applies to the case of incorporation has no
application here and that the reference to the Municipal Corporation Act and
the Municipalities Act in ss. 68 and 69 of the 1973 Adhiniyam must be construed
to refer to these Acts as amended from time to time. The development authority
can, therefore, draw upon the powers contained in s. 127A of the Municipalities
Act and s. 135 of the Municipal Corporation Act even though these provisions
were subsequently introduced in these Acts.
The next contention of the
learned counsel for the petitioner is that the development authority should
have followed the procedure contained in s. 129 of the Municipalities Act and
s. 133 of the Municipal Corporation Act for imposing the tax. In our opinion,
this contention is also without any substance. Section 127A of the
Municipalities Act and s. 135 of the Municipal Corporation Act are identical
and they, by their own force, impose the tax. The imposition of tax falling
within these provisions is directly by the State Legislature and it is not
necessary to follow the ordinary procedure for imposing the tax. The words
contained in these sections are: "there shall be charged, levied and paid
for each financial year a tax on the lands or buildings or both at the rates
specified in the table". The sections do not require anything further to
be done for the purpose of the imposition of tax. The sections directly
authorise the Municipality or the Municipal Corporation, as the case may be, to
recover the tax without following the normal procedure for the imposition of a
tax. That is expressly made clear by sub-s. (4) of s. 133 of the Municipal
Corporation Act by way of abundant caution. In our opinion, the procedure for
imposition of tax contained in s. 129 of the Municipalities Act and s. 133 of
the Municipal Corporation Act has no application here. The taxes are directly
imposed by s. 127A of the Municipalities Act and s. 135 of the Municipal
Corporation Act. The development authority, which has the same powers as the
municipality or the municipal corporation can directly recover the tax without
first imposing it in the manner required by s. 129 of the Municipalities Act or
s. 133 of the Municipal Corporation Act.
It is then contended by the
learned counsel for the petitioner that the properties belonging to the
petitioner-company over which the property tax has been imposed are in reality
the properties of the Union of India, and, therefore, these properties come
within the exception contained in s. 127A(2)(a)(i) of the Municipalities Act
and s. 136(a)(i) of the Municipal Corporation Act and are not taxable. Section
127A(2)(a)(i) of the Municipalities Act grants an exemption in favour of
buildings and lands owned by, or vesting in, the Union Govt. Similar exemption
is granted by s. 136(a)(i) of the Municipal Corporation Act. We are, however,
unable to accept the contention that the properties belonging to the
petitioner-company are owned by, or vested in, the Union Govt. As earlier
stated the petitioner is a Government company incorporated under the Companies
Act. Even if the entire share capital of the petitioner-company may have been
subscribed by the Union Govt., it cannot be said that the Union Govt. owns the
petitioner-company or its properties. The petitioner has a legal entity of its
own. The petitioner owns its properties, the Union Govt. owns only the shares.
This legal position is very well established. As stated in the bank
nationalisation case, R.C. Cooper v. Union of India [1970] 40 Comp Cas 325, 343
(SC):
"A company registered
under the Companies Act is a legal person, separate and distinct from its
individual members. Property of the com pany is not the property of the
shareholders. A shareholder has merely an interest in the company arising under
its articles of association........".
In Heavy Engineering
Mazdoor Union v. State of Bihar [1969] 39 Comp. Cas 905 (SC), the Supreme Court
was dealing with the
Heavy Engineering
Corporation, Ranchi, which like the petitioner before us is a Government
company. The corporation's entire share capital is contributed by the Union
Govt. Even so, it was held that the Corporation was distinct from the Union
Govt. and that it could not be said that the undertaking carried on by the
corporation was carried on by or under the authority of the Union Govt. It was
pointed out that an incorporated company has a separate existence and is in law
a juristic person separate and distinct from its members. It was also pointed
out that "the company in holding its property and carrying on its business
is not the agent of its shareholders". It was further observed that a
commercial corporation, even though it is controlled wholly or partially by a
Govt. Dept., is not a servant or agent of the State.
In Tamlin v. Hannaford
[1950] 1 KB 18 (CA) it was held that the British Transport Commission which is
a statutory corporation constituted under the Transport Act, 1947, is not a
servant or agent of the Crown and has none of the immunities or privileges of
the Crown. It was pointed out in that case that when Parliament intends that a
new corporation should act on behalf of the Crown, it as a rule so states in
the statute constituting the corporation and, in the absence of any such
provision, the proper inference in the case, at any rate, of a commercial
corporation, is that it acts on its own behalf, even though it is controlled by
a Govt. Dept. The case
of Mellenger v. New Brunswick Development Corporation [1971] 1 WLR 604 (CA) furnishes the illustration of a corporation which was
held to be an arm or alter ego of the Government. The Act incorporating the
Corporation expressly stated that it was being constituted "on behalf of
the Crown" and, therefore, it was held to have the same status as a Govt.
Dept. In contrast, in Trendtex Trading Corporation v. Central Bank of Nigeria
[1977] 1 All ER 881 (CA) it was held that the Central Bank of Nigeria was not a
Govt. Dept. and was not entitled to State immunity. Having regard to the
authorities, the petitioner, which is not even a statutory corporation, cannot
be equated to a Govt. Dept like the Railways and the Post Office and its
properties cannot be held to be the properties of the Union Govt. Indeed, the
matter is put beyond doubt by the decision of the Supreme Court in A. P. State
Road Transport Corporation v. ITO [1964] 34 Comp Cas 473; 52 ITR 524; AIR 1964
SC 1486. The Andhra Pradesh Road Transport Corporation claimed exemption from
tax under art. 289 of the Constitution which provides that the property and
income of a State shall be exempt from Union taxation. In negativing the
exemption claimed by the corporation, the Supreme Court held that the
corporation, although a State controlled corporation, had a separate entity and
the income of the corporation was not the income of the State and that it was
not immune from taxation under art 289.
The learned counsel for the
petitioner submitted that although normally a corporation is to be taken as
having a separate legal entity distinct from its shareholders, yet in matters
of taxation, the corporate veil can be lifted and the reality can be seen. In
this connection, reference was made to Tata Engineering and Locomotive Co. Ltd. v. State of Bihar
[1964] 34 Comp Cas 458 (SC). The Supreme Court
in that case after examining as to when the doctrine of lifting the corporate
veil can be applied pointed out (at p. 470):
".....the judicial
approach in cracking open the corporate shell is somewhat cautious and circumspect. It is only where the
legislative provision justifies the adoption of such a course that the veil has
been lifted....... Broadly stated, where fraud
is intended to be prevented, or trading with an enemy is sought to be defeated,
the veil of a corporation is lifted by judicial decisions and the shareholders
are held to be the persons who actually work for the corporation".
The Supreme Court has not
laid down any general principle that in matters of taxation, a corporation must
in every case be equated to its shareholders. If the Legislature enacts a
provision enabling the court to lift the corporate veil for the purpose of
avoiding evasion of tax or to prevent fraud, the court can go behind the
corporate veil. But in the absence of a legislative provision contained in the
Act imposing the tax or in the Act constituting the corporation, it is not open
to the court to equate the corporation to its shareholders. There is nothing in
the 1973 Adhiniyam or the Municipalities Act or the Municipal Corporation Act
enabling us to hold that the properties owned by the petitioner-company must be
deemed to be owned by the Union Govt. which contributed the entire share
capital of the company. It is, therefore, not possible for us to accept the
argument that this is a case where the corporate veil can be lifted and the
company can be equated to the Union Govt. The argument of lifting the veil
must, therefore, fail. The properties of the petitioner belong to the
petitioner. They are not properties owned by, or vested in, the Union Govt. The
exemption contained in s. 127A(2)(a) of the Municipalities Act and s. 136(a)(i)
of the Municipal Corporation Act does not apply to the petitioner-company.
The last contention of the
learned counsel for the petitioner is based upon an agreement, dated 24th June,
1976, entered into between the petitioner and the development authority. By
this agreement, the development authority agreed not to exercise its power of
taxation or to levy any charge under the 1973 Adhiniyam or any other Act or
notification that may come into force from time to time and, in consideration
thereof, the petitioner agreed to contribute an annual sum of Rs. 3,00,000 to
the development authority. The agreement was made for a period of 10 years
beginning from the calendar year 1976. The argument of the learned counsel for
the petitioner is that the development authority waived its power of taxation
by this agreement and, therefore, the imposition of property tax and the
notices issued were invalid. In our opinion, this contention is also devoid of
substance. It is well settled that a public authority cannot fetter the future
exercise of its statutory power by a private contract unless the contract
itself is entered into in exercise of its statutory power [see Indian Aluminium Co. v.
K.S.E. Board, AIR 1975 SC 1967, 1975-76, and Bisra Stone Lime Co. v. Orissa
State Electricity Board, AIR 1976 SC 127]. The
learned counsel for the petitioner has failed to point out any statutory power
in the exercise of which the agreement relied upon may have been entered into
by the development authority. In the absence of any statutory provision which
could have enabled the development authority to fetter the future exercise of
its statutory power of taxation, the agreement cannot create a bar for imposing
the tax by the development authority in the exercise of its statutory power of
taxation.
There is yet another reason
why the defence based on this agreement must fail. The agreement was executed
by the chairman on behalf of the development authority. A meeting of the
development authority was held on 29th January, 1976. The minutes of that
meeting have been exhibited as annex. IX. It was decided in that meeting that
the decision on the imposition of octroi duty in the special area should be
deferred for the time being as the major public sector undertakings were
expected to contribute the agreed amount to the development authority. The rate
of yearly contribution was also decided upon in that meeting. It will thus be
seen that the development authority did not decide to give up or defer the
imposition of any other tax except the octroi tax. The decision contemplated
non-imposition of octroi tax in lieu of annual contributions to be made by the
industrial undertakings functioning within the special area. The chairman of
the development authority was, therefore, not entitled to sign any agreement
promising on behalf of the development authority not to impose any tax
whatsoever. The chairman may have been competent to enter into an agreement
with respect to octroi tax, but as no decision had been taken with respect to
other taxes, the agreement executed by him on behalf of the development
authority was wholly unauthorised. For this reason also, the petitioner cannot
rely upon the agreement.
The
petition fails and is dismissed. There shall be no order as to costs of this
petition. The security amount deposited by the petitioner shall be refunded to
it.
[1992] 74 Comp. Cas. 543 (Mad.)
Hackbridge-Hewittic & Easun
Ltd.
v.
G.E.C. Distribution Transformers
Ltd
MISHRA AND BAKTHAVATSALAM JJ.
OCTOBER 6, 1990
C. Harikrishnan
and K. Jagannatha Rao for the appellant.
T. Dulip
Singh, King and Partridge for the respondent.
Mishra J.—The respondent/plaintiff's suit based upon a
collaboration agreement (exhibit B-1) and as a shareholder in the appellant
company has been decreed for a sum of Rs. 3,67,273 towards royalty and a sum of
Rs. 53,478 towards dividend with future interest at 6% per annum till date of
payment with proportionate costs. In this appeal, the main questions to be
decided are:
"(1) Whether the collaboration agreement (exhibit
D-1) came to an end consequent on the alleged violation of clauses 6(a), (b)
and (c) thereof or not?
(2) Whether the respondent continued to be a
shareholder of the appellant company or not?"
The learned
trial judge has held that the collaboration agreement did not come to an end as
there was no violation of any of the conditions therein and that the respondent
company continues to be a shareholder and, accordingly, entitled to the
dividends on its shareholding in the defendant/appellant company.
Hackbridge
and Hewittic Electric Company was a company under the provisions of the English
Companies Act with its registered office situated at Hersham, Walton-on-Thames,
(1) The, agreement would be deemed to
have been concluded and operative on and from 1st January, 1966, and would be
in force for a period of five years commencing from the said date and ending
with December 31, 1970.
(2) A lump sum payment of pounds 1000
would be payable by the latter to the former for the technical service to be
rendered by the former for substituting aluminium for copper for the
manufacture of distribution transformers up to and including the range of 33
kv.
(3) A royalty of 3% subject to tax would
be payable to the former by the latter on the ex-factory sale price of power
transformers in the range of 33 kv. and above. The Indian ex-factory price of imported
components, if any, would be deducted from the sale price for the purpose of
computing the royalty.
(4) The
latter would be free to export its products.
(5) All the terms and conditions in the
original indenture of agreement dated March 19, 1958, as modified by the
addendum to the agreement dated March 1, 1965, would be read with and treated
as part and parcel of the collaboration agreement dated March 19, 1968, save
and except clauses 2 and 3 of the addendum dated March 1, 1965, to the indenture
of agreement dated March 19, 1968.
It is not in
dispute that the former, that is to say, Hackbridge and Hewittic Electric
Company, rendered technical know-how and received royalties from the latter,
that is to say, the defendant, in terms as above up to January 31, 1970. It so
happened, however, that soon after the execution of the agreement dated August
29, 1968, Hackbridge and Hewittic Electric Company Limited, which was the
contracting party with the defendant, became a subsidiary of General Electric Company
of England, which had a subsidiary in India from before known as General
Electric Company of India Limited. According to the plaintiff, the General
Electric Company of India Limited has been manufacturing transformers in India
long prior to the aforesaid agreements between the parties and in spite of the
fact that the plaintiff and the General Electric Company of India Limited were
subsidiaries of the General Electric Company of United Kingdom, they were
separate legal entities. According to the defendant, Hackbridge and Hewittic
Electric Company Limited occupied, at all material times, a fiduciary position
in regard to the defendant and had undertaken to make the technical know-how
available for manufacture of transformers exclusively to it in India and not be
concerned directly or indirectly in the manufacture of transformers during the
subsistence of the agreement by any other person in India, and as a consequence
of Hackbridge and Hewittic Electric Company Limited becoming a subsidiary of
the General Electric Company group, all technical information and know-how
available to Hackbridge and Hewittic Electric Company Limited became equally
available to the General Electric Company of India Limited, who were
competitors of the defendant. It is also stated in the written statement.
"...Similarly
all information and technical data available with the defendant whether its own
or furnished by Hackbridge Hewittic Electric Company Ltd., are available to
General Electric Company and through them to General Electric Company India
Ltd. Hence a fundamental term of the contract regarding the know-how furnished
by Hackbridge and Hewittic Electric Company Ltd., being exclusively for the
defendant's benefit and Hackbridge Hewittic Electric Company Ltd., preserving
the defendant's secrets ceased to exist after November 29, 1968. Similarly by
becoming a subsidiary of General Electric Company, United Kingdom, Hackbridge
Hewittic has been indirectly embarking upon the business of manufacture of
transformers in India through General Electric Company Ltd".
According to
the plaintiff, the defendant wrongly contended that the manufacture of
transformers in India by the General Electric Company of India, which was a
subsidiary of the General Electric Company Limited, United Kingdom, amounted to
breach of clause 6 of the agreement dated March 19, 1958, as modified by the
addendum dated March 1, 1965, and reiterated in the indenture of agreement
dated August 29, 1968, and further.
"The
plaintiff has not during the subsistence of the said agreement or otherwise
directly or indirectly rendered any technical aid or technical assistance in
relation to the manufacture of transformers to any other manufacturing company
firm or person in India nor directly or indirectly embarked on any scheme of
manufacture of transformers in India".
The plaintiff
company thus now known as GEC Distribution Transformers Limited (Hackbridge and
Hewittic Electric Company) is the successor of Hackbridge Hewittic Electric
Company Limited and a subsidiary of General Electric Company of United Kindgom
which has got a subsidiary known as General Electric Company of India Limited
in India. It is not in dispute that the General Electric Company of India
Limited has been dealing in the same business as the defendant company, which
it appears, had been permitted by Hackbridge and Hewittic Electric Company
under the aforesaid agreements.
Hackbridge
and Hewittic, Electric Company Limited acquired with the sanction of the
appropriate authorities 12,000 equity shares in the defendant company and it is
not in dispute that the defendant paid from time to time dividends in respect
of the said shares after obtaining sanction from the appropriate authorities
and after determination of income-tax payable thereon; the last of such payments
having been made on or before November, 1970. According to the plaintiff, a sum
of Rs. 72,000 remained outstanding from the defendant to the plaintiff as
dividend on the said shares from January 31, 1972, to January 31, 1974. The
defendant's case in this behalf is that out of 12,000 shares allotted to
Hackbridge and Hewittic Electric Company Limited, 1500 shares were allotted
against the royalty payable under the agreement. Since the collaboration
agreement stood terminated by reason of Hackbridge and Hewittic Electric
Company having become a subsidiary of General Electric Company, it ceased to be
entitled to retain the share and thus entitled to any dividend on such
cessation.
Before
entering into the controversy and the contentions, we may also state that while
the plaintiff has claimed both dividends and royalty until the agreement ended
on December 31, 1970, the defendant has alleged that on Hackbridge and Hewittic
Electric Company becoming a subsidiary and adopting a new name as the
subsidiary of General Electric Company, United Kingdom, on and from November
29, 1968, it became disentitled to claim any royalty or dividend subsequent to
that date. According to the defendant, it had no obligation to pay any royalty
after November 29, 1968. Yet, it made the payment of royalty to the plaintiff
for the period from November 29, 1968, to January 31, 1970, under mistake and
which amount paid, it is entitled to recover from the plaintiff, and in any
case, it is fully justified in declining to pay any royalty after February 1,
1970, and it has no liability to pay any dividend accordingly.
The facts
which appear to have been admitted are that the last collaboration agreement
(exhibit D-3) was for a period of five years up to December 31, 1970. As per
clause 5 of the said agreement, all terms and conditions contained in the
original indenture of the agreement dated March 19, 1958 (exhibit D-1), as
modified by the addendum (exhibit D-2) were treated as part and parcel of the
collaboration agreement ending with December 31, 1970, but subject to such
changes which are brought about in the original terms and conditions set out in
exhibit D-1 by exhibit D-2. Ordinarily, therefore, the defendant was bound to
honour the agreement and pay the royalty until December 31, 1970. To understand
whether there was any breach of terms of contract or not or in other words,
whether as a result of the change by which Hackbridge and Hewittic Electric
Company became a subsidiary of the General Electric Company, it constituted a
violation of clause 6(a) of exhibit D-1 or not, it will be proper to read
exhibits D-1, D-2 and D-3 together. Clause 6(a) of exhibit D-1 is to the effect
that the English company, that is to say, Hackbridge and Hewittic Electric
Company Limited, would not directly or indirectly render technical assistance
in relation to the manufacture of transformers to any other manufacturing
company, firm or person in India nor would directly or indirectly embark upon
any scheme of manufacture of transformers in India. There is no pleading or
proof of any direct assistance rendered to any person or any company in India
by the English company or that any technical know-how of the English company
was transmitted into anybody in India. Clause 6(a) which existed during the
last five years of the agreement (vide exhibit D-1), however, mentioned about
directly or indirectly rendering any technical aid or technical assistance or
embarking upon any scheme of manufacture of transformer in India by the English
company. Two consequences of Hackbridge and Hewittic Electric Company Limited
becoming a subsidiary of General Electric Company of United Kindgom, however,
cannot be denied. They being:
(1) All technical know-how of Hackbridge
and Hewittic Electric Company Limited became the know-how of the principal
company that is to say General Electric Company of United Kingdom.
(2) General Electric Company India
Limited, which admittedly was/is a subsidiary of General Electric Company of
United Kingdom, was in the same field of manufacturing transformers as the
defendant company was/is and as a subsidiary of the former, had the advantage
of technical know-how of its principal English company. In other words, a
strong possibility had existed of the technical know-how of Hackbridge and
Hewittic Electric Company Limited becoming available to General Elec tric
Company of India Limited.
The learned
trial judge has said that in the absence of positive evidence, documentary or
oral, to show that Hackbridge and Hewittic Electric Company Limited, England or
the GEC Hackbridge Limited has transferred any technical knowledge or know-how
that was originally imparted by the defendant to any other manufacturing
company in India, it is not possible to conclude that clause 6 of exhibit D-1
had been violated. In the opinion of the learned trial judge, as per clause 6
which stated that the plaintiff would not embark on any scheme of manufacture
of transformers in India either directly or indirectly, there was no evidence
to show that Hackbridge and Hewittic Electric Company or GEC Hackbridge Limited
had embarked upon any venture in India in respect of production of power
transformers. According to the learned trial judge, "Embarking upon
necessarily implies a new venture". The learned trial judge has further said:
"...The
fact that the GEC India Ltd. was manufacturing power transformers ever since
1957 will not amount to embarking upon a new venture on the part of the
plaintiff. Further, GEC India Limited is a separate entity and not in any way
connected with the plaintiff..".
Similarly in
his opinion, there was no evidence to show that the plaintiff had transferred
any technical know-how that was originally imparted to the defendant in favour
of General Electric Company of India Limited.
Before we go
into the evidence, an appreciation of the law on the subject may be of help.
There can be little doubt that each company shall have a separate legal
personality and in that sense, a holding company shall be a separate entity
while a subsidiary shall be separate a legal entity. It is, however, not
unknown to law that a subsidiary, instead of acting on its own, is found acting
as an agent of its holding company.
Pennington in
his book on Company Law, fourth edition, page 50, has taken notice of such
decided cases where the court disregarded the legal personality of the company
because it was formed or used to facilitate evasion of legal obligations. He
has noticed:
"There
are only two decided cases where the court has disregarded the separate legal
personality of a company because it was formed or used to facilitate the
evasion of legal obligations. In the first of these cases the defendant had
been employed by the plaintiff and had entered into a valid agreement not to
solicit the plaintiff's customers or to compete with it for a certain time
after leaving its employment. After this had happened the defendant formed a
company which carried on a competing business, and caused the whole of its
shares to be allotted to his wife and an employee of the company, who were
appointed to be its directors. It was held that since the defendant in fact
controlled the company, its formation was a mere 'cloak or sham' to enable him
to break his agreement with the plaintiff, and an injunction was issued against
him and against the company he had formed restraining them from soliciting the
plaintiffs customers. In the second case, a vendor of land sought to evade
specific performance of a contract for sale by conveying the land to a company
which he 'bought' for the purpose. The company had been formed by third
parties, and the vendor purchased the whole of its shares from them, had the
shares registered in the name of himself and a nominee, and had himself and the
nominee appointed directors. It was held again that the acquisition of the
company and the conveyance of the land to it was a mere 'cloak or sham' for the
evasion of the contract of sale, and specific performance of the contract was
therefore ordered against the vendor and the company.
The American
courts have been far readier to disregard a company's separate legal
personality when it was clearly formed or acquired to facilitate a breach of
the general law or of a contractual obligation. Their attitude is summed up in
the words of Sanborn J. in a passage which further litigation in this country
will probably show represents English law too:
'...A
corporation will be looked upon as a legal entity as a general rule...but 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' ".
Proceeding
further to consider the issue, Pennington has referred to the case of Smith,
Stone and Knight Ltd. v. Birmingham Corporation [1939] 4 All ER 116, 121, and
quoted from the judgment of Atkinson J. observing:
"In one
such case, Atkinson J. attempted to catalogue the matters which the court will
take into account in determining whether a subsidiary company is carrying on
its business as an agent of its holding company. He said:
'I find six
points which were deemed relevant. . . The first point was: were the profits
treated as the profits of the company?—when I say 'the company' I mean the
parent company—secondly, were the persons conducting the business appointed by
the parent company? Thirdly, was the company the head and brain of the trading
venture? Fourthly, did the company govern the adventure, decide what should be
done and what capital should be embarked on the venture? Fifthly, did the
company make the profits by its skill and direction? Sixthly, was the company
in effectual and constant control?'
In that case
Atkinson J. held that a holding company was in occupation of premises, and was consequently
entitled to compensation for the disturbance of its business on the compulsory
purchase of the premises by a local authority, even though the business was
carried on at the premises in the name of a subsidiary. The subsidiary had been
formed simply in order to separate formally the business carried on in its name
from another business carried on by the holding company. The freehold in the
premises and assets of the business were never transferred by the holding
company to the subsidiary. All the subsidiary's shares were held by or in trust
for the holding company, and the subsidiary's directors were all directors of
the holding company. Accounts in respect of the business carried on in the
subsidiary's name were kept as part of the holding company's accounts, and the
subsidiary's profits were dealt with as though they had been earned by the
holding company. It is difficult to imagine a more complete identification of a
holding company with its subsidiary, and it would have been a clear denial of justice
to refuse the holding company compensation for loss suffered in respect of a
business which was in substance its, own. But in a business sense the
identification of the holding company with its subsidiary was equally as close
in . . . yet the court there refused to treat the subsidiary as the holding
company's agent so that the holding company might be deemed the owner of the
subsidiary's property".
Indeed, what
has come to stay as an organic theory, under which the doctrine has departed
from the orthodox approach extending the rule of piercing the veil to know the
true character of a person, has in essence made it almost obligatory to make a
closer examination as to whether the principal and subsidiary like principal
and agent exist for each other or as one mind thus as organs of each other. It
is often said that 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. The
orthodox approach that a company is a legal entity in itself and thus whether
it is a subsidiary of another or not, is of no meaning or consequence for
fixing the responsibility of the activities of one upon another.
Thus, on the
principle aforementioned, the fact that the subsidiary company has a distinct
legal personality does not suffice to dispose of the possibility that its
behaviour might be imputed to the parent company. Such may be the case in
particular when the subsidiary, although being a distinct legal personality,
does not determine its behaviour on the market in an autonomous manner but
essentially carries out the instructions given to it by the parent company.
When the subsidiary does not enjoy any real autonomy in the determination of
its course of action on the market, it is possible to say that it has no
personality of its own and that it has one and the same as the parent company
(see ICI v. E.C. Commission [1972] 11 CMLR 557) and Ramaiya's Companies Act
(10th edition, page 117). Based upon this, the courts in England have so
pronounced in Harold Holdsworth and Co. (Wakefield) Ltd. v. Caddies [1955] 1
All ER 725 (HL) and DHN Food Distributors Ltd. v. London Borough of Tower
Hamlets [1976] 3 All ER 462 (CA) and the modern tendency is, where there is
identity and community of interest between companies in the group, especially
where, they are related as holding company and wholly owned subsidiary or
subsidiaries, to ignore their separate legal entity and look instead at the
economic entity of the whole group.
The Supreme
Court has extended this doctrine in circumstances defying the presumption that
a subsidiary being a distinct legal personality will not be enjoined with the
activities of the holding company or any other subsidiary of the group. In
McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148; 3 SCC 230, the Supreme Court has
said (at page 161 of 154 ITR):
"It is
up to the court to take stock to determine the nature of the new and
sophisticated legal devices to avoid tax and consider whether the situation
created by the devices could be related to the existing legislation with the
aid of 'emerging' techniques of interpretation as was done in W.T. Ramsay v.
IRC [1981] 2 WLR 449; [1982] AC 300, IRC v. Burmah Oil Co. Ltd. [1982] STC 30
and Furniss v. Dawson [1984] 1 All ER 530; 2 WLR 226 (HL), to expose the
devices for what they really are and to refuse to give judicial
benediction".
and referred
to the observations in Furniss v. Dawson [1984] 1 All ER 530 (at page 157 of
154 ITR):
"The
fact that the court accepted that each step in a transaction was a genuine step
producing its intended legal result did not confine the court to considering
each step in isolation for the purpose of assessing the fiscal results".
In CIT v.
Meenakshi Mills Ltd. [1967] 63 ITR 609, the Supreme Court has stated (at page
616):
"It is
true that from the juristic point of view, the company is a legal personality
entirely distinct from its members and the company is capable of enjoying
rights and being subjected to duties which are not the same as those enjoyed or
borne by its members. But 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. For example, the court has power to
disregard the corporate entity if it is used for tax evasion or to circumvent tax
obligation. For instance, in Apthorpe v. Peter Schoenhoffen Brewing Co. [1899]
4 TC 41 (CA), the Income-tax Commissioners had found as a fact that all the
property of the New York company, except its land, had been transferred to an
English company, and that the New York company had only been kept in being to
hold the land, since aliens were not allowed to do so under New York law.
All but three
of the New York company's shares were held by the English company, and as the
commissioners also found, if the business was technically that of the New York
company, the latter was merely the agent of the English company. In the light
of these findings, the Court of Appeal, despite the argument based on Salomon's
case [1897] AC 22 (HL), held that the New York business was that of the English
company which was liable for English income-tax accordingly. In another case,
Firestone Tyre and Rubber Co. v. Lewellin [1957] 1 WLR 464; [1958] 33 ITR 741,
an American company had an arrangement with its distributors in the continent
of Europe whereby it obtained supplies from the English manufacturers, its
wholly owned subsidiary. The English company credited the American with the
price received after deducting the cost plus 5 per cent. It was conceded that
the subsidiary was a separate legal entity and not a mere emanation of the
American parent and that it was selling its own goods as principal and not its
parent's goods as agent. Nevertheless, these sales were a means whereby the
American company carried on its European business and it was held that the
substance of the arrangement was that the American company traded in England
through the agency of its subsidiary. We, therefore, reject the argument of Mr.
Venkataraman on this aspect of the case".
In yet
another case reported in Workmen of Associated Rubber Industry Ltd. v.
Associated Rubber Industry Ltd. [1986] 59 Comp Cas 134, after referring to the
judgments in CIT v. Meenakshi Mills Ltd. [1967] 63 ITR 609 and McDowell and Co.
Ltd. v. CTO [1985] 154 ITR 148, the Supreme Court has observed (at page 136):
"It is
true that in law the Associated Rubber Industry Ltd. and Aril Holdings Ltd.
were distinct legal entities having separate existence. But, in our view that
was not an end of the matter. It is the duty of the court, in every case where
ingenuity is expended to avoid taxing and welfare legislations, to get behind
the smoke-screen and discover the true state of affairs. The court is not
satisfied with form and leave well alone the substance of a transaction".
On the
strength of the authorities aforementioned, it requires to be seen before it is
held that the General Electric Company of India Limited, admittedly, a
subsidiary of General Electric Company Limited, United Kingdom, and the General
Electric Company Limited, United Kingdom, are separate entities and, therefore,
the manufacturing of transformers by General Electric Company of India Limited
cannot be said to be the manufacturing of transformers by the General Electric
Company Limited, United Kingdom, and through the General Electric Company
Limited, United Kingdom, by the plaintiff, who is admittedly a subsidiary of
the General Electric Company Limited, United Kingdom. If, however, after
piercing the veil and/or removing the smoke-screen, it is found that their
activities stand apart and that the subsidiaries have not been functioning with
the directing mind and will of the holding company, it can be said that the
General Electric Company of India Limited's manufacturing process cannot be
regarded as the manufacturing process of the plaintiff.
The
difficulty in the instant-case, however, is that the learned trial judge
proceeding on the presumption that GEC India Limited is a separate entity and
not in any way connected with the plaintiff and that GEC India Limited had been
manufacturing power transformers under industrial licence from the Government
of India ever since 1957 and since there is no evidence to show that the
plaintiff had transferred any technical know-how that was originally imparted
to the defendant to the GEC India Limited, the defendant has not established
that the plaintiff company had embarked upon either directly or indirectly the
scheme of manufacture of transformers in India. The learned trial judge has
also said that there is absolutely no evidence to show that as a matter of fact
the terms contained in clause .6(a) of exhibit D-1 had been violated by the
plaintiff company and that, "a mere possibility of violation cannot affect
the collaboration agreement as contended by the defendant".
His approach in
this regard has evidently overlooked the fact that the activity of GEC India
Limited after the original English company that is to say Hackbridge and
Hewittic Electric Company Limited entered into a new constitution and became a
subsidiary of GEC, U.K. of which GEC India Limited was/is a subsidiary
could/can be deemed to be the activity of the plaintiff, viz., GEC, U.K. and
thus indirectly the activity of the plaintiff. Learned counsel for the
plaintiff-respondent has tried to read in the words "embarked upon either
directly or indirectly a scheme of manufacture" a new venture or a venture
in a distance to which a new scheme of manufacture was provided with the
technical know-how which had been imparted to the defendant by the original
English Company that is to say Hackbridge and Hewittic Electric Company. If
that meaning is sought to be given, the word "indirectly" in clause
6(a) of exhibit D-1 will become redundant. There may not be any evidence to
show that the technical know-how imparted to the defendant was passed on to GEC
India Limited, but GEC, U.K. must necessarily be deemed to impart its technical
know-how to GEC India Limited as if GEC India Limited is found to have carried
on the business of GEC, U.K. as its subsidiary and in the circumstances that
the original English company as a subsidiary of GEC, U.K. became its agent,
which for all purposes, lost its independent character in that, the GEC, U.K.
for manufacturing transformers used the technical know-how that originally
belonged to the plaintiff's predecessor. Had there been an issue framed on the
question whether the original English company after becoming GEC Transformers
Ltd., U.K. and a subsidiary of GEC, U.K. lost its independent identity or not,
and whether the manufacture of transformers by the GEC India Limited was the
business of GEC, U.K. or not since the former was/is an agent of the latter,
and an attempt had been made to remove the smoke-screen to find out who is the
brain behind their operation, and thereafter a conclusion drawn that it was
still possible to hold that the plaintiff company had not indirectly embarked
upon a scheme of manufacture of transformers in India, the position would have
been different. Since there has been no issue framed on this question, and the
learned trial judge proceeded on the premise that GEC India Limited is a
separate entity and not in any way connected with the plaintiff, a very
important aspect of the case was ignored and the parties failed to bring on the
record any evidence that could show that GEC India Limited and GEC, U. K. and
the plaintiff company although in name three different companies, for their
business activities, they were one and the same. Examination of this aspect
could not have been confined to the issue of identity of the holding company,
its subsidiary in India and the plaintiff company and their nature and
character. Such examination would involve one more question and that would be
whether the retention of separate legal identity of the plaintiff company and
GEC India Limited by the holding company was its device to deal in transformers
in India and use the technical know-how of the original English company or not.
In case, the issues aforementioned on fuller examination, receive the answer
that their separate legal identity was a cloak or a veil for the activities of
GEC, U. K. in India with the technical know-how of the original English company
that is to say Hackbridge and Hewittic Electric Company Limited, the plaint
must fail.
Our
conclusion above on the question of interpretation of the terms and conditions
in exhibit D-1, in view of the changed circumstances aforementioned, would lead
us to remit the matter for a rehearing with a direction to frame a specific
issue on the said question giving opportunity to the parties to lead evidence
in accordance with law and then to decide the question afresh. Before, however,
we do so, a few more issues decided by the learned trial judge need attention.
The learned trial judge has taken notice of the provisions in section 64 of the
Contract Act, which provides for a rescission of contract and section 39, which
lays down that when a party to the contract has refused to perform or disabled
himself from performing his promise in its entirety, the promisee may put an
end to the contract unless he has signified by words or conduct his
acquiescence in its continuance. The learned trial judge on the basis of such
provisions of the Contract Act, has agreed with the contention of the plaintiff
that in the absence of rescission of the contract as provided in section 64 or
the defendant putting the contract to an end in terms of section 39 of the Act,
it would be difficult to accept the defendant's case that it had no obligation
under clause 6(a) of exhibit D-1. The learned trial judge has further held that
there are materials to show that there was positive acquiescence on the part of
the defendant company relating to the changes in the constitution of the
plaintiff company and it had no idea of putting an end to the collaboration
agreement. Section 39 of the Contract Act says that the promisee may put an end
to the contract in a case in which it is found that a party to the contract has
refused or disabled himself from performing his promise. It does not mean that
if no steps are taken to bring the contract to an end, it would be presumed
that the promisee acquiesced in its continuance. A perusal of the terms of the
contract in clause 6 of exhibit D-1 reveals that the conditions therein are in
the nature of restraint of trade. In England, this is of public policy, while
in India, except in section 27 of the Contract Act, this is a sort of promise
but somewhere between two different principles of public policy, viz., that on
the one hand a person entering into a contract of his own free will should be
bound by his own bond and on the other hand, he should have unfettered liberty
to exercise his powers and capacities for his own and the community's benefit.
The English company had bound itself to the condition that it would not
directly or indirectly render any technical aid or technical assistance in
relation to the manufacture of transformers to any other manufacturing company,
firm or person in India nor would directly or indirectly embark upon any scheme
of manufacture of transformers in India. Similarly, the Indian company had
bound itself to the condition that it would not directly or indirectly render
any technical aid or assistance in relation to the manufacture of transformers
in any part of the world nor would directly or indirectly undertake manufacture
of the same in any part of the world. Thus it could be seen that violation of
the constraint by either party would disentitle the other to renounce the
contract. The instant case is one in which if facts are proved in the way the
defendant company has alleged, the plaintiff rendered itself incapable of
observing the restraint. A question thus will arise who was to perform the
contract after the original English company changed its character, and if
proved, as alleged by the defendant, merged itself into the holding company,
that is to say GEC, U.K. There are some materials on the record in the instant
case to show that it is the GEC, U.K. through its agent GEC India which wanted
enforcement of the contract and asked the defendant to pay the royalty. We do
not propose to deal with such evidence mainly for the reason that in case, the
case is remitted to the learned trial judge's court for a rehearing, it would
be proper to leave determination of this issue also by him. Section 40 of the
Indian Contract Act reads:
"If it
appears from the nature of the case that it was the intention of the parties to
any contract that any promise contained in it should be performed by the
promisor himself, such promise must be performed by the promisor. In other
cases, the promisor or his representatives may employ a competent person to
perform it".
If this be
the case, then the defendant could ask for the technical know-how only from the
promisor that is to say Hackbridge and Hewittic Electric Company Limited. How
then GEC, U. K. or GEC India can come in asking performance of the defendant's
promise to Hackbridge and Hewittic Electric Company Limited? In all such cases,
one question must be answered, viz., did the contracting party promise personal
performance or did he merely promise a result?
The learned
trial judge had referred to quite a few documents which are in the nature of
correspondence to hold that they indicate positive acquiescence on the part of
the defendant company relating to the changes in the constitution of the
plaintiff company and that the defendant had no idea of putting an end to the
collaboration agreement. It appears that almost every document such as exhibits
P-4, P-5 and P-8 was marked without objection. As a result of this, they have
to be read in evidence. But merely because they have been so admitted in
evidence, will their contents be taken to have been proved in accordance with
law and assuming that the contents also are deemed to have been proved, unless
found relevant under one or the other provision of the Evidence Act, can they
be read to draw conclusions? When put to such a test, for example, exhibit P-4
is the letter addressed to Mr. Massey, Chief Accountant, GEC Transformers
(Hackbridge) Ltd., Hersham Lodge, Walton-on-Thames, Surrey, U.K. The learned
trial judge has said that such a letter could not have been addressed without
the knowledge of what had happened in England and the chairman and managing
director of the defendant company could not have addressed Mr. B. Massey in
that capacity. Then the learned trial judge has referred to paragraph 8 of the
letter and said:
"...Perhaps,
in paragraph 8 of the letter the chairman and managing director indirectly
refers to the transformation that has taken place in England. In exhibit P-4, a
categorical admission is made that a sum of Rs. 3,67,273 is due to the
plaintiff-company for the year ending December 31, 1970....".
The maximum
to which courts in India have gone to take into consideration the contents of
such a document if it is properly admitted is indicated in the judgment of the
Supreme Court in Purushothama Reddiar v. S. Perumal [1972] 1 SCJ 469; AIR 1972
SC 608, wherein a police report on an election meeting held by the returned
candidate was admitted in an election petition without any objection. The
Supreme Court has observed (at page 613):
"Before
leaving this case, it is necessary to refer to one of the contentions taken by
Mr. Ramamurthi, learned counsel for the respondent. He contended that the police
reports referred to earlier are inadmissible in evidence as the head constables
who covered those meetings have not been examined in the case. Those reports
were marked without any objection. Hence it is not open to the respondent now
to object to their admissibility (see Bhagat Ram v. Khettu Ram, AIR 1929 PC
110).
It was urged
that even if the reports in question are admissible, we cannot look into the
contents of those documents. This contention is again unacceptable. Once a
document is properly admitted, the contents of that document are also admitted
in evidence though those contents may not be conclusive evidence".
It appears,
however, in the instant case that all these documents were only formally
admitted without there being any attempt to establish by legal evidence that
the contents are proved. Having so taken the documents in evidence, the
contents have been read as conclusive proof. This evidently is not permissible.
Learned
counsel for the appellant has, however, reiterated the plea of limitation,
which has been negatived by the learned trial judge and also taken us through
certain provisions of the special statute which show that a foreign company
cannot collect its share of profits without clearance by the Reserve Bank of
India. Since we propose to remit this case for a rehearing, we observe that
notwithstanding the finding recorded already by the learned trial judge, in
view of the further opportunity that the parties would get to adduce evidence
and contest afresh, it shall be open to the parties to traverse afresh into the
question of limitation and the issue of dividends as well.
In view of
the errors noticed by us above in the impugned judgment, we are of the opinion
that this is a fit case for remand to the learned trial judge for framing
appropriate issues, giving opportunity to the parties to lead further evidence
and for disposal in accordance with law.
In the
result, this appeal is allowed. The judgment and decree of the learned trial
judge in C.S. No. 265 of 1975 dated July 31, 1979, is set aside. But as the
case is remitted to the learned trial judge for rehearing in the light of the
above observations there will be no order as to costs.
[1992] 74 COMP. CAS. 563 (MAD.)
HIGH COURT OF
v.
Cheran Transport Corporation Ltd
DECEMBER 6, 1990
R.
Karuppan for the Petitioner.
C. Natarajan for the Respondent.
JUDGMENT
Mishra J.—This case has to be disposed of on a short question
but of far-reaching consequences. The assessee-respondent corporation reported
a certain taxable turnover, but when checked it was found that it had to
include in its turnover, the turnover of the Cheran Engineering Corporation
Limited, Pollachi, which once was, under some misapprehension, treated as a
separate assessee. Accordingly, the Appellate Assistant Commissioner thought
that both the assessments should be clubbed together and a single assessment
order should be passed. He remanded the matter to the Assessing Officer to
reconsider this aspect and pass suitable orders. Against that order, the
assessee moved the Sales Tax Appellate Tribunal (Additional Bench),
The question
herein, therefore, is whether Cheran Transport Corporation Limited,
There is some
dispute before us whether the Cheran Engineering Corporation had acquired a
distinct and separate legal personality of its own in the assessment year in
question or not. We, however, do not propose to go into this controversy and proceed
in the instant case on the presumption that Cheran Transport Corporation,
There could
be little doubt that each separate legal personality shall be a separate entity
and they shall have separate legal obligations. This, however, shall be true
only until it is demonstrated mat they existed as independent organs and that
any one of them has no dependence upon the other. The orthodox approach has
given way to a new doctrine of piercing the corporate veil to know the true
character of a person. This has been applied more to the situations where a
certain statutory obligation is in jeopardy,. Pennington, in his book on
Company Law, fourth edition, at page 50, has taken notice of such decided cases
where the court disregarded the legal personality of the company because it was
formed or used to facilitate evasion of legal obligations. He has noticed:
"There
are only two decided cases where the court has disregarded the separate legal
personality of a company because it was formed or used to facilitate the
evasion of legal obligations. In the first of these cases, the defendant had
been employed by the plaintiff and had entered into a valid agreement not to
solicit the plaintiff's customers or to compete with it for a certain time
after leaving its employment. After this happened, the defendant formed a
company which carried on a competing business, and caused the whole of its
shares to be allotted to his wife and an employee of the company, who were
appointed to be its directors. It was held that since the defendant in fact
controlled the company, its formation was a mere 'cloak or sham' to enable him
to break his agreement with the plaintiff, and an injunction was issued against
him and against the company he had formed restraining them from soliciting the
plaintiffs customers. In the second case, a vendor of land sought to evade
specific performance of a contract for sale by conveying the land to a company
which he 'bought' for the purpose. The company had been formed by third
parties, and the vendor purchased the whole of its shares from them, had the
shares registered in the name of himself and a nominee, and had himself and the
nominee appointed directors. It was held again that the acquisition of the
company and the conveyance of the land to it was a mere 'cloak or sham' for the
evasion of the contract of sale, and specific performance of the contract was,
therefore, ordered against the vendor and the company".
Pennington has
further observed that American courts have been far readier to disregard a
company's separate legal personality. Whenever they found that a certain
company was formed to facilitate the breach of the general law or of a
contractual obligation, they thought the veil should be pierced. How their
attitude hardened in this regard has been stated by Pennington in the words of
Sanborn J.
"...A
corporation will be looked upon as a legal entity as a general rule . . . but
when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud, of defend crime, the law will regard the corporation as
an association of persons".
Pennington
has referred to a judgment of Atkinson J. and quoted:
"'I find
six points which were deemed relevant. The first point was: were the profits
treated as the profits of the company?—when I say 'the company' I mean the
parent company—secondly, were the persons conducting the business appointed by
the parent company? Thirdly, was the company the head and brain of the trading
venture? Fourthly, did the company govern the adventure, decide what should be
done and what capital should be embarked on the venture? Fifthly, did the
company make the profits by its skill and direction? Sixthly, was the company
in effectual and constant control?'
In that case,
Atkinson J. held that a holding company was in occupation of premises, and was
consequently entitled to compensation for the disturbance of its business on
the compulsory purchase of the premises by a local authority, even though the
business was carried on at the premises in the name of a subsidiary. The
subsidiary had been formed simply in order to separate formally the business
carried on in its name from another business carried on by the holding company.
The freehold in the premises and the assets of the business were never
transferred by the holding company to the subsidiary. All the subsidiary's
shares were held by or in trust for the holding company, and the subsidiary's directors
were all directors of the holding company. Accounts in respect of the business
carried on in the subsidiary's name were kept as part of the holding company's
accounts, and the subsidiary's profits were dealt with as though they had been
earned by the holding company. It is difficult to imagine a more complete
identification of a holding company with its subsidiary, and it would have been
a clear denial of justice to refuse the holding company compensation for loss
suffered in respect of a business which was in substance its own. But in a
business sense the identification of the holding company with its subsidiary
was equally as close in ... yet the court there refused to treat the subsidiary
as the holding company's agent so that the holding company might be deemed the
owner of the subsidiary's property"
We do not,
however, propose to go beyond our land to find out judgments supporting our
approach as we find in
"It is
up to the court to take stock to determine the nature of the new and
sophisticated legal devices to avoid tax and consider whether. the situation
created by the devices could be related to the existing legislation with the
aid of "emerging techniques of interpretation as was done in W. T.
Ramsay's case [1981] 2 WLR 449; [1982] AC 300, Burmah Oil Co. Ltd.'s case
[1982] Simon's Tax Cases 30 and Dawson's case [1984] 1 All ER 530; [1984] 2 WLR
226 (HL) to expose the devices for what they really are and to refuse to give
judicial benediction".
The Supreme
Court has quoted the observations in Dawson s case [1984] 1 All ER 530; [1984]
2 WLR 226 (HL) (at page 157 of 154 ITR):
"The
fact that the court accepted that each step in a transaction was a genuine step
producing its intended legal result did not confine the court to considering
each step in isolation for the purposes of assessing the fiscal results".
In CIT v.
Meenakshi Mills Ltd. [1967] 63 ITR 609, the Supreme Court has stated (at page
616):
"It is
true that from the juristic point of view, the company is a legal personality
entirely distinct from its members and the company is capable of enjoying
rights and being subjected to duties which are not the same as those enjoyed or
borne by its members. But 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. For example, the court has power to disregard the
corporate entity if it is used for tax evasion or to circumvent tax obligation.
For instance, in Apthorpe v. Peter Schoenhoffen Brewing Co. [1899] 4 TC 41
(CA), the Income-tax Commissioners had found as a fact that all the property of
the New York company, except its land, had been transferred to an English
company, and that the New York company had only been kept in being to hold the
land, since aliens were not allowed to do so under New York law. All but three
of the New York company's shares were held by the English company, and as the
Commissioners also found, if the business was technically that of the New York
company, the latter was merely the agent of the English company. In the light
of these findings, the Court of Appeal, despite the argument based on Salomon's
case [1897] AC 22 (HL), held that the New York business was that of the English
company which was liable for English income-tax accordingly. In another case,
Firestone Tyre and Rubber Co. v. Lewellin [1957] l'WLR 464; [1958] 33 ITR 741,
an American company had an arrangement with its distributors on the continent
of Europe whereby they obtained supplies from the English manufacturers, its
wholly owned subsidiary. The English company credited the American with the
price received after deducting the costs plus 5 per cent. It was conceded that
the subsidiary was a separate legal entity and not a mere emanation of the
American parent and that it was selling its own goods as principal and not its
parent's goods as agent. Nevertheless, these sales were a means whereby the
American company carried on its European business and it was held that the
substance of the arrangement was that the American company traded in England
through the agency of its subsidiary. We, therefore, reject the argument of Mr.
Venkataraman on this aspect of the case".
In Workmen of
Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 59
Comp Cas 134; AIR 1986 SC 12, after referring to the judgment in CIT v.
Meenakshi Mills Ltd. [1967] 63 ITR 609 (SC) and McDowell and Co. Ltd. v. CTO
[1985] 154 ITR 148, the Supreme Court has observed (at p. 136 of 59 Comp Cas):
"It is
true that in law the Associated Rubber Industry Ltd., and Aril Holdings Ltd.,
were distinct legal entities having separate existence. But, in our view, that
was not an end of the matter. It is the duty of the court, in every case where
ingenuity is expended to avoid taxing and welfare legislations, to get behind
the smoke-screen and discover the true state of affairs. The court is not
satisfied with form and leave well alone the substance of a transaction".
In CIT v.
Meenakshi Mills Ltd. [1967] 63 ITR 609, the judicial approach to such problems
is stated as follows (page 137 of 59 Comp Cas):
"It is
true that from the juristic point of view, the .company is a legal personality
entirely distinct from its members and the company is capable of enjoying rights
and being subjected to duties which are not the same as those enjoyed or borne
by its members. But 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".
The Supreme
Court has thus said (page 138 of 59 Comp Cas):
"If we.
look at the facts of this case, what do we find? A new company is created
wholly owned by the principal company, with no assets of its own except those transferred
to it by the principal company, with no business or income of its own except
receiving dividends from shares transferred to it by the principal company and
serving no purpose whatsoever except to reduce the gross profits of the
principal company. These facts speak for themselves. There cannot be direct
evidence that the second company was formed as a device to reduce the gross
profits of the principal company for whatever purpose. An obvious purpose that
is served and which stares one in the face is to reduce the amount to be paid
by way of bonus to workmen. It is such an obvious device that no further
evidence, direct or circumstantial, is necessary"
In one of the
latest judgments in Union of India v. Playworld Electronics Pvt. Ltd., AIR 1990
SC 202, once again the Supreme Court has reiterated the law in these words (at
page 208):
"It is
true, as Shri Rao drew our attention, that even though the corporation might be
a legal personality distinct from its members, the court is entitled to lift
the mask of corporate entity if the conception is used for tax evasion or to
circumvent tax obligation or to perpetrate a fraud. In this connection,
reference may be made to the observations of this court in Juggi Lal Kamlapat
v. CIT [1969] 73 ITR 702; [1969] 1 SCR 988; AIR 1969 SC 932. In the background
of the facts found we, however, need not get ourselves bogged with the
controversy as to judicial approach to tax avoidance devices as was pointed out
in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148; AIR 1986 SC 649, where this
court tried to discourage colourable devices. It is true that tax planning may
be legitimate provided it is within the framework of the law. Colourable
devices cannot be part of tax planning and it is wrong to encourage or
entertain the belief that it is honourable to avoid the payment of tax by
dubious methods. It is the obligation of every citizen to pay the -taxes
honestly without resorting to subterfuges. It is also true that in order to
create the atmosphere of tax compliance, taxes must be reasonably collected and
when collected, should be utilised in proper expenditure and not wasted. See
the observations in CWT v. Arvind Narottam [1988] 173 ITR 479 (SC); [1988] 4
SCC 113; AIR 1988 SC 1824. It is not necessary, in the facts of this case, to
notice the change in the trend of judicial approach in England: Sherdley v.
Sherdley [1987] 2 All ER 54. While it is true, as observed by Chinnappa Reddy
J. in McDowell and Co. Ltd. v. CTO [1985] 154 ITR 148 (SC), that it is too much
to expect the Legislature to intervene and take care of every device and scheme
to avoid taxation and it is up to the court sometimes to take stock to
determine the nature of the new and sophisticated legal devices to avoid tax
and to expose the devices for what they really are and to refuse to give
judicial benediction, it is necessary to remember as observed by Lord Reid in
Greeriberg v. IRC [1971] 47 TC 240 (HL), that one must find out the true nature
of the transaction. It is unsafe to make bad laws out of hard facts and one
should avoid subverting the rule of law. Unfortunately, in the instant case,
facts have not been found with such an approach by the lower authorities and
the High Court had no alternative on the facts as found but to quash the show
cause and the demand notices".
On the
strength of the authorities aforementioned, it can be said that it is not
enough that it is found that the Transport Corporation and the Engineering
Corporation are two separate legal entities. It will be necessary to examine
also whether they are truly separate and independent or one is dependent on the
other or is a colourable device for avoiding legal obligations. Since this is a
new approach that the courts in India have accepted, it cannot be said that the
Appellate Assistant Commissioner committed any gross illegality in thinking
that the two corporations were in reality one and, therefore, their income
should be clubbed for one point taxation. The Tribunal adopted the orthodox
approach and became too technical in identifying the two corporations
separately and so acknowledging without trying to ascertain the true character
of the relationship of the one with the other and noting that they have
separate tax liabilities.
Learned
counsel for the respondent-assessee, however, has drawn our attention to the
fact that although there has been some mention of the background facts in the
order of the Appellate Assistant Commissioner, there has actually been no
examination of the case by any of the authorities in the light of the cardinal
tests that have been indicated invariably in the judicial pronouncements.
1 Were
the turnovers treated separately for each corporation?
2 Were
the persons conducting the business guided by the same head and brain?
3 Were the persons conducting the business of
the Engineering Corporation the same persons conducting the business of the
Transport Corporation?
4 Did the Engineering Corporation decide what
should be done and what capital should be embarked on the venture?
5 Did the business turnover of the Engineering
Corporation stand separately and independently?
6 Who
effectually controlled the Engineering Corporation?
Since we
propose to remand the case, we do not ourselves go into each of these aspects
to find out the true character of the Engineering Corporation. It needs no
emphasis that any decision will have to be made in this regard on the overall
examination and assessment of the real character of the Engineering Corporation
and its relationship with the Transport Corporation and the Assessing Officer
shall be in a better position to appreciate the implications of the business
transactions of the two corporations and their relationship with each other.
Since we have
come to the conclusion that the Appellate Tribunal has not tested the case in
accordance with law and since we also notice that the Appellate Assistant
Commissioner also did not apply himself to the tests that would reveal the real
character of the Engineering Corporation, we set aside the order of the
Appellate Tribunal and affirm the order of the Appellate Assistant Commissioner
with the modification that the Assessing Officer shall afford an opportunity to
the parties to bring such evidence as they may deem fit and proper and
determine in accordance with law as to whether the Engineering Corporation is a
subsidiary of the Transport Corporation and, although it has got a separate
legal identity, it does not act of its own but acts for and on behalf of the
Transport Corporation.
In the
result, this tax case revision is allowed. The order of the Appellate Tribunal
and that of the Appellate Assistant Commissioner, to the extent indicated
above, are set aside. The case is remitted to the assessing officer for
disposal in the light of the observations made above and in accordance with
law. No costs.
[1997] 88 COMP. CAS 136 (MAD.)
HIGH COURT OF
v.
Translanka Air
Travels P. Ltd.
GOVARDHAN J.
JULY 13, 1995
JUDGMENT
Govardhan
J.—The
respondent became a tenant in the petition-mentioned property on a rent of Rs.
2 lakhs per month. A lease deed was entered into between the applicant and the
respondent on May 2, 1994, and it was registered. Clause 1(f) of the lease deed
prohibits the respondent from subletting without the written consent of the
applicant. The respondent who has a set-back in its business, negotiated with
Bank of Ceylon to take on lease the demised premises directly from the
applicant. The respondent, to overcome clause 1(f) of the lease deed, wants to
clandestinely transfer its major shares retaining a negligible share to the
said bank and also Dubai National Air Travels and Ajmer Travels. It would
amount to subletting. The cheques issued were dishonoured for want of funds.
Hence, the applicant has filed the suit and the present application is to
restrain the respondent from entering into any transaction for sub-letting the
premises for transferring its major shares for allowing the demised premises to
be occupied by any person in breach of covenants of the lease deed dated May 2,
1994.
The
respondents in their counter contend briefly as follows : The allegation that
the respondent company negotiated with the Bank of Ceylon is not true. The
respondent company is a private limited company incorporated under the
Companies Act. In order to streamline the administration of the company, it is
inviting more shares from various persons. Section 34 of the Companies Act,
1956, deals with the effect of registration of the memorandum of the company.
According to section 34, the members shall be a body corporate having a
perpetual succession and common seal. The respondent company continues to be in
existence until it is wound up. It is a juristic person distinct from the
shareholders. The change in the shareholding pattern will not affect the
ownership of the leasehold right. The transferring or inviting shares from
others cannot be treated as transferring of the leasehold right. So long as the
respondent company is in existence, transfer of the shares or inviting shares
would not amount to subletting. Injunction if granted would amount to
preventing the defendant company from transferring its share which is not
permissible. The mandatory provisions of Order 39, rules 1 and 2 of the Code of
Civil Procedure, 1908, have not been satisfied and the application is,
therefore, liable to be dismissed.
In
the reply statement, the applicant contends as follows: Subletting would mean
parting with possession by the existing shareholders and directors to a new set
of shareholders or directors. Section 34 of the Companies Act cannot be brought
as a defence when the courts have recognised lifting corporate veil and going
to the true meaning of a particular transaction. The board of directors and
shareholders cannot circumvent the agreement. The induction of new shareholders
and the new management taking over would amount to dividing the contractual
obligation arising under the lease deed. The application may, therefore, be
ordered.
The
suit has been filed by the plaintiff for permanent injunction restraining the
defendant and their men from entering into any transaction for subletting the
demised premises by transferring his major shares allowing the demised premises
to be occupied by third parties in breach of covenant of the lease deed dated
May 2, 1994, entered into between the plaintiff and the defendant in respect of
the suit property. There was an agreement of lease dated May 2, 1995, between
the plaintiff and the defendant and clause 1(f) of the same prohibits the
lessee from subletting wholly or in part, the demised premises apart from
prohibiting the lessee from making any permanent additions or alterations
without the written consent of the lessor. The applicant contends that there is
a set-back in the business of the defendant and the defendant had negotiated
with Bank of Ceylon to take the suit property on lease directly from the
applicant in order to get over the set-back. The same is denied by the
respondent. The applicant further contends that they came to know that the
respondent has been negotiating with Dubai National Air Travels and Ajmer
Travels to sublet the premises and in order to get over clause (1)(f) of the
lease deed, wants to transfer his major shares clandestinely in favour of the
above two companies detaining negligible share and it would amount to
subletting.
Learned
counsel appearing for the applicant would argue that the property having been
leased in favour of the defendant, a private limited company, transferring
major shares in favour of third parties by the defendant would amount to
subletting and it has to be restrained since what the applicant attempts to do
is under the corporate veil. Learned counsel appearing for the respondent would
on the other hand argue that inviting others to purchase shares or selling the
shares retained by the company, is a right of the company registered under the
Companies Act and it cannot be stated that under the corporate veil, the
respondent is trying to sublet the premises to Ajmer Travels and Dubai National
Air Travels to get over the condition in the lease deed. Learned counsel
appearing for the applicant has drawn the attention of this court to the
provisions of section 34 of the Companies Act and would argue that where two
persons who were the joint owners of leasehold rights in land attempted to
circumvent an injunction against alienation of certain rights by transferring
the leasehold rights to a private limited company (of which they alone were the
shareholders and directors) which alienated the rights, the court held that the
corporate veil was being used as a cloak to wilfully disobey the court's
orders. He would also refer to a decision reported in Jyoti Limited v.
Kanwaljit Kaur Bhasin [1987] 62 Comp Cas 626 wherein, the Delhi High Court has
held that the corporate veil was being blatantly used as a cloak to wilfully
disobey the orders of the court for an improper purpose. In the above decision,
two ladies, who have formed a private company in which one was the chairman and
other was managing director and transferred a property when there was an
agreement of sale entered by them with the plaintiff in existence and when the
plaintiff filed the suit and obtained injunction, has chosen to contend that
the company had entered into the agreement. It was in those circumstances, the
Delhi High Court has held that the corporate veil was being blatantly used as a
cloak to wilfully disobey the orders of the court issued against the two ladies
from transferring the property. The facts of the above case cannot be said to
have any bearing to the facts in the present case. There was no transfer of
shares involved in the reported case. Two individuals against whom injunction
has been granted, have resisted the same by contending that the act said to
have been committed by them individually was the act of the company of which
one was the chairman and the other was the managing director. It was an attempt
made by them clandestinely to escape. In the present case, there is no such
clandestine act On behalf of the defendant. Even assuming that they have called
for subscription for the shares or sale of the shares held by them, it cannot
be considered as an act done by them under the veil of the corporate entity. As
regards the true legal position of a company or corporate body and the
circumstances under which its entity as a corporate body will be ignored and
the corporate veil lifted, so that the individual shareholder may be treated
liable for its acts, the Supreme Court (see Tata Engineering and Locomotive Co.
Ltd. v. State of Bihar [1964] 34 Comp Cas 458, 468) has expressed itself as
follows:
"The
true legal position in regard to the character of a corporation or a company
which owes its incorporation to a statutory authority, is not in doubt or
dispute. The corporation in law is equal to a natural person and has a legal
entity of its own. The entity of the corporation is entirely separate from that
of its shareholders; it bears its own name and has a seal of its own ; its
assets are separate and distinct from those of its members ; it can sue and be
sued exclusively for its own purpose.; its creditors cannot obtain satisfaction
from the assets of its members ; the liability of the members or shareholders
is limited to the capital invested by them ; similarly, the creditors of the
members have no right to the assets of the corporation."
In
this connection, I wish to refer to the Guide to the Companies Act by Ramaiya,
page 285, where the learned author, under the heading "Company distinct from
its shareholders", has observed as follows :
"A
shareholder has got no interest in the property of the company though he has
undoubtedly a right to participate in the profits if and when the company
decides to divide them... The company is a juristic person and is distinct from
the shareholders. The dividend is a share in the profits declared by the
company as liable to be distributed among the shareholders... There is nothing
in the Indian law to warrant the assumption that a shareholder who buys shares,
buys any interest in the property of the company which is juristic person
entirely distinct from the shareholders. The true position of a shareholder is
that on buying shares he becomes entitled to participate in the profits of the
company in which he holds the shares, if and when the company declares, subject
to the articles of association, that the profits or any portion thereof should
be distributed by way of dividends among the shareholders. He has undoubtedly a
further right to participate in the assets of the company which would be left
over after winding up. Bacha F. Guzdar v. CIT, AIR 1955 SC 74 ; [1955] 25 Comp
Cas 1."
From
the above, we can safely come to the conclusion that the property of a company
cannot be considered to be the property of members. We can even refer to the
fact that when the majority of the shareholders of a company have migrated to
India, it was held that it does not and cannot change the nationality and
domicile of the company as observed by the learned author Ramaiya in his book
at page 287. When the majority of the shareholders have migrated to India and
yet it was held that the said fact does not change the nationality and domicile
of the company, bringing more shareholders to the defendant company or selling
a portion of the shares retained/owned by it to third parties by the defendant
company cannot be considered as a change of the company itself. Therefore,
simply because the applicant contends that the defendant is trying to sell the
shares owned by it to third parties particularly the two travel companies
mentioned in the affidavit, it cannot be stated that under the corporate veil,
the respondent is subletting the premises to the two companies. In this
connection, I also wish to refer to the decision reported in Madras Bangalore
Transport Co. (West) v. Inder Singh [1986] 3 SCC 62, wherein the Supreme Court
has held that when a limited company formed with partners of existing tenant
firm as directors, both the firm and the company operating from the same place,
each acting as agent of the other, actually it was only an alter ego or
corporate reflection of the tenant-firm and the two were one for all practical
purposes having substantial identity and hence there was no subletting. In the
present case, there is no question of forming a second company by the
respondent even if the allegations of the applicant are true. The attempt of
the respondent to invite applications and allot more shares or attempts of the
respondent to sell a portion of the shares owned by it, cannot be considered as
an act under the corporate veil committed by the respondent to sublet the
premises. In that view, I am of opinion that the applicant cannot be considered
to have shown either prima facie case or balance of convenience or relative
hardship, in order to grant injunction.
In
the result, the application is dismissed.
[2000] 101 Comp. Cas. 257 (SC)
SUPREME COURT OF
v.
Bharat Coking Coal Ltd.
S. RAJENDRA BABU AND S.S.
MOHAMMED QUADRI, JJ.
MARCH 8, 2000
A.K. Srivastava, Abhay Prakash Sahay, P.K.
Dutta and C.S. Ashri, for the Appellant.
Harish N. Salve, Anip Sachthey, Anupam Lal Das, Ms.
Sandhya Rajpal, S.C. Mallick and K.C. Bajaj, for the Respondent.
Syed
Shah Mohammed Quadri J.—This appeal is directed against the judgment and decree of the
High Court of Judicature at Patna (Ranchi Bench), in appeal from Appellate
Decree No. 21 of 1979 (R) passed on November 11, 1997. The
appellants-plaintiffs filed Title Suit No. 28(A) of 1976 in the court of the
Subordinate Judge, First Court, Dhanbad, praying for a declaration of title in
respect of a bungalow and a piece of land admeasuring 1.38 acres consisting of
survey plots Nos. 91 to 94 appertaining to Khatian No. 2 of Mouza Nichitpur (hereinafter
referred to as "the suit property") and for permanent injunction
restraining the respondents from interfering with their possession.
The
suit property was owned by Nichitpur Coal Company Private Limited (hereinafter
referred to as "the company"), which is registered under the Indian
Companies Act. By a resolution of the board of directors of the company dated
September 21, 1970, it was resolved to sell the suit property to the appellants
for a consideration of Rs. 5,000. However, the appellants paid Rs. 7,000 to one
of the directors under receipt dated December 30, 1970, (exhibit 10). An
agreement to sell the suit property to the appellants for Rs. 7,000 (Rs. 5,000
as consideration of the bungalow and Rs. 2,000 as price of the land) was
executed by the company on January 3, 1971, (exhibit 8). The company executed
the sale deed in their favour on March 20, 1972, (exhibit 9).
The
Coal Mines (Nationalisation) Act, 1973 (for short "the Act of 1973"),
came into force on May 1, 1973, and from that date the right, title and
interest of the owners in relation to the coal mines specified in the Schedule
appended to the Act of 1973 (the said company is mentioned at serial No. 133 of
the Schedule) vested in the Central Government (they will hereinafter be referred
to as "the vested properties"). Thereafter under the order of the
Central Government, the vested properties stood transferred to and vested in
the Government company named Bharat Coking Coal Ltd. (for short
"BCCL"). As the appellants did not hand over the possession of the
suit property to BCCL. it initiated proceedings under the Public Premises
(Eviction of Unauthorised Occupants) Act, 1971 (for short "the P.P.
Act"), for their eviction from the suit property on October 15, 1976.
Being
faced with eviction proceedings under the Public Premises (Eviction of
Unauthorised Occupants) Act, the appellants filed the said suit against BCCL
for declaration of their rights in, title to and interest over the suit
property. The suit was resisted by BCCL, inter alia, on the ground that with
effect from the appointed date the suit property vested in it and that the
alleged sale transaction in favour of the appellants was sham, collusive,
without any consideration and was brought into existence to avoid the effect of
vesting of the suit property under the Act of 1973. It was also stated that the
appellants are wives of the directors of the company, who are real brothers. On
appreciation of the evidence placed before it, the trial court held that the
appellants got no title to the suit property and were, therefore, not entitled
to any relief and thus dismissed the suit on September 22, 1977. Aggrieved by
the judgment and decree of the trial court, the appellants filed Title Appeal
No. 147 of 1977 before the learned District Judge, Dhanbad. On reappraisal of
the evidence on record, the learned District Judge allowed the appeal and set
aside the judgment and decree of the trial court and decreed the suit of the
appellants, as prayed for on October 6, 1978. The BCCL then unsuccessfully
carried the matter, in second appeal, before the High Court of Judicature at
Patna (Ranchi Bench). The judgment and decree of the High Court dismissing the
second appeal on October 7, 1985, was challenged by BCCL in Civil Appeal No.
838 of 1986 in this court. On August 17, 1993, this court set aside the
impugned judgment and decree of the High Court and remitted the matter to the
High Court to decide the following two points:
"(1) Whether the transaction in question is a bona
fide and genuine one or is a sham, bogus and fictitious transaction as held by
the trial court; and
(2) Whether in view of section 3(1) read with
section 2(h)(xi) and the entry at serial No. 133, in the Schedule to the Act,
the property in question stood transferred to and vested in the Central
Government free of all encumbrances, on the appointed clay under the Coal Mines
(Nationalisation) Act."
It
was observed that the result of the second point would depend on the decision
of point No. 1.
However,
after remand, in view of the submission made by learned counsel for BCCL that
point No. 2 was covered by the judgment of this court in Bharat Coking Coal
Ltd. v. Madanlal Agrawal [1997] 1 SCC 177 (SC), the High Court decided it
first. On point No. 1 the High Court restored the judgment of the trial court
holding" that the transaction of sale between the appellants and the
company was sham and bogus and was entered into to avoid the vesting of the
suit property in the Central Government under section 3(1) of the Act of 1973
and thus allowed the second appeal filed by the BCCL on November 11, 1997. That
judgment and decree are under challenge in this appeal.
A.K.
Srivastava, learned senior counsel appearing for the appellants, pointed out
that contrary to the observation of this court, the High Court has proceeded to
decide point No. 2 first and that resulted in prejudice to the appellants. He
argued that the High Court found that the appellants had proved three facts,
namely, (i) the board of directors of the company passed a resolution on
September 21, 1970, (exhibit 12) to sell the suit property in favour of the
appellants; (ii) the appellants paid Rs, 7,000 to one of the directors of the
company under receipt dated December 30, 1970, (exhibit 10) and (iii) sale deed
was executed by the company on March 20, 1972, (exhibit 9). He invited our
attention to the evidence of PW-8, the accountant of the company, to prove the
passing of the resolution, to substantiate payment of Rs. 7,000 and its entry
in the books of account of the company and the execution of the sale deed dated
March 20, 1972, (exhibit 9) by the company. In view of these proved facts and
in the absence of any rebuttal evidence, it was con tended, the High Court
ought to have held that the sale of the suit property under exhibit 8 was
genuine and valid.
Anip
Sachthey, learned counsel appearing for the respondents, has contended that the
suit property is in the midst of the colliery and that the directors of the
company and the appellants are none other than husbands and wives and that the
transaction was entered into to save the suit property from vesting in the
Central Government under section 3 of the Act of 1973.
We
have perused the deposition of PW-8—accountant—and the impugned judgment. There
can be no doubt that the High Court in para. 13 of its judgment mentioned that
the resolution of the company dated September 21, 1970, (exhibit 12) receipt
evidencing payment of Rs. 7,000 on December 30, 1970, (exhibit 10) under which
one of the directors, husband of appellant No. 1, received the said amount and
the sale deed executed on March 20, 1972 (exhibit 9) had been proved by the
appellants. But then, the High Court also noted with approval the following
circumstances, pointed out by the first appellate court, firstly, the
resolution dated September 21, 1970, (exhibit 12) was an antedated document.
Srivastava submitted that the Government authorities were in possession of all
the records of the company and they should have produced the original record to
substantiate the allegation that the resolution was antedated and in the
absence of such record the High Court was not justified in confirming the
finding of the first appellate court. The fact remains that the appellants
themselves took no steps to summon the record from the custody of the concerned
authority. That apart, there is no mention of the resolution dated September
21, 1970, (exhibit 12) either in the receipt (exhibit 10) signed by one of the
directors or in the agreement for sale of January 3, 1971, (exhibit 8) or in
the sale deed dated March 20, 1972, (exhibit 9). On the basis of the intrinsic
evidence, pointed put above, the conclusion that the resolution was an
antedated document, appears to be irresistible. Secondly, it is pointed out by
the High Court that though the resolution mentions the sale consideration as
Rs. 5,000 there is no explanation as to why it was enhanced to Rs. 7.000 for
which receipt was signed by one of the directors of the company. Thirdly, a
more telling aspect is that the appellants did not exercise their rights as
purchasers over the suit property till the date of the filing of the suit; the
water and electricity connections were obtained during the pendency of the suit
by them; further till the date of vesting of the suit property under the Act of
1973 it was maintained by the company for the use of the directors.
It
is rightly commented by the High Court that the agreement for sale (exhibit 8)
of the suit property is not a registered document; it recites the suit property
will be sold for Rs. 5,000 even though the consideration of Rs. 7,000 was paid
on December 30, 1970, (exhibit 10) itself and neither the agreement nor the
sale deed is in terms of the resolution.
Two
other aspects which have weighed with the High Court are: the transaction of
sale was between the husbands and the wives and that they had no independent
source of their income, which cannot be ignored altogether as irrelevant.
Srivastava
submitted that undue emphasis was given to the fact that the directors of the
company were brothers and the appellants are their wives. He argued that the
company is a separate legal entity which is independent of its directors and
shareholders and repeatedly referred to the oft-quoted decision in Solomon v.
Salomon [1897] AC 22 (HL). The principle laid down in Salomon's case more than
a century ago in 1897 by the House of Lords that the company is at law a
different person altogether from the subscribers who have limited liability, is
the foundation of joint stock company and a basic incidence of incorporation
both under the English law and Indian law. Lifting the veil of incorporation
under statutes and decisions of the courts is an equally settled position of
law. This is more readily done under American law. To look at the realities of
the situation and to know the real state of affairs behind the facade of the
principle of the corporate personality, the courts have pierced the veil of
incorporation. Where a transaction of sale of its immovable property by a
company in favour of the wives of the directors is alleged to be sham and
collusive, as in the instant case, the court will be justified in piercing the
veil of incorporation to ascertain the true nature of the transaction as to who
were the real parties to the sale and whether it was genuine and bona fide or
whether it was between the husbands and the wives behind the facade of the
separate entity of the company. That is what was done by the High Court in this
case.
There
can be no dispute that a person who attacks a transaction as sham, bogus and
fictitious must prove the same. But a plain reading of question No. 1.
discloses that it is in two pails : the first part says, "whether the
transaction, in question, is bona fide and genuine one" which has to be
proved by the appellants. It is only when this has been done that the
respondent has to dislodge it by proving that it is a sham and fictitious
transaction. When the circumstances of the case and the intrinsic evidence on
record clearly point out that the transaction is not bona fide and genuine, it
is unnecessary for the court to find out whether the respondent has led any
evidence to show that the transaction is sham, bogus or fictitious.
For
the aforementioned reasons, we are unable to say that the High Court erred in taking
the view that the sale, in favour of the appellants, is neither bona fide nor
genuine and confers no right on them.
In
view of the finding on point No. 1, the suit property remained the property of
the company and, therefore, it vested in the Central Government under section
3(1) of the Act of 1973. This is what the High Court held on point No. 2, which
is supported by the judgment of this court in Bharat Coking Coal Ltd. v.
Madanlal Agrawal [1997] 1 SCC 177.
In
the result, we find no merit in the appeal. It is accordingly dismissed with
costs.
[1996] 86 COMP. CAS 546 (SC)
v.
City Mills Distribution
(P.) Ltd.
J.S. VERMA, S.P. BHARUCHA AND SUJATA V. MANOHAR JJ.
FEBRUARY 5, 1996
J. Ramamurthy, R. Satish
and S.N. Terdol for the Appellant.
S.P.
Bharucha J.—This is a reference under section 257 of. the,
Income-tax Act, 1961, made by the Income-tax Appellate Tribunal directly to
this court in view of the difference in the views taken by the Allahabad and
the Calcutta High Courts upon the same issue. The question to be answered reads
thus:
"Whether,
on the facts and in the circumstances of the case; the Appellate Tribunal was
right in holding that the pre-incorporation profits of Rs. 24,862 cannot be
included in the assessment of the assessee-company for the assessment year
1974-75?"
The
assessment year is 1974-75. The relevant accounting year ended on September 30,
1973. The assessee-company was incorporated on October 30, 1972. It filed a
return for the assessment year 19.7475 disclosing an income of Rs. 1,79,690.
The Income-tax Officer assessed the assessee-company's total income at Rs.
2,04,530. In so doing, 1ie included, inter alia, the sum of Rs. 24,862 as the
assessee-company's pre-incorporation profit. He found that the promoters of the
assessee-company had carried on business on its behalf and had received the sum
of Rs. 80,534 for the period October 1, to October 29, 1972. After deducting
expenses, the income in this behalf was Rs. 24,862. According to the Income-tax
Officer, this was the income of the assessee-company because its promoters had
acted and carried on business on its behalf and the assessee-company had
accepted the act of the promoters after its incorporation.
The
assessee-company's appeal to the Commissioner of Income-tax (Appeals) was
dismissed. The assessee-company then appealed to the Tribunal. The Tribunal
observed that the real questions were: When did the pre-incorporation profit
accrue? Did it accrue before incorporation? If so, which was the legal entity
which carried on the business and earned the income at the time of accrual? The
Tribunal held' that, in lath, the promoters and the assessee-company were
different legal persons and that the income which had accrued on October 29,
1972, was income that was earned by the promoters. Accordingly, the appeal of
the assessee-company was allowed.
The
reference was made because of the decisions we now cite.
In
CIT v. Bijli Cotton Mills Ltd. [1953] 23 Comp Cas 114 (All), the
respondent-company was' incorporated on December 11, 1943. Prior to that
date, the firm that promoted it. had entered into an agreement to purchase a
mill for it and, on December 10, 1942, had obtained its possession. The sale
deed of the mill was executed in favour of the respondent-company after it. had
been incorporated. The respondent-company chose to accept the profits of the
mill made before its incorporation, but treated the promoters as accountable therefor.
The Allahabad High Court observed that it was true that under the law the
respondent-company had come to existence only upon its incorporation and it was
not possible to hold that the legal title in the business or its profits had
vested in it before s incorporation. It was, however, well-settled that if the
promoters of a company carried on business on behalf of a company which they
intended to float, the company, on its incorporation, had a right to either
accept what had been done on its behalf by the promoters or repudiate the same.
If the company accepted what the promoters had done on its behalf it had a
right to claim from them the entire income for the period during which the
business was carried on for its benefit. Reliance was placed on the judgments
of the Bombay High Court in CIT v. Abubaker Abdul Rehman [1939] 7 ITR 139 and
CIT v. Trustees of Sir Currimbhoy Ebrahim Baronetcy Trust, AIR 1932 Bom 106,
where it had been held that if the income of the trust property as it accrued
was earmarked and had to be handed over by the trustee to the beneficiary, the
beneficiary could be said to be in receipt of that income and could be taxed
directly. If, on the other hand, the income came into the hands of the trustee
and he had the right to dispose of it and it was only the balance left over
that was payable to the beneficiary, then the income was taxable in the hands
of the trustee. The latter decision had been upheld by the Privy Council. These
decisions showed that under the Income-tax Act, it was not only legal
ownership. that had to be looked into, but the court could also go into the
question of beneficial ownership and decide who should be held liable for tax
after taking into account the question as to who, as a matter of fact, was in
receipt of the income which was to be taxed. The assessment proceedings in
respect of the respondent-company had been started at a time when it had
already decided to accept what had been done on its behalf by the promoters and
take over the business and income made therefrom. It was, therefore, in the
same position as a beneficiary for whom the income was earmarked as payable to
it and the same could be legally assessed in its hands.
The
aforesaid decision, it may be mentioned, was followed in a subsequent decision
of the Allahabad High Court, Security Printers of India (P.) Ltd. v. CIT [1970]
78 ITR 766.
The
Calcutta High Court has taken a different view in CIT v. Tea Producing Co. of
India Ltd. [1963] 48 ITR 200. The respondent-company was incorporated on May
29, 1951, with, inter alia, the object of t over a tea estate as a going
concern. it commenced business on June 23, 1951. In November, 1951, it
purchased the tea estate with effect from3 January 1,.1951, and the terms of
the sale deed stated that all the income and profits from January 1, 1951,
would belong to the respondent-company and it would be liable for all tax dues
from that date. For the accounting year ending December 31, 1951, the
respondent-company showed a lo& The Income Officer held that the assessee
was not entitled to claim the whole of 40 per cent. of the loss but only the
portion of the 40 per cent. proportionate to the period from which it commenced
business, i.e., from June 23, 1951, to December 31, 1951. The Tribunal allowed
the loss for the entire year. The High Court considered the judgment in the
case of Bijli Cotton Mills Ltd. [1953] 23 Comp Cas 114 (All) and disagreed
therewith. It said that under the Income-tax Act an assessee meant a person by
whom income-tax or any other sum of money was payable thereunder. Tax had to be
paid by an 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, Therefore, before a person
could be assessed, it had to be shown that it was he who had, carried on the
business, profession or vocation. The Calcutta High Co , could not see how a
person could be said to have carried on a business during a period w-hen he was
not born or he could be assessable to tax in respect thereof. As in the case of
a natural born person, so in the case of a legal entity like a company, the
liability to pay tax could only arise after the date of birth or incorporation.
The liability of a company to pay income-tax for the business carried on by its
promoter could only be respect of a period subsequent to its incorporation. In
the case of Cotton Mills' Ltd. [1953] 23 Comp Cas 114, the Allahabad High Court
placed reliance upon the judgment of the Bombay High Court in the case of
Abubaker, Abdul Rehman [1939] 7 ITR 139 and had taken the view that under the
Income-tax Act, it was not only the legal ownership that had to be looked into
but the court could go into ,the question of beneficial ownership and decide
who should be held liable for tax after taking into account the question as to
who was, as a matter of fact, in receipt of the income which was to be taxed.
The Calcutta High Court pointed out that the observations of the Bombay High
Court in this regard had been disapproved by the Privy Council in CIT v. Dewan
Bahadur Dewan Krishna Kishore [1941] 9 ITR 695.
In
our view, the Tribunal was right in saying that the relevant question was: what
was the legal entity that had carried on the business before the
assessee-company was incorporated and earned the income at the time of its
accrual. A company becomes a legal entity in the eye of law only when it is
incorporated. Prior to its incorporation, it simply does not exist. The
assessee-company did not exist when the income with which we are here concerned
was earned. It is, therefore, not the assessee-company which earned the income
when it accrued and it is not liable to pay tax thereon.
The
same result is reached by a somewhat different process of reasoning. A company
can enter into an agreement only after its incorporation. It is only after
incorporation that a company may decide to accept that its promoters have
carried on business on its behalf and appropriate the income thereof to itself.
The question as to who is liable to pay tax on such income cannot depend upon,
whether or not the company after incorporation so decides. It is he who carried
on the business and received the income when it accrued, who is liable to bear
the burden of tax thereon
It
may be that the transaction of appropriation by a company to itself of income
earned by its promoters before its incorporation is also subject to tax; that
is not in issue before us and we do not express any view in that behalf.
For
the reasons aforestated, we answer the question in the affirmative and in
favour of the assessee.
There
shall be no order as to costs.
Section 35
Conclusiveness
of certificate of incorporation
[1960]
30 COMP. CAS. 437 (AP)
V.
CHANDRA
REDDY, C.J.
JAGANMOHAN
REDDY, J.
WRIT
PETITION NOS. 476, 539,511 AND 616 OF 1959
JULY
29, 1959
CHANDRA
REDDY, C.J.- Writ Petitions
Nos. 476, 539 and 616 of 1959 are for the issue of a writ of scire facias to
rescind the certificate issued by the Registrar of Companies to Andhra Prabha
Private limited, Vijayawada, while writ petition No. 511 of 1959 is for the
issuance of a writ of certiorari to quash the authentication of declaration by
one of the respondents for the printing and publication of "Indian
Express" from Vijayawada. All the petitioners were either working
journalists or workers employed in the Express Newspapers Private Limited and
their petitions follow the same pattern and raise common questions of law and
fact and could, therefore, be disposed of in one judgment.
A few facts,
which are material for appreciating the issues involved in these petitions, may
be briefly set out. Express Newspapers Private Limited, otherwise termed as the
Express Group, has been publishing several dailies and weeklies amongst them
being the Indian Express, Dinamani , Andhra Prabha and Andhra Prabha
Illustrated Weekly. We are now concerned only with Andhra Prabha and Andhra
Prabha Illustrated Weekly. The Express Group is supposed to be the biggest
chain in the newspaper world. This concern had in its employment a number of
working journalists, proof readers, members of the staff and workers. Some of
the newspapers published by this concern have a wide circulation and, according
to the petitioners, it was a very flourishing industry earning enormous
profits, while the respondents have it that the company was incurring huge
losses for some years. There are several other newspapers similarly situated in
For some years
past working journalists were agitating for the creation of a machinery to have
their salaries, allowances etc., enquired into by some agency, which would be
empowered to fix reasonable terms and conditions of services for them as a
whole. Isolated attempts were made by the various States to appoint Committees
to enquire into conditions of the employees of the newspaper industry. But the
problem could not be tackled on an All-India basis. Following on the
declaration of the policy by the prime Minister in that behalf in the year
1951, the Press (Objectionable Matter) Act, 1952, was passed by the parliament.
In September,
1952, the Press Commission was appointed to report, among other things on the
method of recruitment, training, scales of remuneration. benefits and other
conditions of employment for working journalists, the settlement of disputes
affecting them and the factors which influenced the establishment and
maintenance of high professional standards. After the Press Commission made its
report, the Working Journalists (Conditions of Service and Miscellaneous provisions)
Act (XLV of 1955) was passed which received the assent of the President in
December, 1955, to have better conditions of service established for those
working in the newspaper industry. Section 8 of the Act authorised the Central
Government to constitute a Wage Board for fixing the rates of wages in respect
of working journalists.
In exercise of
that power, the Union Government created a Wage Board for fixing and
determining the rates of wages in accordance with the provisions of the Act.
This Board gave its decision classifying newspaper establishments into several
groups according to their gross earnings and fixing scales of wages of the
various grades of working journalists. As a result of the proposals of the
Board, there was an increase in the emoluments of the employees working in this
industry with the result that the wage bill went up very high. This threw an
additional burden on the industry, the Express Newspapers being one such. The
Express Newspapers Private limited and several other newspaper establishments
invoked the jurisdiction of the Supreme Court under article 32 of the
Constitution questioning the vires of the Act and challenging the decision of
the Board contending, inter alia, that the implementation of the decisions
would be beyond the capacity of the industry and would lead to their utter
ruin.
While
upholding the constitutionally of the Act, except in regard to one or two
provisions, the Supreme Court set aside the decision of the Wage Board as
illegal and void. One of the reasons adduced in support of the conclusion of
their Lordships was that the Wage Board, in fixing the rates of wages, had not
taken into account the capacity of the industry to pay. After this, the
Government made an Ordinance, subsequently replaced by Act XXIX of 1958, which
was in substance on the same lines as Act XLV of 1955 and which made no
departure in regard to the main policy embodied in the earlier Act. By virtue
of the authority conferred by Act XXIX of 1958, the Government of India
constituted a Wage Committee in June, 1958, to fix the rates of wages etc. This
Committee made tentative proposals in December, 1958, which were circulated to
all newspaper proprietors including those of the Express Group. The Committee
also classified the newspaper industry into various Classes A to E according to
their gross receipt. In this classification, the Andhra prabha Limited, which
was treated as a unit, was assigned place in Group C. As a result of the
recommendations of this Committee, the Express Newspapers Limited had to pay a
sum of about two lakhs of rupees a month by way of additional wages to working
journalists and the members of the staff.
Early in
November, 1958, there was a dispute between Express Newspapers Limited and its
employees and it was settled through the mediation of open of the Ministers of
Madras. However this did not result in the establishment of peace between the
employers and the employees. The management was contemplating either to
transfer and sell its publication or to do some other thing in order to relieve
itself of the difficulties in carrying on business and further losses. This
appears from the resolution passed by the shareholders of the company at an
extraordinary general body meeting on the 11th February, 1959, which reads as
follows :
"
Considering the difficulties experienced by the company in carrying on its
business, this company should cease to do business as proprietors and
publishers of newspapers, dailies, weeklies and magazines and that the company
should transfer and sell its publications to other parties and also sell or
hire out otherwise dispose of its printing plant and machinery and equipment
and also lease out its premises at various places."
It is claimed
on behalf of the respondents that it was in pursuance of this resolution that
the board of directors sold to the Andhra Prabha private Limited, Vijayawada,
as a going concern the proprietary rights of printing and publishing the Andhra
prabha and the Andhra Prabha Illustrated Weekly, which was registered in April,
1959. Thereafter, correspondence ensued between the employers and the employees
in the course of which the latter were informed,among other things that the
Andhra Prabha Private Limited had agreed to take into their service all staff
and workers that are connected with the aforesaid business purchased by them at
Vijayawada without any interruption of service on the existing terms and
conditions of service and with the obligation to pay to all of them in the
event of retrenchment, compensation on the basis that their services have been
continuous and have not been interrupted by such transfer. This did not satisfy
the employees and they wrote to the management impeaching the transaction of
sale as a sham and not a real or genuine one, resorted to to defraud them. The
assurances of the management to the contrary did not have the desired effect
and the employees of the
" I.
Payment of gratuity at the rate of one month's wages for every completed year
of service or part thereof in excess of six months to every employee of Express
Newspaper who was retired subsequent to November I, 1958.
2.
Reinstatement of the nine women clerks whose services were terminated as a
measure of punishment following their participation in the protest
demonstration conducted by the
3. Payment of
three months wages as bonus for the financial year 1957-58."
It is said there
being no prospect of resumption of work, the Express Newspapers Private Limited
decided to close the publication of all the dailies and periodicals at
Thereupon,
some of the persons working in the Andhra Prabha and the Andhra Prabha
Illustrated Weekly section have filed these petitions for the prayers mentioned
above, questioning the bona fides of the promoters of Andhra Prabha Private
limited, Vijayawada, and imputing a motive to them to circumvent the
recommendations of the Wage Committee and to defeat the lawful claims of the
employees. These allegations are refuted by the respondents, who assert that
there was nothing sinister in the formation of the Andhra prabha Private
limited, Vijayawada, that it was for a perfectly legitimate purpose that the
company in question was started that the creation of the company had not in any
way affected prejudicially the interests of the erstwhile workers and working
journalists and that such of them who were working in the particular department
could not be absorbed, into the new concern on the same conditions of service
obtaining in the Express Group.
Before we
embark upon a discussion on the several problems that present themselves in
this enquiry, it is useful to understand the meaning and scope of a writ of
scire facias. This is Latin phrase meaning " that you cause to know
". In Wharton's Law Lexicon, this is described as a judicial writ, founded
upon some record, and requiring the persons against whom it is brought to show
cause why the party bringing it should not have advantage of such record.
Osborn in his Concise Law Dictionary says that it is a writ founded upon some
record, such as a judgment or letters patent etc., directing the sheriff to
make known to the person against whom it is brought to show cause why the
person bringing it should not have advantage of the record etc. or where it is
used to repeal letters patent etc., why the record should not be annulled.
This writ is
of two kinds. One is satisfaction of a decree in execution. This has become
obsolete. The other is issued for the purpose of rescinding Crown grants,
charters or franchises. In
We will now
consider the limits of the operation of this peculiar type of writ, which is
rarely heard of in this country. On this topic, it is useful to refer to a
passage in Halsbury's Laws of England, Vol. 11 3rd Edition, page 153 :
" Scire
facias on the Crown side of the Queen's Bench Division is a proceeding for the
purpose of rescinding or repealing Crown grants, charters and franchises. It
must be distinguished from the obsolete writ of scire facias used in aid of
executions and from scire facias on the Revenue side of the Queen's Bench
Division which was abolished by the Crown Proceedings Act, 1947. Scire facias
on the Crown side is still available."
This passage
indicates that it is available only for the purpose of cancelling or revoking
the incorporation of a company created under a charter.
The statement
of law contained in Halsbury's Laws of England, Vol.9 (Simonds Edition), page
99, is also apposite in this context.
" A
corporation may be dissolved on proceedings on a scire facias instituted on the
Crown side of the Queen's Bench Division and to every Crown grant there is
annexed by the common law an implied condition that it may be repealed by scire
facias by the Crown.
Proceedings on
a scire facias may be taken if the charter has been obtained by fraud or
misrepresentation; or if the Crown has granted a charter under a mistake as to
facts, or under a misapprehension as to the construction or effect of the
charter; or if the Crown has exceeded its powers ; or if the corporation has
done something which is prohibited or is not authorised by its charter. A
subject whose rights are affected by a franchise or charter granted to a
corporation may, as of right, procure the cancellation or forfeiture of the
charter by scire facias; for the prerogative of the Crown is the privilege of,
and may be used by, the subject on the flat of the Attorney-General."
It is open to
serious doubt whether this could be applied to a company incorporated under the
Indian Companies Act or under some special enactment. In Princess of Reuss v.
Bos (I) (1871) L.R. 5 H.L. 176. the House of Lords were not prepared to extend
this writ to companies created under a statute. There a company was in
corporated under the companies Act, 1862. Some persons, who were foreigners,
formed a company with the aim of raising money in
This
contention was overruled and the incorporation was held to be valid
notwithstanding that the memorandum of association was extraordinary and
unusual, that the real object was to attract (sic.) the company and that the
creation of shares that were to pass from hand to hand was contrary to the
spirit of the Act of 1862. According to the learned Law Lords, when once a
company was born, the only method by which it could be got rid of was be
getting it extinguished through the effect of the Act of Parliament which
provides for the winding up and not by disincorporation. The speech of the Lord
Chancellor (Lord HATHERLEY) brings out the scope of this writ :
" The
question is, therefore, simply whether it has been created. If created, there
is no power given in this Act of Parliament, nor in any other Act of Parliament
that I am aware of, by which through any result of a formal application, like
an application by scire facias, to repeal a charter, the company can be got rid
of, unless it can be got rid of by being extinguished through the effect of the
Act of Parliament which provides for the winding up of companies when they
ought, from any circumstances whatsoever, to be wound up."
This doctrine
was to some extent modified by the House of Lords in Bowman v. Secular Society
ltd. (I) [1917] A.C. 406. LORD PARKER observed that the section did preclude
all His Majesty lieges from going behind the certificate or from alleging that
the society was not a corporate body with the status and capacity conferred by
the Acts, that such a certificate of registration could not bind the Crown and
that the Attorney-General on behalf of the Crown could institute proceedings by
way of certiorari to cancel registration, which the Registrar had improperly or
erroneously allowed. the effect of the pronouncement is that either the
Attorney-General can initiate proceedings for the cancellation of the
certificate or a subject, who is adversely affected by the franchise, could
invoke such a writ with the fiat of the Attorney-General.
Dealing with
the dictum of LORD PARKER on the subject, Holdsworth in Volume IX of A History
of English Law offers this comment :
" It is
true that dicta of great weight asset that the Crown might institute
proceedings to attack the validity of its creation, because the Crown is not
bound, as the subject is bound, by section 17 of the Companies (Consolidation)
Act, 1908, which makes the certificate of the Registrar absolutely conclusive
as to the fact of incorporation. But as yet there has been no direct decision
on the question whether the Crown possesses even this modified power."
Bowman v.
Secular Society ltd. (I) [1917] A.C. 406, does not render much assistance to
the petitioners, who strongly relied upon it, since the fiat of the
Attorney-General or of the Advocate-General is absent in this case.
Queen v.
Prosser (2) (1848) 50 E.R. 834. and Eastern Archipelago Company v. The Queen
(3)(18530 118 E.R. 988 called in aid by the counsel for the petitioners for the
proposition that any subject could apply for a writ of scire facias do not really
carry them anywhere. On the other hand, they tend to negative their contention.
In Queen v. Prosser (I) (1848) 50 E.R. 834 the Master of the Rolls (LORD
LANGDALE) remarked :
" The
action of scire facias to repeal letters patent is a proceeding of the Crown
for the benefit of the public adopted and authorised upon information that the
letters patent are void and of no force or effect in law for some such reason
as that the conditions upon which the grant was made were not performed or that
the grant was improperly made; or in effect, that a monopoly supposed to have
been granted legally has in fact been granted illegally and to the prejudice of
the public or of her Majesty's subjects.
It has been
said that the writ issues of course, the fiat of the Attorney- General for
issuing it being granted as of course. I think that this ought not to be the
case; and I would hope, that there is some error or exaggeration in the notion
upon that subject which seems to prevail, as it appears to me, that the Attorney-General,
when applied to for his fiat, without which the writ cannot issue, has as
important duty to perform."
To a like
effect is the dictum in the second one. it is to be borne in mind that these
two cases are cases of either a charter or a patent. it is apparent from these
two rulings that the fiat of the Attorney-General is an essential ingredient of
the issue of this type of writ at the instance of a subject. Thus, these two
decisions do not lay down anything inconsistent with our view. On the other hand,
the rule stated therein accords, with the conception indicated by us above.
In view of
this, it is still a moot question whether the writ of scire facias could be
called in aid to get rid of an incorporation effected under the provisions of
an enactment and not by virtue of a charter.
Assuming that
this form of writ survives, could the registration of the company be impugned
on any of the grounds, which are urged in these cases, namely, that it was
incompetent for the Registrar of Companies to issue the certificate having
regard to the aims and objects of the company. This contention has to be
answered with reference to the powers and duties of the Registrar of Companies.
They are defined in section 33. Before registration of the memorandum and articles
could be effected, certain requirements are to be fulfilled by virtue of that
section.
It is
convenient at this stage to refer to the terms of section 33:
" (I)
There shall be presented for registration to the Registrar of the State in
which the registered office of the company is stated by the memorandum to be
situate - (a) the memorandum of the company; (b) its articles if any; and (c)
the agreement, if any, which the company proposes to enter into with any
individual, firm or body corporate to be appointed as its managing agent, or
with any firm or body corporate to be appointed as its secretaries and
treasurers.
(2) A
declaration by an advocate of the Supreme Court or of a High Court, an attorney
or a pleader entitled to appear before a High Court, or a chartered accountant
practising in India, who is engaged in the formation of a company, or by a
person named in the articles as a director, managing agent, secretaries and
treasurers, manager or secretary of the company, that all the requirements of
this Act and the rules thereunder have been complied with in respect of
registration and matters precedent and incidental thereto, shall be filed with
the Registrar; and the Registrar may accept such a declaration as sufficient
evidence of such compliance.
(3) If the
Registrar is satisfied that all the requirements aforesaid have been complied
with by the company and that it is authorised to be registered under this Act,
he shall retain and register the memorandum, the articles, if any, and the agreement
referred to in clause (c) of sub-section (I),if any."
It is manifest
that once the conditions envisaged in paragraphs I and 2 are satisfied, the
Registrar has no option but to register it. It is not competent for him to
refuse registration on any extraneous considerations or for any reason other
than non-compliance with the provisions of sub-sections (I) or (2) of section
33. The only duty cast on the Registrar before he could register it is to see
that the requirements prescribed by sub-sections (I) or (2) are complied with.
It is not within his province to make enquiries into matters, which are
unconnected with the conditions enumerated in sub-sections (I) or (2) or into
collateral matters to probe into the motives of the promoters.
Indisputably,
the provisions of sub-sections (I) or (2) have been satisfied here. Yet the
point presented for the petitioners is that the condition precedent to
registration of a company is the existence of a validly incorporated company
and if the purpose for which a company is floated is illegal or opposed to
public policy, no recognition could be given to it by the Registrar. The
admissibility of this argument depends upon the interpretation to be put upon
section 12 of the Indian Companies Act.
Section 12, so
far as is relevant for this enquiry, runs thus :
“(I) Any seven
or more persons, or where the company to be formed will be a private company,
any two or more persons, associated for any lawful purpose may, by subscribing
their names to a memorandum of association and otherwise complying with the
requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability."
Thus the
essence of a validly incorporated company is that it should consist of a
particular number of persons and that it should be associated for a lawful
purpose. It is not the petitioner's case that the promoters of the company fell
short of the number needed for the purpose of this section. The only point
debated is that this was not started for any lawful purpose. We find it
difficult to assent to the proposition that the purpose for which the company
was formed is anyway unlawful or opposed to any public policy.
We may now
examine the relevant clause of the memorandum of association of the Andhra
Prabha private limited. Clause III, so far as it is relevant for this enquiry,
recites the objects of the company to be,
1. To carry on business as
proprietors and publishers of any newspaper, journals, magazines, books and
other literary works and undertakings.
2. To acquire and take over and
carry on the business of publishing of the Madras edition of the Telugu
newspaper known was Andhra Prabha and the madras edition of the Telugu weekly
known as Andhra prabha Illustrated Weekly, being newspaper and weekly now being
published by the Express Newspapers Private Limited and for this purpose to
enter into one or more agreements with the Express Newspapers Private Limited
on such conditions and on such terms as may be deemed fit.
We are unable
to find anything in the objects, which could be regarded as objectionable or
unlawful or opposed to public policy. There is nothing illegal in the
publishing of a newspaper. Unless the purpose appears to be unlawful ex facie
or is transparently illegal or prohibited by any statute it could not be
regarded as an unlawful purpose. The question of the motive that induced the
founders of a company is unrelated to the scope of section 12 as it is not a
field of enquiry which the section recognises as legitimate. The problem has to
be solved quite apart from the motive or the conduct of the individuals forming
the association. The only consideration that is material is whether it is
permitted by law.
A right is
given to every citizen to form a limited concern and so long as there is
nothing unlawful or illegal in the objects of the association, that right
cannot be denied to him. The fact that this company is calculated to affect the
future interests of its workers would not nullify it. It is not suggested that
any attempts are being made to carry on the business by illegal methods. So the
objectives and the means are good. Even if this tends to jeopardise the
interest of the petitioners, it cannot enter the determination of the character
of the object of the association since it is a collateral consequence.
The view of
ours gathers support from a judgment of the House of Lords in Salomon v.
Salomon and Co. (1) [1897] A.C. 22 what happened there was this. One Salomon
carried on business as a leather merchant in a very satisfactory way for some
time. Encouraged by this, he conceived the idea of starting a limited company
with a nominal capital of 40,000 shares of 1 pounds each. the issued shares
were only 20,000. He sold all his assets to a limited company which consisted of
himself, his wife, daughter and four sons, who each subscribed for one share,
the sale being known and approved by the shareholders. In considerations of the
transfer of his assets to the company, Salomon took all the shares for himself
except those allotted to his wife and children, one each.
In part
payment of the purchase money, debentures forming floating security were issued
to Salomon and these shares gave him the power of voting and all the
requirements of the Companies Act were observed. The business was conducted for
a while. Then, bad times came and the company had to be wound up. After
satisfying the debentures there was not sufficient money to pay the ordinary
creditors. In the course of the winding up, the Court of Appeal, in agreement
with the judgment of VAUGHAN WILLIAMS J. held that the company was merely an
instrument of Salomon, that it was devised to enable him to carry on business
in the name of the company with limited liability contrary to the trade intent
of the Companies Act of 1862 and to get preference over other creditors of the
company by procuring a first charge on the assets by means of such debentures
and that the creditors were unaffected by other arrangements.
On appeal, the
House of Lords reversed that judgment. The learned Law Lords could not
subscribe to the rule stated by the Court of Appeal " that the Act
contemplated the incorporation of seven independent bona fide members, who had
a mind and a will of their own, and were not of the mere puppets of an
individual who, adopting the machinery of the Act, carried on his old business
in the same way as before, when he was a sole trader." it was remarked by
Lord Chancellor (LORD HALSBURY) that the words " seven independent bona
fide members with a mind and will of their own, and not the puppets of an
individual," which were not there are by construction to be read into the
Act.
According to
the learned Lord Chancellor, it would be possible to go behind the certificate
of incorporation by proceedings in the nature of scire facias by showing that
fraud had been committed upon the officer entrusted with the duty of giving the
certificate. But when once the company was legally incorporated, it should be
treated like any other independent person and the motives of those who took part
in floating the company were quite irrelevant in discussing what those rights
and liabilities are.
We cannot also
see our way to accede to the theory that the Registrar before functioning under
section 33 of the Act should enquire into the circumstances under which the
company was proposed to be formed. In our considered judgment, not only is such
an obligation not laid on him but he would be exceeding his jurisdiction if he
should undertake any such thing. It is not within his duty to call upon the parties
to lead evidence for this purpose.
In this
connection we may advert to the pronouncement of the Judicial Committee in
Moosa Goolam Ariff v. Ebrahim Goolam Ariff (1) (1912) I.L.R. 40 Cal. I. There,
the memorandum of association of a proposed company was signed by two adult
persons and by a guardian of the other five members, who were minors at that
time, the guardian making a separate signature for each of the minors.
Thereupon, the Registrar issued a certificate of incorporation. The question
arose in a suit for certain reliefs whether the company was properly
constituted, the memorandum of association not having been signed by the
required number of subscribers, five of them being minors not competent to
contract. The privy Council, in disagreement with the Chief Court of Lower
Burma, held that the certificate of incorporation was conclusive for all
purposes and not merely a prima facie answer to such an objection and that
courts would not question the validity of the certificate, even assuming that the
condition of registration were not fulfilled.
The same
concept underlines section 35 of the (Indian) Companies Act. This section gives
legislative recognition to the dicta of the judicial Committee in Moosa Goolam
Ariff v. Ebrahim Goolam Ariff (1) (19120 I.L.R. 40 Cal. I extending the
conclusiveness of the certificate to matters precedent and incidental thereto.
Thus position
is firmly established that if a company is born, the only method to get it
extinguished is not not by assailing its incorporation, since courts could not
go behind it, but by resorting to the provisions of enactments which provide
for the winding up of companies. It is essential that the objects of
association should be considered apart from the motives of the conduct of the
individual corporators, that the company is only an artificial creation and
that the distinction should be well marked between its legal entity and its
actions. That being the case the only course open to any one who is aggrieved
by the constitution of a company is to get rid of it by resorting to winding up
proceedings. It is not as if such persons are without remedy.
Ample
provision is made in the Indian Companies Act in this respect in the shape of
sections 234, 235, 237 and 243. The scheme of these provisions is that the
Central Government can suo motu initiate an enquiry into the formation of a
company, cause an investigation to be made into its affairs and if it is not
satisfied apply to the court to wind up the business. Under section 234, even
the Registrar of Companies could, on perusing the documents which a company is
required to submit to him under the Act, call for any information that might be
necessary and bring it to the notice of the Central Government if they reveal
an unsatisfactory state of affairs. It is not necessary for us to examine in
detail the various provisions of these sections in this behalf. So, the workers
and the working journalists could approach the authorities concerned for
redress by invoking these provisions, if the affairs of the company are
conducted to their detriment.
On the
assumption that it is competent for a court to scrutinise the objects of a
company, we will proceed to consider the intent and the purpose of the
formation of the company as both sides have requested us to express our opinion
on this topic. A fraudulent desire to evade responsibility thrown by the
recommendations of the Wages Committee as accepted by the Government by the
creation of a dummy company's is ascribed by the petitioners to the promoters
of Andhra Prabha private Limited, Vijayawada. We are invited to infer such an
intention from two circumstances (i) a going concern, which was worth very much
more than ten lakhs, was sold for only about seven lakhs of rupees which
indicates in the view of the petitioners that it was not financial
consideration that was responsible for the transaction now attacked as
fraudulent but an anxiety to avoid paying the workers according to the wages
structure embodied in the proposals of the Wage Committee, and (ii) that the
Express Newspapers Limited reserved the right of advertisement and that the new
company would have nothing to do with advertisement revenue. According to the
petitioners, this device was adopted with a view to show a reduced income since
the mainstay of any newspaper is advertisement revenue. Without that the
profits of a newspaper industry would be considerably low, which would deprive
the workers and working journalists of a decent bonus.
On the other
hand it is stated for the respondents that the creation of the company in
dispute was quite a bona fide act and that there were very weighty reasons for
its formation with its registered office at Vijayawada. Sri Viswanatha Sastri,
learned counsel for respondents 2 to 4 urges that in starting this company to
publish a Telugu daily and weekly at Vijayawada, the founders were in a way
meeting the past demands of the workers and were also giving effect to the
recommendations of the Press Commission. It is pointed out that the workers and
the working journalists were agitating for the separation of different units
run by Express Newspapers so that the profit or loss of each of the periodicals
might be separately accounted for and that it was their grievance that profits
accruing from some of the prosperous dailies were absorbed by the units which
were run at a great loss. In fact one of the complaints made in the affidavits
itself is that the clubbing together of the several papers was prejudicial to
the interest and prospects of working journalists. Further,. it is said that
the Press Commission itself in paragraph 1207 of its report recommended as
follows :
" We
would like, if it were possible, that every paper should be constituted as
separate unit so that its profits and losses are definitely ascertainable and
both the proprietor and the employees know where they stand. In the case of
multiple editions, each unit should be separated from the others in the matter
of accounts."
It is to carry
out the recommendations of the Press Commission and to modify the agitators in
that behalf that the step now challenged was taken. The further case of the
respondents is that endless trouble was created by the workers and the working
journalists and so it was felt that the Express Newspapers Limited could not
afford to carry on the business of publishing newspapers without incurring
further loss and for that purpose the directors of Express Newspapers Limited
thought of selling their publications to the new company. We are told and it is
not disputed that the machinery that was sold to the new concern was pledged to
the United Commercial Bank and that it was released on payment of 3 lakhs of
rupees by the Andhra Prabha (Private) Ltd. Another reason offered in this
behalf is that after the formation of the State of Andhra Pradesh, Madras was
not the place for the production of a Telugu paper, since only a 1000 copies
out of 55,000 copies of Andhra Prabha were sold in Madras and that Vijayawada
would be a convenience centre for publishing telugu papers as a separate and
distinct unit.
It is said on
behalf of the respondents that the incorporation of the new company is not
calculated in any way to prejudice the interests of the workers and the working
journalists as their conditions of service would be the same in the new concern
and that the place assigned to Andhra Prabha in the classification would not be
disturbed in the new set up also.
Taking up the
first ground of attack, we feel that it is unsubstantial. We cannot appreciate how
such a move on the part of those controlling the destinies of the Express Group
of papers could minimise the responsibility of the establishment to pay higher
wages or adversely affect the position of the workers and the working
journalists. As a result of the under-valuation, the net profits to be earned
by this paper would be considerably swelled for the reason that the interest to
be deducted would be very much less. On this account the under valuation, far
from being harmful to the workers, places them in a position of vantage in
regard to bonus etc., and it is hardly beneficial to the employers.
If really the
persons responsible for the promotion of this company had in contemplation the
enrichment of themselves at the expense of the workers and the working
journalists, they would have inflated the value they have paid to the going
concern, so that a good part of the profits might be consumed by the interest
payable on the capital. For these reasons, we are not persuaded that cheap
price was conceived to defraud the employees of their legitimate claims.
As regards the
reservation of the right of advertisement, it is denied in the
counter-affidavit. It is stated that the right of publication of a paper
carries with it the right of advertisement as being one of the component parts
of the publication of a paper. The rights of printing and publishing the Telugu
daily and weekly were unreservedly sold to Andhra Prabha Private Limited, and
there is no warrant for the complaint that the advertisement rights were not
conveyed to the new company.
Our attention
was also drawn to the agreement dated April 2, 1959, entered into between the
Andhra Prabha Private Limited, and the Express Newspapers Private Limited,
wherein it was stipulated that all the proprietary rights in those papers
together with all pending contracts including rights and obligations under such
contracts with the newspaper selling agents, subscribers to the journals and
advertisers and advertising agencies in the aforesaid journals were conveyed to
the new company. That apart, we are unable to see how Express Newspapers
Limited could keep to themselves this right or what advantage they would gain
by such a step. Surely, unless paid for, advertisements cannot be inserted in
these papers and such revenues as are derived from this source have to be
treated as the income of this unit. It follows that much weight cannot be
attached to these complaints.
Coming now to
the case of the respondents, there is much substance in the first reason. That
there is a recommendation of the Press Commission favouring the constitution of
the Telugu paper as a separate unit is not open to doubt. Next the affidavit as
also the counter-affidavit seem to support the theory that the workers and the
working journalists also were making such a demand.
It is
unnecessary for us to ascertain the truth or otherwise of the other reasons
adduced in support of the formation of the company. But one thing stands out
prominently, namely, that the step now impugned cannot in any way affect the
position of the petitioners in regard to their conditions of service, having
regard to the agreement and the stipulations between the Express Newspapers
Private Ltd. and the Andhra Prabha Private Limited which we have set out in the
above narration. Under those contracts, the new company is under an obligation
to take into their service all the employees connected with these two Telugu
papers on the same conditions of service and without any interruption. The
purchasers were also bound to pay these persons, in the event of retrenchment,
compensation on the basis that their services have been continuous and have not
been interrupted.
It is alleged
in the counter-affidavit and it is not traversed in the reply affidavit that
dues by way of retrenchment compensation, gratuity etc., amounting to Rs.
7,09,480 had been paid to the employees of the Express Group of papers. We
cannot, therefore, understand what grievance the petitioners could have by the
publication of these Telugu papers from Vijayawada. In these circumstances, we
are not convinced that there is much foundation for the complaint that the
founders or the promoters of the company had any evil designs or were actuated
by the fraudulent object of defeating the rights and privileges of the workers
and working journalists connected with these two papers. At any rate, the
objectives attributed, to the promoters are not apparent to us. However, it
does not preclude the petitioners from availing themselves of such remedies as
might be open to them as and when necessity arises. In our opinion, the
petitioners misconceived their remedy in approaching this court.
For the above
reasons, we dismiss these writ petitions with costs of the 2nd respondent in
W.P. No. 616 of 1959. Advocate's fee is fixed at Rs. 250.
Petitions
dismissed.
Section 36
Effect
of memorandum and articles
andhra pradesh
high court
[2004]
55 scl 459 (ap)
HIGH COURT OF ANDHRA PRADESH
Irrigation Development Employees Association
v.
Government of Andhra Pradesh
B. SUDERSHAN
REDDY AND K.C. BHANU, JJ.
W.A.
NOs. 1039 OF 2002 AND 1594 OF 2003
MARCH 16, 2004
Section
291, read with section 36, of the Companies Act, 1956 - Directors-Powers of -
Appellants represented employees working in various categories in A.P. State Irrigation
Development Corporation Ltd. (Corporation) - State Govt. was only stakeholder
in Corporation - In order to improve performance of Corporation, State
Government issued an order to downsize cadre strength - Appellants filed writ
petitions against said order which was dismissed by Single Judge - Whether
since order issued by State Government was as shareholder of Corporation and
not in exercise of its power under article 162 of Constitution, principle of
administrative law could not be applied to test validity of governmental action
- Held, yes - Whether, therefore, impugned order issued by Government and
compliance thereof by board of directors could not be set aside either by
applying doctrine of ultra vires or rule against surrender of discretion and
abdication of duty - Held, yes - Whether to downsize cadre strength, since
Corporation had applied recognized reasonable procedure of ‘last come first go’
in each category of employees, it could not be said to be either irrational or
in violation of articles 14 and 16 of Constitution - Held, yes
Facts
The appellants represented the employees working in various
categories in the A.P. State Irrigation Development Corporation Ltd.
(Corporation). It was one of the State level public enterprises and was wholly
owned by the State Government. The State Government was the only stakeholder in
the Corporation. The Corporation originally had 2541 employees. In order to
initiate necessary corrective measures to improve the performance of the
Corporation, a decision had been taken to downsize the cadre strength. So, the
Corporation, implemented the Voluntary Retirement Scheme. The option was
exercised by 1593 employees, leaving a balance of 948 employees. The
Government, having reviewed the performance of the Corporation again, decided
that the cadre strength should be reduced to 404 employees. Hence, the
Government vide G.O. Ms No. 50 dated 15-11-2001, issued order to that
effect. Against aforesaid order, appellants filed writ petitions which were
dismissed by the Single Judge.
On writ appeal
:
Held
The Corporation was a
Government company registered under the Companies Act, 1956, and had its own
legal entity, distinct and separate from the Government. The management of the
affairs of the company and its day-to-day affairs vested with the board of
management. The board of directors of the Corporation determined the staffing
pattern. The staffing pattern was under continuous review from time-to-time.
The review was based upon the requirement of staff which was need-based to
undertake economically viable projects. The Corporation sought for the
Government’s approval from time-to-time to float Voluntary Retirement Scheme to
discharge surplus manpower. The Corporation itself submitted proposals to
further downsize the cadre strength of the Corporation so as to make the
organization economically viable and also for its survival. At one stage, the
Government had proposed the cadre strength of respondent-Corporation at 281
employees but with the efforts of the management of the Corporation, it was
subsequently increased
to 404 employees. These facts clearly highlighted that the board of directors
of the Corporation was actively involved in the decision-making process and the
proposals at every point of time emanated from the board of the Corporation
itself. [
Even under
article 90 of the articles of association, the Government was entrusted with
powers to approve the staffing pattern, rules for recruitment, promotions, pay
scales, allowances and, other payments, etc. The Government was entitled to
issue such directives or instructions as it thought fit (sic) in regard to
finances and the conduct of the businesses and affairs of the company and all
such directions issued were required to be complied with by the board of directors.
The width and amplitude of the power of the Government under article 90 was
wide enough which included the power to issue directions with regard to
staffing pattern. The power to issue directions or instructions in regard to
the affairs of the company was wide enough to include the power to issue
directions to fix the cadre strength. The contention that under article 90, the
Government was entitled only to approve the proposals regarding staffing
pattern but could not issue directions was totally untenable. [
A reading of
sections 36(1) and 291(1) makes it clear that the board of directors of the
company are also bound to act in accordance with the memorandum and articles.
Therefore, the contention that article 90 contravened section 291 was totally
untenable and unsustainable. [
The public
law remedy available under article 226 of the Constitution of India cannot be
invoked to resolve issues regarding the validity of the articles of association
of a company, or about exercise of powers prescribed therein, since the
articles of association, do not contain the bye-laws of a co-operative society
and do not have the force of law. The doctrine of ultra vires has no
application to test the validity of an action under the memorandum and articles
of association of a company. The articles of association merely govern the
internal management, business or administration of a company. They may be
binding upon the persons affected by them but they do not have the force of
statute. The articles of association of a company incorporated under the Act
have never been held to have the force of law. [
The power
exercised by the Government, in the instant case, was as the shareholder of the
Corporation and not in exercise of its power under article 162 of the
Constitution. In that view of the matter, it would be impermissible to apply
the principles of administrative law in order to test the validity of the
Governmental action in the instant case. Article 14 of the Constitution cannot
be construed as a charter of judicial review of State’s actions and to call
upon the State to account for its action in its manifold activities by stating
reasons for such actions. The principles of administrative law, such as against
surrender of discretion and abdication of duty would apply in case of exercise
of power conferred by a statute or rules made thereunder or instruments, which
are statutory in their nature. The direction issued by the Government in its
capacity as a shareholder that the cadre strength of the Corporation be fixed
at 404 employees and the compliance thereof by the board of directors could not
be set aside either by applying the doctrine of ultra vires or rule against
surrender of discretion and abdication of duty. [
The instant
case was a case where the decision and the reasons for the decision could only
be gathered by looking at the entire course of events stretching over the
period from the initiation of the proposal to reduce the staff as recommended
for restructuring by Committee to the taking of the final decision impugned in
the writ petition. In the instant case, neither a statutory function nor a
statutory provision was involved. Though the issue relating to restructuring
and the decision, bore public character but that could only be settled after
protractive decision, clarification and consultation with all the interested
persons. Therefore, the impugned governmental Order could not be interfered
with by applying the doctrine of ultra vires, the rule against surrender or
abdication of duty. The contention was, accordingly, rejected. [Paras 23 and
24]
Policy decision and abolition of posts
Reduction of
cadre strength had resulted in abolition of posts. Downsizing of the cadre
strength in the Corporations is a part of the restructuring process of State
level public enterprises in order to improve their performance, minimize public
liability and thereby promote and advance public interest. Therefore, the
decision of the Government as well as that of the Corporation was in the nature
of policy decision. [
Policy decision resulting in abolition of certain posts -
Whether suffered from any Constitutional vice
The
respondent-Corporation was an instrumentality of the State within the meaning
of article 12. Its decisions were liable to be tested on the touchstone of
articles 14 and 16, i.e., as to whether the policy decision was taken in
violation of Part-III of the Constitution of India. The High Court is well
within its limits to declare the policy as unconstitutional. But it is clearly
well-settled that the High Court in exercise of the power of jurisdictional
review cannot embark upon an enquiry as to whether a particular policy is vice
or whether a better public policy can be evolved. The wisdom and advisability
of policy decisions, which are not in violation of Part-III of the Constitution
of India, are not amenable to judicial review. [
The right of
the State or of its instrumentality to change its policy decisions from time-to-time
under the changing circumstances cannot be disputed and it is an integral part
of democratic process. The High Court in exercise of its jurisdiction under
article 226 of the Constitution while considering the validity of the
Governmental policy cannot weigh the pros and cons of the policy or scrutinise
it and test the degree of its beneficial or equitable disposition for the
purpose of varying, modifying or annulling it, based on even or sound
reasoning. One of the inputs in formulating and reformulating the Governmental
policies may be availability or lack of resources. Since the purse of the State
is not under the control of the court, it will not transgress into the field of
policy decision. [
The impugned
court order itself provided details of budgetary allocations on the works
allotted to them for the past 60 years. It was estimated on the basis of
previous six years figures that the Corporation would be able to obtain and
execute the works worth only Rs. 65 crores and not beyond that. It was under
those circumstances, that the decision to downsize the cadre strength, to the
level of 404 employees was taken. There had been a drastic reduction in
execution and maintenance of tube-wells and bore-wells by the Corporation. On
account of high interest rates, the Corporation had stopped borrowing loans and
it was now totally dependent on budgetary support from the Government for
finance to execute the sanctioned schemes. Availability of large number of
administrative works on hand was a matter of no consequence. Unless budgetary
allocations were made and budgetary releases were made therefrom, the
sanctioned administration works could not be executed for lack of funds. The
factors that were taken into consideration by the respondents in formulating
policy decision to downsize the cadre strength could not be characterised as
arbitrary. The decision was neither arbitrary nor in violation of Part-III of
the Constitution of India. [
Principles of
Natural
Justice
It is
well-settled that reduction of cadre strength and consequent abolition of posts
are matters of policy and principles of natural justice have no application at
all in such matters of policy. [
Be that as it
may, the decision of the Government as well as the Corporation was not taken
unilaterally without any process of consultation. More than one authority was
involved in the consultation process. The authorities had discussed various
aspects with the Corporation and the service associations separately. The
service associations representing the employees made written representations
requesting not to further downsize the cadre strength. It was not, as if, any
viable alternative proposal emanated from the associations and the same had not
been taken into consideration before formulating the impugned policy decision.
In the circumstances, there was no merit in the submission made by the
appellant that the policy decision was vitiated on account of non-compliance
with the principles of natural justice. [
writ of mandamus -
whether can be issued to compel state to provide more funds by way of
allocations
The
appellants in effect sought the intervention of the High Court to command the
State Legislature to provide more funds by way of budgetary
allocations/releases. [
It is
well-settled that the High Court in exercise of the power under article 226
cannot issue a writ of mandamus to make law. [
It is true
that the Corporation had been established to cater to certain functions of the
State which were in larger public interest as providing irrigation
infrastructural facilities is undoubtedly in larger public interest, but it is
subject to availability of financial resources and the priorities for which the
Legislature, in its wisdom, decides to allocate the funds. It is for the
Government to decide as to how it can utilize the available resources at its
command. The High Court in exercise of its jurisdiction under article 226
cannot compel the State to alter its priorities and utilise the available
resources either for a specified public purpose or vary or modify, the
priorities chosen by the State. [
For the
aforesaid reasons, it was not appropriate to interfere with the well considered
judgment of the Single Judge. [
The
downsizing of the cadre strength that had resulted in abolition of certain
posts did not suffer from any constitutional infirmities. The decision was not
violative of articles 14 and 16. The contentions raised in that regard were,
accordingly, rejected. The impugned order passed by the court was upheld. [
Identification of surplus employees - Whether it suffered
from any arbitrariness?
The impugned order gave the details of employees in
different cadres/categories constituting sanctioned strength of 404 employees
of the Corporation. Other than those cadres/categories, the remaining
cadres/categories had been abolished in their entirety. Therefore, the surplus
employees were required to be identified only from amongst the different
cadres/categories constituting the sanctioned strength of 404 employees. The
Corporation identified surplus employees by applying the general principle of
‘last come, first go in each category’ uniformly. The downsizing of the cadre
strength of Corporation was taken up as a matter of policy by the Government to
ensure the survival of the Corporation. Uniform methodology was adopted in
declaring surplus staff duly taking their date of entry into the cadre. [
Under section 25G of the Industrial Disputes Act, 1947, in
case of retrenchment, the employer is required to ordinarily retrench the
workman who was the last person to be employed in that category. It is true
that section 25G applies only to workmen but the principle ‘last come first go
in each category’ is a recognised reasonable procedure. The application of such
procedure in identifying the surplus employees cannot be said to be either
irrational or in violation of articles 14 and 16 of the Constitution. It was
explained that the emanated objective sought to be achieved under VR Scheme,
notified in the Corporation’s circular was to achieve the optimum level of
manpower in the Corporation with a desirable average age mix so as to cope with
the changing needs of the society and the organisation. It was under those
circumstances that the Corporation considered it appropriate to apply the
principle of ‘last come first go in each category’ to achieve the objective of
having a desirable age mix to cope with the changing needs. There was a
possibility of applying the procedure of ‘step’ down’ canvassed by the
appellants for identifying surplus employees, based on their total length of
service in the Corporation. Even such a procedure could have been a reasonable
procedure and may have satisfied the test laid down under articles 14 and 16.
But unless the Court came to the conclusion that the principle of ‘last come
first go in each category’ applied by the Corporation was arbitrary and in
violation of articles 14 and 16, no directions could be issued directing the
Corporation to adopt the procedure of ‘stepping down’ in substitution of the
adopted procedure. When there were two reasonable modes for identification of
the surplus employees available, the Corporation was entitled to choose one
such reasonable mode and in such a situation, the High Court in exercise of its
jurisdiction under article 226, could not compel the Corporation to adopt the
other mode which in its view may equally be reasonable and efficacious. [
The Corporation did not single out any employee for any
adverse treatment as such. It was not the case of the appellants that the
action of the Corporation in identifying the surplus employees was a colourable
exercise of power. Neither any post was created nor promotions effected with a
view to declare such promoted employees as surplusage. On the other hand, the
Corporation identified nearly 450 employees as surplus by uniformly applying
the principle of ‘last come first go in each category’ except in case of
employees belonging to scheduled castes and scheduled tribes category. [
For the aforesaid reasons, there was no infirmity in the
procedure followed for identification of surplus staff. The methodology adopted
and the procedure advised in that regard was neither arbitrary nor unreasonable
and, therefore, not hit by articles 14 and 16 as ‘last come first go’ is one of
the well-known reasonable rules adopted in cases of retrenchment of employees
consequent upon abolition of posts. [
The appellants further submitted that they were neither put
on notice nor they were given any opportunity of being heard prior to their
being identified as surplus by the Corporation and as such, the entire exercise
of identification was vitiated for the reason of non-compliance with the
principles of natural justice. So far as the employees in the workman category,
who had been identified as surplus and had not taken VR Scheme, were concerned,
they could only be retrenched in accordance with section 25N of the Industrial
Disputes Act, 1947. In that regard, it could be said that the rights of the
employees in the workmen category were so well protected that failure on the
part of the Corporation in giving them an opportunity of being heard at that
stage was of no consequence since they were not being retrenched straightaway
by the Corporation. [
It is well-settled that in all cases of violation of the
principles of natural justice, the court in exercise of its jurisdiction under
article 226, need not necessarily interfere and set at naught the action taken
unless the decision taken has resulted in any prejudice. [
On the facts and in the circumstances, no useful purpose
could have been served by putting the appellants on notice before the actual
identification of the surplusage. No real prejudice had been caused to the appellants
on account of not affording the opportunity to make representation. The
Corporation uniformly applied the rule of ‘last come first go in each category’
in the process of identification of the surplusage. In the circumstances, it
was not possible to interfere with the decision of the Corporation on the
ground of infraction of rule of audi alteram partem. [
In the result, all the writ appeals were dismissed except
with regard to claim of the physically disabled employees in whose case, the High
Court having referred to the Persons with Disabilities (Equal Opportunities,
Protection of Rights and Full Participation) Act, 1995, considered it
appropriate to direct the Corporation to examine the feasibility of applying roster backwards. [
Cases referred to
Co-operative Central Bank Ltd. v.
Additional Industrial Tribunal AIR 1970 SC 245 (para 20), LIC of India v.
Escorts Ltd. AIR 1986 SC 1370 (para 21), Rakesh Ranjan Verma v. State of Bihar
AIR 1992 SC 1348 (Para 25), Poddar Projects Ltd. v. A.P.S.E. Board AIR 1982 AP
189 (para 26), Balco Employees’ Union (Registered) v. Union of India [2002] (2)
SCC 333/2002 AIR SC 350 (para 29), State of Punjab v. Ram Lubhaya Bagga AIR
1998 SC 1703 (para 30), Narmada Bachao Andolan v. Union of India AIR 2000 SC
3751/(10) SCC 664 (para 30), Union of India v. Tejram Parashramji Bombhate AIR
1992 SC 570 (para 30), M. Ramnatha Pillai v. State of Kerala AIR 1973 SC 2641
(para 33), State of Himachal Pradesh v. Umed Ram Sharma AIR 1986 SC 847 (para
46), Managing Director Uttar Pradesh Warehousing Corpn. v. Vinay Narayan
Vajpayee AIR 1980 SC 840 (para 61), A.L. Kalra v. Project & Equipment
Corpn. of India Ltd. AIR 1984 SC 1361 (para 61), Suraj Prakash Bhandari v.
Union of India AIR 1986 SC 958 (para 65), State of Haryana v. Des Raj Sangar
AIR 1976 SC 1199 (para 65), Haryana Financial Corpn. v. Jagadamba Oil Mills
2002 AIR SC 834/[2002] (3) SCC 496 (para 66), Ashwani Kumar Singh v. U.P.
Public Service Commission 2003 AIR SC 2661 (para 66), State of Orissa v.
Sudansu Sekhar Misra AIR 1968 SC 647 (para 67), A.K. Kraipak v. Union of India
AIR 1970 SC 150 (para 75), Central Inland Water Transport Corpn. v. Brojo Nath
Ganguly AIR 1986 SC 1571 (para 75), Delhi Transport Corpn. v. D.T.C. Mazdoor
Congress AIR 1991 SC 101 (para 75), M.C. Mehta v. Union of India AIR 1999 SC
2583 (para 84), Aligarh Muslim University v. Mansoor Ali Khan AIR 2000 SC 2783
(para 85), State of Karnataka v. Mangalore University Non-Teaching Employees’
Association [2002] (3) SCC 302/2002 AIR SC 1223 (para 86), G. Govinda Rajulu v.
Andhra Pradesh State Construction Corpn. Ltd. AIR 1987 SC 1801 (para 90),
Management of Dandakaranya Project v. Workmen through Rehabilitation Employees
Union AIR 1997 SC 852 (para 92), Ajit Singh v. State of
Vedula
Venkataramana, Nuty Ram Mohan Rao, A. Suryanarayana Murthy, S. Laxma Reddy,
V.R.S. Anjaneyalu and J. Ramachandra Rao for the Appellant. Ramesh
Ranganathan for the Respondent.
Judgment
B. Sudershan Reddy. J. - Since in all these writ
appeals and writ petitions the subject-matter and the questions that arise for
consideration are inter-related, they may be disposed of by this common
judgment.
W.A. No. 1039
of 2002
2. The unsuccessful writ
petitioners are the appellants in this writ appeal preferred against the order
passed in W.P. No. 24647 of 2001 dated June 4, 2002 holding that G.O. Ms. No.
50, Public Enterprises (II) Department, dated November 15, 2001, does not
suffer from any illegality or legal infirmity.
3. The appellants herein
filed the writ petition invoking the extraordinary jurisdiction of this Court
under Article 226 of the Constitution of India, with a prayer to issue a writ
in the nature of mandamus declaring G.O. Ms. No. 50, Public Enterprises (II)
Department, dated November 15, 2001, as illegal and void.
4. The appellants
represent the employees working in various categories in the A.P. State
Irrigation Development Corporation Limited (for short ‘the Corporation’). The
Corporation is one of the State Level Public Enterprises and it is a wholly
owned A.P. Government Company, registered under the provisions of the Companies
Act, 1956. The primary objects of the Corporation are to survey, investigate,
construct, execute and carry out schemes and works of all kinds for the
exploitation of irrigation potential in the State and for maximum utilisation
of available water resources, to create irrigation facilities to the upland
areas through lift irrigation and ground water schemes. The paid up share
capital of the Corporation was at Rs. 117.22 crores as on March 31, 2001. The
company is being managed by its Board of Directors. That almost all the shares
are held by the State Government except Rs. 95,00,000 of share money held by
the Government of India. The State Government is the only stakeholder in the
company. Article 90 of the Articles of Association of the Company enables the
Government to issue directions and instructions from time to time. Article 90
reads thus:
“Notwithstanding anything contained in any of
these articles, the Government may from time to time issue such directives or
instructions as they may think fit in regard to the finances and the conduct of
the business any affairs of the Company and the Directors shall duly comply
with and give effect to such Directives or instructions.
In particular the Government will have the
following powers. To call any information, approve plans, Budgets, foreign
collaborations, new business and activity, new projects over and above the
limits specified by the Government. Further the following powers/acts are
vested only in the Government to approve the staffing pattern, rules for
recruitment, promotions, pay scales, allowances and all other payments.”
5. The Government of Andhra
Pradesh having decided to review the performance of State Level Public
Enterprises and in order to initiate necessary corrective measures to improve
their performance in the light of the changed policy perspectives constituted a
Committee with Sri K. Subrahmanyam, IAS (Retired), as Chairman. The Committee
examined the details of the working of State Level Public Enterprises including
the working of the 3rd respondent Corporation and submitted its
recommendations. The Government constituted a Cabinet Sub-Committee to examine
in detail the recommendations of the Committee after duly obtaining the views
of the administrative departments concerned. The Cabinet Sub-Committee having
considered the issue made its own recommendations in respect of the 3rd respondent
Corporation. The full details thereof are not required to be noticed.
6. The Corporation
originally had 2541 employees. In the light of the recommendations of the
Subrahmanyam Committee and in order to implement the recommendations of the
Subrahmanyam Committee, a decision has been taken to downsize the cadre
strength. The Corporation has implemented Voluntary Retirement Scheme (for
short ‘VR Scheme’) in three phases, the options for which were exercised by
1593 employees, leaving a balance of 948 employees working in the Corporation.
7. The Government once
again reviewed the performance of the 3rd respondent Corporation in August,
1999. It was found that there is a need to study the staff strength with
reference to the changed organization structure consequent on implementation of
VR Scheme. The Transaction and Financial Adviser, Implementation Secretariat of
the Public Enterprises Department, conducted the study, submitted a report and
recommended that the cadre strength of the 3rd respondent-Corporation should be
fixed at 404 employees. The matter was placed before the Cabinet sub-Committee
on Public Sector Undertakings and the Cabinet Sub-Committee in its meeting held
on September 22, 2001, having considered the manpower study of the Corporation concurred
with the recommendation that the cadre strength of the respondent-corporation
ought to be fixed as 404 employees. Based on the recommendations of the Cabinet
Sub-Committee, the Government vide G.O. Ms. No. 50 dated November 15, 2001
determined and accordingly ordered the cadre strength of the Corporation as 404
employees as detailed in the annexure appended to the said G.O. The appellants
challenged the same in the writ petition unsuccessfully.
8. Sri V. Venkataramana,
learned counsel, appearing on behalf of the appellants inter alia contended
that the Government of Andhra Pradesh has no power or authority to issue the
impugned G.O. downsizing the cadre strength to the level of 404 employees. The
decision, if any, in this regard, if at all, could have been taken only by
Corporation. The Corporation on being a juristic person is entitled to fix the
cadre strength of the staff and staffing pattern. Being the employer, such
decision to be taken is in the exclusive domain of the Corporation. Article 90
of the Memorandum of Articles of Association does not empower the Government to
issue any such directions downsizing the cadre strength of the staff in the
Corporation. The decision of the Government amounts to interference in the
affairs of the Corporation. The learned counsel alternatively contended that
there is no valid and tangible material available on record in support of the
decision taken by the Government. No relevant factors went into consideration
and therefore, the decision making process is vitiated. The learned counsel
proceeded to contend that even if the decision of the Government is to be
recorded, as a policy decision, the same is liable to be tested on the
touchstone of Article 14 of the Constitution of India. A decision based on
irrelevant consideration is an arbitrary decision and liable to be struck down
as violative of Article 14 of the Constitution of India.
9. Sri Ramesh Ranganathan,
learned Additional Advocate-General, contended that reduction of cadre strength
and consequent abolition of posts are matters of policy and the High Court in
exercise of the power of judicial review cannot embark upon an enquiry as to
whether the particular policy is wise or whether a public policy can be
evolved, unless such policy decisions violate Articles 14 and 16 of the
Constitution of India. The learned Additional Advocate-General contended that
the reasons are clearly and specifically stated and are evident from the
impugned G.O. itself. That on account of the accumulative loss, there was no other
option except to downsize the cadre strength of the staff. The power exercised
by the Government under Article 90 of the Memorandum of Articles of
Association, is as the shareholder of the Corporation and not in exercise of
its executive power under Article 162 of the Constitution of India. Article 90
of the Memorandum of Articles of Association of the Corporation empowers the
Government to approve the staffing pattern of the Corporation. In any event,
the proposals for downsizing of the cadre strength emanated from the
Corporation itself and the Corporation and members of the appellants’
association were actively involved before the impugned G.O. was issued.
10. We have elaborately
heard the learned counsel appearing on behalf of the appellants as well as the
learned Additional Advocate-General representing the State as well as the
Corporation. We have given our earnest and anxious consideration to the rival
submissions made during the course of hearing of this batch of appeals.
11. In order to consider the
submissions, it is just and necessary to notice a few facts about which there
is no dispute.
12. The impugned G.O. dated
November 15, 2001 itself reveals that the Corporation has been incurring losses
continuously over the years and that the accumulated loss as on March 31, 2001
stood at Rs. 27 crores, as on March 31, 2002 it was Rs. 38 crores and as on
March 31, 2003 it was Rs. 42.62 crores.
13. The accumulated losses
of the Corporation are on account of several factors and it would not be
possible for this Court to make a detailed enquiry notwithstanding the several
accusations made by the appellants against the respondent-Corporation holding
it exclusively responsible for the losses incurred by the Corporation. Each
blamed the other.
14. There does not appear to
be much dispute that the Corporation used to execute its schemes with the
financial assistance provided by the Government of A.P. and institutional
finance at a debt equity ratio of 1:3. The Government of Andhra Pradesh used to
release the share capital every year and in addition thereto, the Corporation
used to borrow loans from Nationalised Banks to meet its financial
requirements. The NABARD refinanced the said loans borrowed by the Corporation
from the commercial banks. The refinance facility by NABARD was stopped during
1988 and thereafter, the Corporation had to borrow loans directly from the
commercial banks at RBI specified interest rates. Due to high incidence of
interest, the 3rd respondent stopped borrowing loans and started exclusively
depending on the Government and District Agencies for funds to execute its
schemes. The fact remains that the Corporation, now is, totally dependent on
budgetary support from the Government for finance to execute the sanctioned
schemes. The details of the budget releases based on the works allotted by the
Government to the Corporation during the past three years are evident from the
impugned G.O. itself.
15. There is also no dispute
that the Corporation earlier used to execute and maintain lift irrigation
schemes, bore-wells and tube-wells. After closure of the A.P. Wells Scheme,
funded by Netherlands, there has been a drastic reduction in execution and
maintenance of bore-wells and tube-wells by the Corporation. In the meanwhile,
the maintenance work of lift irrigation schemes was also handed over to
beneficiary committees viz., Associations of Ayacutdars. The Corporation, as of
now, executes only lift irrigation schemes through different agencies and earns
centage charges of 15% on the works so executed.
16. In the light of background facts, we now proceed to consider
the submissions made before us.
Whether the Government has no power or authority to issue the impugned
G.O.?
17. There cannot be any
dispute that the Corporation, a Government company registered under the
Companies Act, 1956, has its own legal entity, distinct and separate from the
Government. The management of the affairs of the company and its day-to-day
affairs vest with the Board of Management. The Board of Directors of the
Corporation determined staffing pattern at their 43rd meeting held on September
29, 1990. The staffing pattern was under continuous review from time to time.
The review was based upon the requirement of staff to be need based to
undertake economically viable projects. The Corporation sought for the
Government’s approval, from time to time to float V.R. Scheme to discharge
surplus manpower. The Corporation itself submitted proposals on January 6, 1991
to further downsize the cadre strength of the Corporation so as to make the
organisation economically viable and also for its survival. At one stage, the
Government has proposed the cadre strength of respondent-Corporation at 281
employees and with the efforts of the management of the Corporation, it was
subsequently increased to 404 employees. We have adverted to these facts in
order to highlight that the Board of Directors of the Corporation are actively
involved in the decision-making process and the proposals at every point of
time emanated from the Board of the Corporation itself.
18. That even under Article
90 of the Memorandum of Articles of Association, the Government is entrusted
with powers to approve the staffing pattern, rules for recruitment, promotions,
pay scales, allowances and other payments etc. The Government is entitled to
issue such directives or instructions as it may think fit (sic) in regard to
finances and the conduct of the businesses and affairs of the company and all
such directions issued are required to be complied with by the Board of
Directors. The width and amplitude of the power of the Government under Article
90 of the Memorandum of Articles of Association is wide enough which includes
the power to issue directions with regard to staffing pattern. The power to
issue directions or instructions in regard to the affairs of the company is
wide enough to include the power to issue directions to fix the cadre strength.
The contention that under Article 90 of the Memorandum of Articles of Association,
the Government is entitled only to approve the proposals regarding staffing
pattern itself but cannot issue directions is totally untenable. The general
powers of the Board of Directors of a company under section 29(1) of the
Companies Act, 1956, are subject to the provisions of the Act.
19. Section 36(1) of the
Companies Act provides that the memorandum and articles shall, when registered,
bind the company and the members thereof to the same extent as if they
respectively had been signed by the company and by each member, and contained
covenants on its and his part to observe all the provisions of the memorandum
and of the articles. A reading of sections 36(1) and 291(1) of the Companies
Act, makes it clear that the Board of Directors of a Company are also bound to
act in accordance with the memorandum and articles. Therefore, the contention
that Article 90 of the Articles of Association contravenes section 291 of the
Companies Act is totally untenable and unsustainable.
20. Be it as it may, the public
law remedy available under Article 226 of the Constitution of India cannot be
invoked to resolve the issues regarding the validity of the Articles of
Association of a Company, or exercise of powers prescribed therein, since the
Articles of Association, lacks the bye-laws of a Co-operative Society and do
not have the force of law. The doctrine of ultra vires has no application to
test the validity of an action under the Memorandum and Articles of Association
of a company. The Articles of Association merely govern the internal
management, business or administration of a company. They may be binding
between the persons affected by them but they do not have the force of statute.
The Articles of Association of a company incorporated under the Companies Act have
never been held to have the force of law. (See: Co-operative Central Bank Ltd.
v. Additional Industrial Tribunal AIR 1970 SC 245).
21. The power exercised by
the Government in the instant case is as the shareholder of the Corporation and
not in exercise of its power under Article 162 of the Constitution of India. In
that view of the matter, it would be impermissible to apply the principles of
Administrative Law in order to test the validity of the Governmental action in
the instant case. Article 14 of the Constitution of India cannot be construed
as a charter of judicial review of State actions and to call upon the State of
account for its action in its manifold activities by stating reasons for the
actions (See: L.I.C. of India v. Escorts Ltd. AIR 1986 SC 1370). The principles
of Administrative law, such as against surrender of discretion and abdication
of duty would apply in case of exercise of power conferred by a statute or
rules made thereunder or instruments, which are statutory in their nature. The
direction issued, if any, by the Government in its capacity as a shareholder
that the cadre strength of the Corporation to be fixed at 404 employees and the
compliance thereof by the Board of Directors cannot be set aside either by
applying the Doctrine of ultra vires or rule against surrender of discretion
and abdication of duty.
22. This debate need not
detain us any further, since there is enough material available on record
revealing that the proposals emanated from the Board of Directors from time to
time to downsize the cadre strength of the Corporation and the Government
expressing its approval in exercise of its function under Article 90 of the
Memorandum of Articles of Association. The continuous interaction between the
Board of Directors of the Corporation and the Government is evident from the
record. That apart, the Board of Directors of the Corporation in its 132nd
Board meeting held on December 3, 2001 resolved to adopt the impugned G.O. The
Board also resolve to address the Government and seek permission to float VR
Scheme and also to request the Government or provide necessary advances before
floating VR Scheme to call back all its employees on deputation and
extraordinary leave.
23. This is a case where the
decision and the reasons for the decision can only be gathered by looking at
the entire course of events stretching over the period from the initiation of
the proposal to reduce the staff as recommended for restructuring by
Subrahmanyam Committee to the taking of the final decision impugned in the writ
petition. The case on hand is the one where neither a statutory function nor a
statutory provision is involved. The issue relating to restructuring and the
decision, no doubt, bears public character but which can only be settled after
protractive decision, clarification and consultation with all interested
persons.
24. Therefore, we are not
inclined to interfere with the impugned G.O. by applying the Doctrine of ultra
vires nor applying the rule against surrender or abdication of duty. The
contention is accordingly rejected.
25. The decision in Rakesh
Ranjan Verma v. State or Bihar, AIR 1992 SC 1348 upon which reliance has been
placed by the learned counsel for the appellants in support of the contention
that the Government could give direction only on policy matters and not on
day-to-day matters of administration such as determination of cadre strength,
in our considered opinion, is not applicable to the fact situation on hand. In
Rakesh Ranjan Verma’s case (supra), the provisions of section 78-A of the
Electricity (Supply) Act fell for interpretation. Section 78-A provides that in
discharge of its functions, the Electricity Board shall be guided by such
directions on questions of policy as may be issued by the Government from time
to time. Article 90 of the Articles of Association of the Corporation, which
empowers the Government of approve the staffing pattern of the Corporation, is
much wider in its scope and amplitude. We have already dealt with the same. Rakesh
Ranjan Verma’s case (supra) has no application to the case on hand.
26. Similarly, the decision of this Court in Poddar Projects Ltd.
v. A.P.S.E. Board AIR 1982 AP 189, has also no application to the instant case
in which it was held that the directions issued by the State Government under
section 78-A of the Electricity (Supply) Act, are not intended to regulate the
contractual relationship between the Electricity Board and the consumers of
electric energy supplied by it. The State Government is empowered only to give
directions on questions of policy in general and not in relation to any
particular consumer.
Policy decision and abolition of posts:
27. It is required to
appreciate that reduction of cadre strength had consequently resulted in
abolition of posts. We have already noticed that downsizing of the cadre
strength in the Corporation is a part of the restructuring process of State
Level Public enterprises in order to improve their performance, minimize public
liability and thereby promote and advance public interest. There cannot be any
difficulty to hold that the decision of the Government as well as the
Corporation is in the nature of policy decision. The policy decision is
traceable to the action plan of public enterprises reforms under the A.P.
Economic Reforms Project.
28. The question that falls
for consideration is whether the policy decision resulting in abolition of
certain posts suffered from any constitutional vice?
29. The respondent
Corporation is an instrumentality of the State within the meaning of Article 12
of the Constitution of India. Its decisions are liable to be tested on the
touchstone of Articles 14 and 16 of the Constitution of India i.e., the policy
decision taken in violation of Part-III of the Constitution of India. This
court will be well within its limits to declare the policy as unconstitutional.
But it is clearly well settled that this Court in exercise of the power of
jurisdictional review cannot embark upon an enquiry as to whether a particular
policy is vice or whether a better public policy can be evolved. The wisdom and
advisability of policy decisions, which are not in violation of Part-III of the
Constitution of India are not amenable to judicial review. In Balco Employees’
Union (Registered) v. Union of India [2002] (2) SCC 333 : the Supreme Court
observed:
“91. In a democracy, it is the prerogative of
each elected Government to follow its own policy. Often a change in Government
may result in the shift in focus or change in economic policies. Any such
change may result in adversely affecting some vested interests. Unless any
illegality is committed in the execution of the policy or the same is contrary
to law or mala fide, a decision bringing about change cannot per se be
interfered with by the Court.”
30. The right of the State
or of its instrumentality to change its policy decisions from time to time
under the changing circumstances cannot be disputed and it is an integral part
of democratic process. This Court in exercise of its jurisdiction under Article
226 of the Constitution of India, while considering the validity of the
Governmental policy cannot weigh the pros and cons of the policy or to
scrutinise it and test the degree of its beneficial or equitable disposition
for the purpose of varying, modifying or annulling it, based on even sound
reasoning. One of the inputs in formulating and reformulating the Governmental
policies may be availability or lack of resources. Since the purse of the State
is not under the control of the Court, it will not transgress into the field of
policy decision. It would be unnecessary to burden this judgment with various
authoritative pronouncements of the Supreme Court delineating the parameters of
judicial review in evaluating the policy decisions of the Government. (See: State
of Punjab v. Ram Lubhaya Bagga AIR 1998 SC 1703: 1998 (4) SCC 117, Narmada
Bachao Andolan v. Union of India AIR 2000 SC 3751 : 2000 (10) SCC 664 and Union
of India v. Tejram Parashramji Bombhate AIR 1992 SC 570 : 1991 (3) SCC 11.
31. We have noticed the
sequence of events ultimately that lead to the impugned decision of the
Government as well as the Corporation. The impugned G.O. itself provides
details of budgetary allocations on the works allotted to them, for the past 60
years. It was estimated, on the basis of previous six years figures that the
Corporation would be able to obtain and execute the works worth only Rs. 65
crores and not beyond that. It was under those circumstances, the decision to
downsize the cadre strength, for the break even point of execution of works of
Rs. 65 crores at the level of 404 employees was fixed. It is to be noted that
there has been a drastic reduction in execution and maintenance of tube-wells
and bore-wells by the Corporation. That on account of high interest rates, the
Corporation stopped borrowing loans and it is now totally depending on
budgetary support from the Government for finance to execute the sanctioned
schemes. That availability of large number of administrative works on hand is a
matter of no consequence. Unless budgetary allocations are made and budgetary
releases made therefrom and in the absence of budgetary release the sanctioned
administration works cannot be executed for lack of funds. These factors that
were taken into consideration by the respondents in formulating its policy
decision to downsize the cadre strength cannot be characterised as arbitrary.
The decision is neither arbitrary nor in violation of Part-III of the
Constitution of India, notwithstanding our reservations about the policy, we
cannot interfere with the same.
Principles of Natural Justice
32. It is very well settled
that reduction of cadre strength and consequent abolition of posts are matters
of policy and principles of natural justice have no application at all in such
matters of policy.
33. In
M. Ramnatha Pillai v. State of Kerala AIR 1973 SC 2641, the Supreme Court
observed:
“The power to create or abolish a post is not
related to the Doctrine of Pleasure. It is a matter of Government policy
whether (sic) sovereign Government has this power in the interest and necessity
of internal administration. The creation of abolition of post is dictated by
policy decision, exigencies of circumstances and administrative necessity. The
creation, the continuance and the abolition of post are all decided by the
Government in the interest of administration and general public......the
abolition of post may have the consequence of termination of service of a
Government Servant. Such termination is not dismissal or removal within the
meaning of article 311 of the Constitution of India. The opportunity of showing
cause against the proposed penalty of dismissal or removal does not therefore
arise in the case of abolition of post. The abolition of post is not a personal
penalty against the Government Servant.”
34. In
Balco Employees Union (supra), the Supreme Court observed :
“47. . . .Even though the workers may have
interest in the manner in which the company is conducting its business,
inasmuch as its policy decision may have an impact on the workers rights,
nevertheless it is an incidence of service for an employee to accept a decision
of the employer which has been honestly taken and which is not contrary to law.
Even a Government servant, having the protection of not only Articles 14 and 16
of the Constitution but also of Article 311, has no absolute right to remain in
service. For example, apart from cases of disciplinary action, the services of
Government servants can be terminated if posts are abolished. If such employee
cannot make a grievance based on Part III of the Constitution or Article 311
then it cannot stand to reason that like the petitioners, non-Government
employees working in a company which by reason of judicial pronouncement may be
regarded as a State for the purpose of Part III of the Constitution, can claim
a superior or a better right than a Government servant and impugn its change of
status. In taking of a policy decision in economic matters at length, the
principles of natural justice have no role to play. While it is expected of a
responsible employer to take all aspects into consideration including welfare
of the labour before taking any policy decision that, by itself will not
entitle the employees to demand a right of hearing or consultation prior to the
taking of the decision.” [Emphasis supplied]
35. The
principle is so well settled and bears no repetition.
36. Be that as it may, the
decision of the Government as well as the Corporation was not taken unilaterally
without any process of consultation. More than one authority is involved in the
consultation process. The authorities have discussed various aspects with the
Corporation and the service associations separately. The service associations
representing the employees made written representations requesting not to
further downsize the cadre strength. It is not, as if, any viable alternative
proposals emanated from the associations and the same has not been taken into
consideration before formulating the impugned policy decision. In the
circumstances, we find no merit in the submission made by the learned counsel
that the policy decision is vitiated on account of non-compliance with the
principles of natural justice.
Review of policy from time to time :
37. Sri S. Ramachander Rao,
learned senior counsel invited our attention to the statements made in the
earlier Governmental orders regarding the finality of VR Scheme and contended
that having made such a statement as to the finality of VR Scheme, it was not
open to the Government to review its earlier policy and once again downsize the
sanctioned cadre strength further.
38. We find no merit in the
submission. Such statements made in the G.Os. or before the Commissioner of
Labour would not disentitle the Govenrment and the Corporation from reviewing
their earlier policy. The policy decisions are not static and they keep on
evolving from time to time depending upon the exigencies of the situation. The
reasons are clearly evident from the impugned G.O. itself as to what are those
circumstances that necessitated the Government to review its earlier policy and
further downsize the sanctioned strength of the employees of the Corporation.
We have already adverted to each one of those reasons stated and it is unnecessary
to reiterate the same.
39. Reliance also has been
placed on letters addressed by the Chairman of the Corporation to the
Honourable Chief Minister in October, 2003, subsequent to the impugned judgment
on June 4, 2002 and June 25, 2003 in support of the contention that on account
of the availability of the work and administrative sanction, there is a need of
increasing the cadre strength above 404 employees. We cannot place any reliance
upon the letters stated to have been addressed by the Chairman of the
Corporation to the Honourable Chief Minister.
40. It is evident from the
averments made in the counter-affidvait that even after the impugned G.O. was
issued, the actual budgetary allocations and budgetary releases for subsequent
years show that the budgetary releases are far less than the breakeven point of
Rs. 65 crores, and Corporation is not able to earn sufficient centage charges
ot meet its establishment costs even at the downsize cadre strength of 404
employees.
41. After the impugned G.O. dated
November 15, 2001 was issued, the actual budgetary allocations and budgetary
releases for subsequent releases are as under:
|
S. No. |
Year |
Budget |
|
|
|
Releases/Allotted |
|
|
|
(Rs. in crores) |
|
1. |
2001-02 |
51.08/70.82 |
|
2. |
2002-03 |
23.25/32.10 |
|
3. |
2003-04 |
35.62/52.550 |
|
|
(Upto end of February 2004) |
|
42. For the aforesaid
reasons, we do not find any merit in the contentions advanced by the learned
counsel.
43. We also do not find any merit
in the contention that relevant factors have not been taken into consideration
while formulating the policy to downsize the cadre strength. The averments made
in the counter-affidavit filed by the State as well as the Corporation clearly
reveal that relevant factors alone have been taken into consideration. The
availability of work and the administrative sanction according to the learned
counsel for the appellants are two important factors that were never taken into
consideration by the respondents in formulating their policy to downsize the
cadre strength. It needs no repetion that availability of work and
administrative sanction for those works is of no consequence unless budgetary
allocations are made and budgetary releases made therefrom. The said sanctioned
works cannot be executed for lack of funds. We cannot ignore the fact that the
Corporation having stopped borrowing loans is now totally depending on
budgetary support from the Government for finance to execute the sanctioned
schemes.
Whether a writ
of mandamus lies compelling the state to provide more funds by way of
allocations?
44. The appellants in effect
seek the intervention of this Court to command the State Legislature to provide
more funds by way of budgetary allocations/releases. Under Article 203(2) of
the Constitution of India, estimates are required to be submitted in the form
of demands for grants in the Legislative Assembly, which has the power to
assent, or to refuse to assent to any such demand. That after grants under
Article 203 of the Constitution of India have been made by the Assembly, a Bill
is required to be introduced in the Legislative Assembly under Article 204(1)
of the Constitution of India, to provide for appropriation out of the
Consolidated Fund of the State and on the said Bill being passed it becomes the
“Appropriation Act”. Article 204(3) of the Constitution of India prohibits
withdrawal of money from the Consolidated Fund of the State except under appropriation
made by law passed in accordance with the provisions of Article 204. Thus
budgetary allocation, made under the Appropriation Act, is law made by the
State Legislature and cannot be deviated from. The budgetary releases from out
of the allocations made under the Appropriate Act are once again dependent on
several factors, such as, actual receipt of estimated revenue, expenditure
required to be incurred for certain unforeseen contingencies etc. These are
also once again placed for approval of the Legislature and on being passed
becomes law as “Appropriation Act-II”. Thus, both the budgetary allocations and
budgetary releases are in effect to the laws made by the State Legislature.
45. It is very well settled
that this Court in exercise of the power under Article 226 of the Constitution
of India, cannot issue a writ of mandamus to make law.
46. In State of Himachal
Pradesh v. Umed Ram Sharma AIR 1986 SC 847 : 1986 (2) SCC 68, the Supreme
Court held:
“.... that total sanction of bill for a project
is within the domain of the Legislature and the executive has no power to
exceed the total sanction without the consent or assent of the Legislature and
the Court cannot impinge upon that field of Legislature. The executive,
however, on the appreciation of the priorities can determine the manner of
priorities to be presented to the Legislature. The Court cannot also, in our
opinion, impinge upon the judgment of the executives as
to the priorities. [Emphasis supplied].”
47. Sri Nuty Ram Mohan Rao,
learned counsel for the appellants, contended that the issues that arise for
consideration in this case are not to be looked from the angle of profit and
loss incurred by the Corporation while discharging its functions conferred in
public interest. Public interest is the paramount consideration and the
activity of providing irrigation infrastructural facilities undertaken by the
Corporation must be allowed to carry on for which purposes the State is bound
to provide adequate resources. The contention was, if, those activities earlier
undertaken by the Corporation are allowed to go on, there would not be any need
to downsize the cadre strength. We find it difficult to accept the submissions
made by the learned counsel for the appellant. It is true, the Corporation has
been established to cater to certain functions of the State which are in larger
public interest as providing irrigation infrastructural facilities is
undoubtedly in larger public interest but it is subject to availability of
financial resources and the priorities in which the Legislature, in its wisdom,
decides to allocate the funds. It is for the Government to decide as to how
best it has to utilise the available resources at its command. We in exercise
of our jurisdiction under Article 226 of the Constitution of India, cannot
compel the State of alter its priorities and utilise the available resources
either for a specified public purpose or vary or modify, the priorities chosen
by the State. The argument is attractive but does not stand scrutiny.
48. For the aforesaid
reasons we are not persuaded to interfere with the well considered judgment, of
the learned single Judge.
49. The downsizing of the
cadre strength that had resulted in abolition of certain posts does not suffer
from any constitutional infirmities. The decision is not violative of Articles
14 and 16 of the Constitution of India. We accordingly reject the contentions
raised in this regard. G.O. Ms. No. 50, dated November 15, 2001 is accordingly
upheld.
Writ Appeal No. 1594 of 2003 and Batch
50. In this batch of cases,
the appellants challenge the action of the Corporation in identifying surplus
employees and calling upon those identified surplus employees to exercise their
option for V.R. Scheme. The circular dated September 7, 2002 and the notice dated
September 7, 2002 issued by the Corporation are impugned on various grounds.
Both the proceedings have been issued consequent upon the Government Orders
vide G.O. Ms. No. 50 dated November 15, 2001 fixing the cadre strength of the
Corporation at 404 employees. Be it noted that the said G.O. having been
adopted by the Corporation decided itself to implement the same. That after the
Govenrment accorded approval to float the V.R. Scheme to discharge the
manpower, the entire matter has been placed once again before the Board on its
138th meeting held on September 8, 2002 and the Board has decided to float
cadre-based V.R. Scheme to surplus identified employees. The Scheme is known as
“APSIDC Employees Voluntary Retirement Scheme-2002, Phase-V.d” for identified
surplus employees. As it evident from the impugned circular dated September 7,
2002 the objective of the scheme is:
(a) to improve the
performance of the Corporation,
(b) to achieve the optimum level of
manpower in the Corporation with the desirable average age mix so as to cope up
with the changing needs of the society and the organisation,
(c) to provide for necessary adjustment
in the manpower through redeployment so that over all levels of skills and
productivity are improved,
(d) to compensate such manpower as may
be rendered surplus in restructuring or other exercise taken up by the
organisation.
51. The Scheme came into
force from September 9, 2002 and the applications received on or after the said
date but on or before September 30, 2002 alone were to be considered for the
financial package notified.
52. On the same day, the
Corporation issued notice dated September 7, 2002 to all of those employees who
have become surplus duly informing them that they were entitled to avail the
V.R. Scheme opportunity as per the scheme notified from September 9, 2002 to
September 30, 2002 with a cut-off date as October 31, 2002. They were put on
further notice that in case one does not wish to avail the opportunity, the
Corporation will be constrained to take necessary steps to discharge the
surplus employees in accordance with the regulations in force. These
proceedings were impugned in the writ petitions.
Gist of submissions:
53. The main contention
advanced by the learned counsel appearing on behalf of the appellants relates
to the identification of the appellants as surplus staff.
54. Sri A. Suryanarayana
Murthy, learned counsel appearing on behalf of some of the appellants lead the batch
and made elaborate submissions attacking the impugned decision of the
Corporation. He contended that the procedure adopted for identification of the
appellants as surplus is totally arbitrary and unreasonable as no discernible
criteria has been adopted by the Corporation in this regard. The unilateral
decision of the Corporation without any prior notice and hearing to the
affected employees is liable to be set aside. The learned counsel further
contended that the identification of surplus staff must be based on the
principle of “stepping down”. If such principle is applied, the employee who
ranks last in the cadre in which he is presently working, will become the
senior most in the cadre to which he will be rolled down and thus the
Corporation would be in a position to retain senior employees with rich
experience. The learned counsel further contended that there is no rationale
behind the classification of the employees into surplus and non-surplus and
therefore the classification is not a valid classification. The learned counsel
further submitted that the Corporation ought to have first invited such of
those employees of the work charged establishment, who continued to work in the
provincial establishment, as surplus.
55. Sri Nuty Ram Mohan Rao,
learned counsel submitted that the identification of the appellants as surplus
is unscientific since it is not based on any material except the report of the
one-man committee. He reiterated the submission made by Sri A. Suryanarayana
Murthy that the Corporation ought to have applied the principle of “roll back”
or “stepping down”. Had the Corporation followed such rule, the appellants
would not have been identified as surplus. The learned counsel further
contended that the Corporation should have applied the reservation roster in
the reverse order for identification of surplus employees.
56. Sri. S. Laxma Reddy,
learned counsel for the appellants contended that the right to life includes
right to livelihood. The Corporation instead of identifying the appellants as
surplus ought to have exploited alternative avenues for making the Corporation
viable in order to retain the employees who are now found surplus. The action
of the Corporation resulted in infringement of fundamental rights guaranteed
under Article 21 of the Constitution of India.
57. Sri V.R.S. Anjaneyulu,
learned counsel, submitted that the method and manner in which the employees
have to be identified has not been spelt out and there are no guidelines issued
either by the Government or the Corporation for identifying the surplus staff.
The whole exercise undertaken by the Corporation is arbitrary and unreasonable.
58. Sri J. Ramachandra Rao,
Learned counsel for the appellants, attacked the identification of the
appellants as surplus on the ground that the identification is unscientific.
The identification of surplus staff should be in accordance with the procedure
laid down under section 21-G of the Industrial Disputes Act, 1947.
59. The
other counsel more or less adopted the submissions.
60. Sri Ramesh Ranganathan,
learned Additional Advocate-General, appearing on behalf of the respondents
submitted that the writ petitions as filed by the appellants are premature and
liable to be dismissed. According to the learned Additional Advocate-General,
it is open for the identified surplus employees either to accept the VR Scheme
or reject it. The classification of employees in two categories, viz., those to
be retained in service and those identified as surplus and offered VR Scheme is
a reasonable classification and does not violate Article 14 of the Constitution
of India. The Classification is not patently arbitrary as there is a definite
object sought to be achieved by making such classification.
61. Before we proceed to
examine the rival submissions, it is just and necessary to note that the
respondent Corporation is an instrumentality of the State Govenrment and hence,
is a State within the meaning of Article 12 of the Constitution of India for
the purposes of Part-III of the Constitution and that all its actions are
liable to be tested on the touchstone of Articles 14 and 16 of the Constitution
of India. It is well settled that Article 14 of the Constitution of India
strikes at arbitrariness in executive/administrative action because any action
that is arbitrary must necessarily involve the negation of equility. At the
same time, we are required to bear in mind that even if the Corporation is an
instrumentality of the State as comprehended in Article 12 of the Constitution,
yet the employees of the Corporation are not governed by Part-XIV of the
Constitution. The Supreme Court, took the view that there is no good reason
why, if Government is bound to observe the equality clauses of the Constitution
in the matter of employment and in its dealings with the employees, the
Corporations set up or owned by the Government should not be equally bound and
why, instead, such Corporations could become citadels of patronage and
arbitrary action. The independence and integrity of those employed in the
public sector should be secured as much as independence and integrity of civil
servants. The Supreme Court found that the distinction sought to be drawn
between protection of Part-XIV of the Constitution and Part-III has no
significance (See: Managing Director, Uttar Pradesh Warehousing Corpn. v. Vinay
Narayan Vajapayee AIR 1980 SC 840 and A.L. Kalra v. Project and Equipment
Corpn. of India Ltd. AIR 1984 SC 1361.
Identification of surplus employees- Whether it suffers from any
arbitrariness?
62. Annexure to G.O. Ms. No.
50 dated November 15, 2001 gives the details of employees in different
cadres/categories constituting sanctioned strength of 404 employees of the
Corporation. Other than those cadres/categories, the remaining
cadres/categories have been abolished in their entirety. Therefore, the surplus
employees were required to be identified only from amongst the different
cadres/categories constituting the sanctioned strength of 404 employees. The
Corporation as is evident from the averments made in the counter-affidavit
identified surplus employees by applying the general principle of “last come,
first go in each category” uniformly. The downsizing the cadre strength of
Corporation was taken up as a matter of policy of the Government, to ensure the
survival of the Corporation, uniform methodology was adopted in declaring
surplus staff duly taking their date of entry into the cadre.
63. Under section 25-G of
the Industrial Disputes Act, 1947, in case of retrenchment the employer is
required to ordinarily retrench the workman who was the last person to be
employed in that category. It is true that section 25-G of the Industrial
Disputes Act 1947, applies only to workman but the principle “last come first
go in each category” is a recognised reasonable procedure. The application of
such procedure in identifying the surplus employees cannot be said to be either
irrational or in violation of Articles 14 and 16 of the Constitution of India.
It is explained that the emanated objective sought to be achieved under VR
Scheme, notified in the Corporation’s circular dated September 7, 2002 is to
achieve the optimum level of manpower in the Corporation with desirable average
age mix so as to cope with the changing needs of the society and the
organisation. It is under those circumstances the Corporation considered it
appropriate to apply the principle of “last come first go in each category” to
achieve the objective of having a desirable age mix to cope with the changing
needs. There was a possibility to apply the procedure of “step down” canvassed
by the appellant for identifying surplus employees, based on their total length
of service in the Corporation. Even such a procedure could have been reasonable
procedure and may have satisfied the test under Articles 14 and 16 of the Constitution
of India. But unless this Court comes to the conclusion that the principle of
“last come first go in each category” applied by the Corporation is arbitrary
and in violation of Articles 14 and 16 of the Constitution of India, no
directions can be issued directing the Corporation to adopt the procedure of
“stepping down” in substitution of the adopted procedure. When there are two
reasonable modes for identification of the surplus employees available, the
Corporation is entitled to choose one such reasonable mode and in such a
situation this Court in exercise of its jurisdiction under Article 226 of the
Constitution of India, cannot compel the Corporation to adopt the other mode
which in its view may equally be reasonable and efficacious.
“Stepping down” Procedure:
64. In the affidavit filed
in support of the writ petitions, it is asserted that “it is the fundamental
principle governing the service as and when reduction of posts and persons are
being reverted or retrenched, the seniority in substantive post has to be taken
into account for retention.” In the counter-affidavit, the challenge is met by
the State explaining that the Corporation identified surplus employees in each
category and served notices to individual employees in the order of reverse seniority.
That after promotion to higher categories after fulfilling the service
conditions prescribed for such promotions and having served in the promoted
category for a considerable length of time, the petitioners cannot claim and
seek reversion to the post from which they were promoted several years ago. The
lien on the feeder post comes to an end as soon as they were promoted to the
higher category and on completion of probation in the promotion category. It is
further stated in the counter-affidavit that the contention of the petitioners
that the total length of service has to be taken into consideration while
identifying the staff, is to be accepted the very object and policy of issuing
G.O. Ms. No. 50 dated November 15, 2001 would be defeated, as persons working
in lower categories alone would be liable to be declared surplus by retaining
the staff in higher categories which may not be workable.
65. The learned counsel for
the appellants placed reliance on the judgments of the Supreme Court in Suraj Prakash
Bhandari v. Union of India AIR 1986 SC 958 and State of Haryana v. Des Raj
Sangar AIR 1976 SC 1199, in support of the contention that the step down
procedure is necessarily to be followed by the Corporation in all cases of
reduction in sanctioned strength and consequent abolition of posts. In our
considered opinion Suraj Prakash Bhandari’s case (supra) is not an authority
for the proposition that in every case of abolition of post consequent upon
reduction of sanctioned strength, employees working in a higher category should
be reverted to a lower category and retained by giving emoluments which they
were earlier drawing in the lower category. The Supreme Court having found that
an employee therein was singled out for adverse treatment, held that if the
action of the organisation, in promoting the said employee and declaring him as
surplus was to be accepted, then it would arm the employer with a new weapon to
promote an employee after creating a new post, abolish it after some time and
relieve him from duties on the plea of surplusage. But we are required to
notice that the Corporation in the instant case did not single out any employee
for any adverse treatment as such. It is not the case of the appellants that
the action of the Corporation in identifying the surplus employees is a
colourable exercise of power. Neither any post was created nor promotions
effected with a view to declare such promoted employees as surplusage. On the
other hand, the Corporation identified nearly 450 employees as surplus by
uniformly applying the principle of “last come first go in each category”
except in case employees belonging to Scheduled Castes and Scheduled Tribes
category.
66. The observations of the
Courts are not to be read as “Euclid’s theorems” nor as provisions of the
statute. These observations must be read in the context in which they appear.
The judgments of Courts are not to be construed as statute. [See: Haryana
Financial Corpn. v. Jagadamba Oil Mills 2002 (3) SCC 496 and Ashwani Kumar
Singh v. U.P. Public Service Commission AIR 2003 SC 2661].
67. In Des Raj Sangar’s case
(supra) the Supreme Court observed that whether a post should be retained or
abolished is essentially a matter for the Government to decide. As long as such
decision of the Government is taken in good faith, the same cannot be set aside
by the Court. It is not open to the Court to go behind the wisdom of the
decisions and substitute its own opinion for that of the Government on the
point as to whether a post should or should not be abolished. In the said case,
however, the Supreme Court on interpreting the Punjab Civil Service Rules held
that “Abolition of the post of Panchayati Raj Election Officer, his services
should not have been terminated, the said rules provided that in the absence of
written request by the employee concerned, the lien on the post permanently
held by him cannot be terminated. On the abolition of the higher post and in
the absence of a written request of an employee to terminate his lien on the
lower permanent post, the lien automatically gets revived and the employee was
entitled to be reverted to the lower post.” No similar rule as in the Punjab
Civil Services Rule exist in the Corporation and as such the decision in Des
Raj Sangar’s case (supra) also does not have any application. We need to remind
ourselves the well-known principle of law that a decision is only an authority
for what it actually decides but what is of a decision in its ratio and neither
observation found therein nor what logically follows from the various
observations made in it. It is not a profitable task to extract a sentence here
and there and build upon it. (See: State of Orissa v. Sudansu Sekhar Misra AIR
1968 SC 647).
68. For the aforesaid
reasons we do not find any infirmity in the procedure followed for
identification of surplus staff. The methodology adopted and the procedure
devised in that regard is neither arbitrary nor unreasonable and therefore not
hit by Articles 14 and 16 of the Constitution. “Last come first go” is one of
the well-known reasonable rules adopted in cases of retrenchment of employees
consequent upon abolition of posts.
Employees promoted from work charged establishment category:
69. The learned counsel for
the appellants contended that the procedure adopted by the Corporation in
retaining the employees not borne in the cadre and identifying those who are
borne in the cadre of surplus is wholly arbitrary and offends the equality
clause enshrined in Article 14 of the Constitution of India. The appellants
were originally appointed in the Corporation as Typists. That in terms of Staff
Regulations Chapter-X Item-10 of the Corporation they were converted as Junior
Assistants vide proceedings of the Corporation dated December 10, 1990. The
provisional seniority list of Assistants as on November 1, 2001 was
communicated to all the concerned vide the Corporation proceedings dated
December 6, 2001 and December 14, 2001 requiring the employees to submit their
objections, if any, within 20 days from the date of the order. It is evident
from the record that the employees from the work charged establishments, who
were promoted as Junior Assistants, prior to conversion of the appellants, from
the posts of Typist to the posts of Junior Assistant, were placed higher in the
provisional seniority list, as also in the provisional seniority lists for the
previous years. There is no dispute that the regulations of the Corporation
provides for promotion of employees in the work charged establishment, to the
category of Junior Assistants. The promotions were effected by the Corporation
much prior to conversion of the appellants from the category of Typists of the
category of Junior Assistants. Those promotions remained unchallenged.
70. However, the contention
was that the Government had not approved the proposals for regularisation and
conversion of employees in the work charged establishment to the provincialised
category and in such view of the matter those erstwhile employees of the work
charged establishment ought to have been identified as surplus and not the
appellants. In these proceedings, we cannot go into the question relating to
the inter se seniority between the erstwhile employees of the work charged
establishment and the appellants. The proceedings relied on by the appellants
are of the years of 1991 and 1992, more than a decade ago. In these
proceedings, the appellants cannot be permitted to canvass the correctness of
those proceedings in a collateral manner and contend that they ought to be
treated as seniors and retained in service by duly declaring the erstwhile
employees of the work charged establishment as surplusage. The erstwhile
employees of the work charged establishment who were promoted much prior to
conversion of the appellants from the category of Typists and from the category
of Junior Assistants are not impleaded as respondents in these proceedings.
71. We
find no merit in the contention and the same is accordingly rejected.
Violation of Principles of Natural
Justice:
72. The learned counsel for
the appellants submitted that the appellants were neither put on notice nor
they were given any opportunity of being heard prior to their being identified
as surplus by the Corporation and as such the entire exercise of identification
is vitiated for the reason of non-compliance with the principles of natural
justice.
73. So far as the employees,
in the workmen category, who have been identified as surplus and have not taken
VR Scheme are concerned they can only be retrenched in accordance with section
25-N of the Industrial Disputes Act, 1947. The prior permission of the
appropriate Government or the specified authority as the case may be is a
mandatory requirement inasmuch as and in the absence of such permission no
workmen employed in industrial establishment who had been in continuous service
for not less than one year under an employer shall be retrenched. The
application for permission is required to be made by the employer in the
prescribed manner stating clearly the reasons for the intended retrenchment and
a copy of such application shall also be served simultaneously on the workmen
concerned in the prescribed manner. The Government or the specified authority
after giving a reasonable opportunity of being heard to the employer and the
workmen and the persons interested in such retrenchment may by order for
reasons recorded in writing grant or refuse to grant such permission as prayed
for by the employer. The rights of the employees in the workmen category are so
well protected and failure on the part of the Corporation in giving them an
opportunity of being heard at this stage is of no consequence since they are
not being retrenched straightaway by the Corporation at this stage.
74.
The plea that the entire exercise of identification is vitiated for non-compliance
with the principles of natural justice is only available to the identified
surplus employees in the non-workmen category, who have not taken VR Scheme.
75.
The learned counsel for the appellants in support of their submission placed
reliance upon the decision of the Supreme Court in A.K. Kraipak v. Union of
India AIR 1970 SC 150 : 1969 (2) SCC 262, Central Inland Water Transport Corpn.
v. Brojo Nath Ganguly AIR 1986 SC 1571 : 1986 (3) SCC 156 and Delhi Transport
Corpn. v. D.T.C. Mazdoor Congress AIR 1991 SC 101.
76.
In A.K. Kraipak’s case (supra), the Supreme Court observed, “the aim of the
rules of natural justice is to secure justice or to put it communicatively to
prevent miscarriage of justice. These rules can operate only in areas not covered
by any law validly made. They do not supplant the law of the land but
supplement it. The rules of natural justice are not embodied rules. What
particular rule of a natural justice should apply to a given case must depend
to a great extent on the facts and circumstances of that case, the framework of
the law under which the enquiry is held and the Constitution of the Tribunal or
body of persons appointed for that purpose. Whenever a complaint is made before
a Court that some principle of natural justice had been contravened the Court
has to decide whether the observance of that rule was necessary for a just
decision on the facts of that case.”
77.
In Central Inland Water Transport Corpn. Ltd.’s case (supra) the Supreme Court
struck down clause (i) of Rule 9 of the Rules of the Corporation as void under
section 23 of the Contract Act as being opposed to public policy and is also
ultra vires Article 14 of the Constitution of India that to the extent that it
confers upon the Corporation, the right to terminate the employment of a
permanent employee by giving him three months’ notice in writing or by paying
him the equivalent of three months’ basic pay and Dearness Allowances in lieu
of such notice in that, besides being arbitrary and unreasonable it wholly
ignores audi alteram partem rule. Rule 9(i) of the Rules of the Corporation was
characterised as “the Henry VIII Clause”. It conferred absolute and arbitrary
power upon the Corporation. The Court held that Rule 9(i) is not covered by any
situation, which would justify the total exclusion of the audi alteram partem
rule.
78.
In Delhi Transport Corpn.’s case (supra). Regulation 9(b) of the Delhi Road
Transport Authority (Conditions of Appointment and Service) Regulations, 1952,
which conferred arbitrary uncanalised, unbridled, unrestricted power to
terminate the services of a permanent employee without recording any reasons
for the same and without adhering to the principles of natural justice and
equality before the law was declared void. The Supreme Court took the view that
conferment of power with wide discretion without any guidelines, without any
just, fair or reasonable procedure is constitutionally anathema to Articles 14,
16(1), 19(1)(g) and 21 of the Constitution of India.
79.
We fail to see what relevance those decisions have to the case before us. No
such regulation, which empowered identification of the surplusage, is in
question before us.
80.
The question that falls for consideration is whether the observance of rule of
audi alteram partem was necessary for a just decision, on the facts of the
case?
81.
We have noted the sequence of events right from the stage of G.O. Ms. No. 50
dated November 15, 2001, ordering the cadre strength of the Corporation for 404
employees as detailed in the annexure thereto. We have also noted that the
Corporation adopted uniform procedure of “last come first go in each category”
and found the same to be a reasonable procedure. In such view of the matter
nothing further remains to be decided by the Corporation at this stage. No real
prejudice, therefore said to have been caused to the appellants, on account of
the failure on the part of the Corporation in giving them an opportunity of
being heard before identifying them as surplus. It is, by now, well settled
that in all cases of violation of the principle of natural justice, the Court
in exercise of its jurisdiction under Article 226 of the Constitution of India,
need not necessarily interfere and set at naught the action taken unless the
decision taken had resulted in any prejudice.
82.
The test is whether the observance of the rule of audi alteram partem was
necessary for a just decision?
83.
It is true that all decisions against an individual, which involve adverse
civil consequences must be in accordance with the principles of natural justice
but whether any particular principle of natural justice would be applicable to
a particular situation has to be judged in the light of the facts and
circumstances of each particular case. “The rules of natural justice are flexible
and cannot be put on in rigid formula.” In order to sustain a complaint of
violation of principles of natural justice, it has to be pleaded and
established that prejudice has been caused to the party concerned.
84.
In M.C. Mehta v. Union of India AIR 1999 SC 2583 the Supreme Court observed
that “if on the admitted or indisputable factual position, only one conclusion
is possible and permissible, the Court need not issue a writ merely because
there has been a violation of the principles of natural justice.”
85.
In Aligarh Muslim University v. Mansoor Ali Khan AIR 2000 SC 2783 : 2000
(7) SCC 529, the Supreme Court reiterated its earlier view that the principle
that in addition to breach of natural justice, prejudice also must be proved.
“That not mere violation of natural justice but de facto prejudice (other than
non-issue of notice) had to be proved”.
86.
In State of Karnataka v. Mangalore University Non-Teaching Employees’
Association 2002 (3) SCC 302, the Supreme Court having found that in a case where
the payment already made is sought to be recovered, thereby visiting the
employees with adverse monetary consequences, the affected employees should
have been put on notice and their objections called for, but refused to
interfere in the matter on the ground that in all cases of violation of
principles of natural justice the Court need not necessarily interfere and set
at naught the action taken.
87. It is held that Mangalore University Non-Teaching Employees’
Association’s case (supra):
“11. ...But, it is by
now well settled that in all cases of violation of the principles of natural
justice the Court exercising jurisdiction under Article 226 of the Constitution
need not necessarily interfere and set at naught the action taken. The genesis
of the action contemplated the reasons thereof and the reasonable possibility
of prejudice are some of the factors which weigh with the Court in considering
the effect of violation of the principles of natural justice. When undisputably
the action taken is within the parameters of the rules governing the payment of
HRA and CCA and moreover the university authorities themselves espoused the
cause of employees while corresponding with the Government, it is difficult to
visualize any real prejudice to the respondents on account of not affording the
opportunity to make representation...” (P. 885)
88. On the facts and in the
circumstances, we find that no useful purpose could have been served by putting
the appellants on notice before the actual identification of the surplusage. No
real prejudice has been caused to the appellants on account of not affording
the opportunity to make representation. The Corporation uniformly applied the
rule of “last come first go in each category” in the process of identification
of the surplusage. In the circumstances it is not possible to interfere with
the decision of the Corporation on the ground of infraction of rule of audi
alteram partem.
Subsidiary contentions:
89. Now we shall proceed to
examine some subsidiary contentions urged by each one of the counsel.
Residual employees of A.P. State Construction Corporation:
90. The residual employees of
the A.P. State Construction Corporation Limited, were absorbed into the services
of the Corporation pursuant to G.O. Ms. No. 87 dated March 26, 1993 which
itself has been issued pursuant to the directions of the Supreme Court in G.
Govinda Rajulu v. Andrha Pradesh State Construction Corpn. Ltd. AIR 1987 SC
1801 : 1986 Suppl. SCC 651, wherein the Supreme Court had directed that the
employees of the A.P. State Construction Corporation whose services were sought
to be terminated on account of the closure of the Corporation shall be
continued in service on the same terms and conditions either in the Government
Department or in the Government Corporations. They were accordingly absorbed by
the Corporation and pursuant thereto they became its employees, having accepted
the service conditions, rules and regulations as applicable to the regular
employees of the Corporation. Their absorption itself was subject to certain
terms and conditions in G.O. Ms. No. 87 dated March 26, 1993, according to
which they were required to take the last rank in the category in which they
were working.
91. In our considered
opinion, the claim of the residual employees of A.P. State Corporation cannot
be put on higher pedestal than that of the regular employees of the respondent
Corporation. They are among the employees identified as surplus on application of
the principles of “last come first go in each category”. They were required to
take the last rank in the category when they were absorbed into Corporation
under G.O. Ms. No. 87 dated March 26, 1993. We find no merit in their
submission.
92. In Management of
Dandakaranya Project v. Workmen through Rehabilitation Employees Union AIR 1997
SC 852 : 1997 (2) SCC 296 : the Supreme Court while referring to G. Govinda
Rajulu’s case (supra) observed that “in the said case neither there has been
any discussion on any question of law nor any circumstances have been indicated
under which the direction was given. The being the position the aforesaid
decision cannot be of universal application in all cases where there has been a
closure of the project which resulted in termination of the employees.” The
judgment of the Supreme Court in G. Govinda Rajulu’s case (supra), in no manner
helps the contention urged on their behalf.
Women employees and those appointed on compassionate grounds:
93. The appellants contended
that since they are women, they are entitled for quota of 33-1/3% and applying
roster backwards, they should be retained in the service to the extent of the
their quota. Suffice it to notice that none of those women (appellants) were
appointed in the Corporation under any quota. As such the question of
application roster backwards for women categories does not arise. Similarly an
employee appointed on compassionate grounds is not entitled to claim any
preferential claim vis-a-vis the other employees. Their claim cannot be over
and above the regular employees. We find no merit in their claims.
The claim of
employees belonging to Backward Classes and categorisation of Scheduled Castes:
94.
The appellants who (sic) belong to other Backward Classes (OBC) category claim
that they are entitled for similar protection as given to Scheduled Castes and
Scheduled Tribes employees and that the roster backwards should be applied in
their case also. It is required to notice that the Corporation even in case of
Scheduled Castes and Scheduled Tribes employees did not apply the roster
backwards but the learned single Judge issued such directions directing the
respondent-Corporation to consider the cases of Scheduled Castes and Scheduled
Tribes employees by applying the roster backwards while identifying surplus
Scheduled Castes and Scheduled Tribes employees. The learned single Judge found
that the Corporation as well as the Government failed to apply their mind and
did not take into consideration the provisions of Constitution of India
conferring special protection to the Scheduled Castes and Scheduled Tribes. The
Constitution mandates the State to accord favourable treatment to them. Having
regard to the special constitutional protection provided by Articles 15,
16(4)(a) of the Constitution of India to the employees belonging to the
Scheduled Castes and Scheduled Tribes, the learned single Judge directed the
Corporation to re-examine the matter and consider the feasibility of applying
the reservation roster backwards in respect of the employees belonging to the
Scheduled Castes and Scheduled Tribes in identification of surplus employees to
whom VR Scheme is to be offered. The learned single Judge held such policy
would receive the constitutional approval of providing adequate representation
to the Scheduled Castes and Scheduled Tribes in the service of the Corporation.
We are in complete agreement with the view taken by the learned single Judge.
95.
It is very well settled and needs no reiteration that the Scheduled Castes are
the most backward of the Backward Classes, it is for that reason, the learned
single Judge thought it fit to issue directions in the manner referred to
herein above. The OBC employees cannot therefore equate themselves with
employees belonging to the Schedule Castes and Scheduled Tribes. Their claim is
based upon Article 16(4) of the Constitution of India which is enabling
provision as held by the Supreme Court in Ajit Singh v. State of Punjab AIR
1999 SC 3471 : 1999(7) SCC 209 and Raees Ahmad v. State of U.P. AIR 2000 SC 583
: 2000 (1) SCC 432. In the circumstances, no mandamus can be issued directing
the Corporation to apply roster backwards even in case of employees belonging
to Backward Classes. Employees belonging to Backward Classes cannot, as a
matter of right, claim that they should also be given the benefit of
application of roster backwards, similar to that of Scheduled Castes and
Scheduled Tribes.
96. Similarly, the
contention that the A.P. Scheduled Castes (Rationalisation of Reservation) Act,
2000, applied and by so applying roster it should be ensured that Scheduled
Caste employees in their respective categories are retained in service is
untenable and unsustainable. It is needless to observe that the
appellants/petitioners were appointed much prior to the said Act coming into
force and were not given the benefits of categorisation at the time of their
appointment and promotion since the said Act came into force only with effect
from December 9, 1999. We find no merit in the contention.
Employees in the work charged establishment:
97. Pursuant to G.O. Ms. No.
50 dated November 15, 2001 the work charged establishment has been abolished in
its entirety. The reduction of sanctioned strength under G.O. Ms. No. 50 dated
November 15, 2001, once found to be valid, the claim of the
appellants/employees in the work charged establishment cannot be considered. No
relief can be granted to them.
Employees sent on deputation:
98. The contention that
since the appellants/petitioners were working in other organisations, they
should be promoted to work in the place at which they are presently working and
should not be counted as employees of the respondent-Corporation while
admitting its sanctioned strength of 404 employees is totally untenable and
unsustainable. The submission is totally misconceived. It is needless to
observe that the employees hold a lien on their post in the parent department
and are liable to be repatriated at any time and such of those employees who
are on deputation, continue to hold the lien on their post in the parent
department. The Corporation while determining the sanctioned strength had
rightly taken the number of employees on deputation into account, as those on
deputation have no vested right to continue on deputation forever.
Abolition of Intermediate Post and Abolition of single Post of Computer
Operator:
99. That as a policy measure
in the process of restructuring, the Corporation abolished intermediate post in
the cadre of Deputy Manager and Hydrologists/Geophysicists. The complaint is
that while the cadres of Managers and Assistant Managers are being retained,
the intermediate post of Deputy Manager has been abolished. Similarly, while
the cadres of Senior Hydrologists and Senior Geophysicists and Assistant
Hydrologists and Assistant Geophysicists has been retained, the intermediate
post of Hydrologists/Geophysicists has been abolished. In the counter-affidavit
it is explained that there was duplication in the work discharged by the Deputy
Managers/Hydrologists/Geophysicists. The Corporation was of the opinion that
these intermediary posts could be abolished and the work assigned earlier to
the employees in those categories could easily be distributed among the
employees in the higher and lower cadres. There is a rational basis for taking
such a view in the matters. The decision cannot be said to be an arbitrary one.
We find no merit in the claim.
100.Likewise the single post of Computer Operator has been
abolished since it has become redundant for the reason that most of the
employees in the Corporation have been trained on computers. The policy
decision behind the abolition of the single post of computer is self-evident.
We cannot interfere with such policy decision, which is supported by valid
reasons.
The claim of
Employees declared Surplus consequent upon abolition of Roster Backwards in the
case of Scheduled Castes and Scheduled Tribes:
101.That placing reliance upon G.O.Ms. No. 121 dated October 31,
1991, the petitioners contend that instead of applying roster backwards, the
identified surplus Scheduled Castes and Scheduled Tribes employees ought to
have been retained in service by creating the required supernumerary posts. We
have noticed that the Corporation applied roster backwards in case of Scheduled
Castes and Scheduled Tribes employees on the directions of this Court. The
Corporation itself did not apply the roster backwards on its own.
102.Be it as it may, G.O. No. 121 dated October 31, 1991, admitted
is applicable to Government Departments only and does not have universal application.
The Corporation did not adopt the said G.O. and therefore it has no application
to the employees of the Corporation.
103.That apart the very scheme and policy of reduction in
sanctioned strength and consequent abolition of posts is to ensure self-sustenance,
and survival of the Corporation. The creation of supernumerary posts would be
counter-productive as employees to that extent of supernumerary posts created
would exceed the sanctioned strength of 404 employees which would in turn be in
violation of G.O. Ms. No. 50 dated November 15, 2001. Hence, we find no merit
in the claim.
Absorption in Government Departments:
104.The Corporation as a legal entity distinct and separate from
the Government and the employees of the Corporation are not Government
employees. They are not entitled to seek absorption in Government Departments.
No such directions can be issued by this Court in exercise of its judicial
review jurisdiction.
Physically Handicapped:
105.The Persons with Disabilities (Equal
Opportunities, Protection of Rights and Full Participation) Act, 1995, has been
enacted to give effect to the proclamation on the full participation and
equality of the people with disabilities in the Asian and Pacific region. The
Economic and Social Commission for Asian and Pacific convened a meeting to
launch the Asian and Pacific Decade of the disabled persons 1993-2002 at
Beijing on December 1 to 5, 1992. The meeting adopted the proclamation on the
full participation and equality of people with disabilities in the Asian and
Pacific Region. India is a signatory to the said proclamation. The Parliament
having considered it necessary to implement the aforesaid proclamation enacted
the Act.
106.Section 33 of the Act, mandates
that every Government shall appoint in every establishment such percentage of
vacancies not less than three per cent for persons or class of persons with
disability of which one per cent each shall be reserved for persons suffering
from—
(i) blindness or low
vision;
(ii) hearing impairment;
(iii) locomotor disability or cerebral
palsy; in the posts identified for each disability.
107.
The claim of these employees is that some of them were appointed under
physically handicapped quota, certain others contend that they acquired physical
disabilities while in service. The Act itself has been enacted in order to
ensure the full participation and equality of people with disabilities. The Act
is special in its nature. The rights of the persons with the disabilities are
required to be protected. The persons with the disabilities constitute
themselves into a separate class. In our considered opinion, the Corporation is
required to consider whether it is required to deviate from application of rule
of “last come first go in each category” and apply the roster backwards in the
case of physically disabled employees and apply the same in similar manner as
in the case of Scheduled Castes and Scheduled Tribes employees. We accordingly
consider it appropriate to direct the respondent-Corporation to examine the
feasibility of applying the roster backwards in the case of physically disabled
employees and take an appropriate decision as expeditiously as possible.
Validity of Staff Regulation 21:
108.
The Regulation 21 of Andhra Pradesh State Irrigation Development Corporation
Limited Staff Regulations enables the Corporation to terminate the services of
employees by giving three months notice. The constitutional validity of the
regulation is challenged. The Regulation according to the petitioners is
arbitrary, illegal and in violation of section 23 of the Indian Contract Act.
Reliance has been placed on the judgments of the Supreme Court in Central
Inland Water Transport Corpn. (supra) and Delhi Transport Corpn.’s cases
(supra).
109. That so far the
Corporation did not invoke Regulation 21 of the Regulations and terminated the
services of any of its employees. The termination of services of identified
surplus employees is not discharge simpliciter, but is a consequence of
abolition of posts. At any rate, it is unnecessary to go into the said
question, as it does not arise for consideration in this batch of cases. It is
very well settled that this Court under Article 226 of the Constitution of
India, would not adjudicate academic issues. The question raised is left open
for the present. We are not inclined at this stage to go into the said question
relating to the constitutional validity of Regulation 21 of the Regulations.
110. In the result, all the writ
appeals and writ petitions are accordingly dismissed except with regard to the
claim of the physically disabled employees whose cases are required to be
reconsidered in the light of the directions aforementioned. No order as to
costs.
[1957] 27 COMP. CAS. 468 (MAD.)
BALAKRISHNA
AYYAR J.
Application
No. 1598 of 1956
MOP
No. 187 of 1955
NOVEMBER
23, 1956
BALAKRISHNA AYYAR J. - The Link Industries Ltd., a public limited
company incorporated in 1946, was ordered to be wound up on 8th February, 1956.
In 1947, however, it was a going concern. On 13th August, 1947, the company
issued 50,000 shares of the nominal value of Rs. 10 each, and Ramanathan
Chettiar, the applicant herein, took up 36,555 shares on each of which he paid
Rs. 5. At this time the Link Industries Ltd. was being managed by another
limited liability company called Factors Ltd. of which A. C. K. Krishnaswami
was managing director.
The case of
the applicant is - here I quote from Exhibit P. 1, the letter which the
applicant wrote to A. C. K. Krishnaswami on 15th April, 1949 - that at the time
he took up these shares,
“it was
expressly understood and agreed to that in the event of my taking the bulk of
the shares of account of the non-subscription from the public, the shares will
be Rs. 5 paid up only till such time as I am able to unload the 3/4 of my
holding in the market at a little profit. The other day when you were kind
enough to call on me the subject came up for discussion and I told you about
the position.”
This letter,
it may be explained, was written by Ramanathan Chettiar to Krishnaswami in view
of a notice dated 12th April, 1949, calling for a meeting of the Board of
Directors to consider among other things,
“the question
of making a second call of Rs. 2-8-0 on the 50,000 partly paid up shares.”
On 18th April,
1949, Krishnaswami replied to Ramanathan Chettiar by Exhibit P. 3, in which he
stated :
“The subject
has been included in the agenda only for consideration. I hope to meet you here
before the meeting and if you insist after discussing with me, I shall withdraw
the subject from the agenda.”
On 21st April
1949, the applicant wrote to Krishnaswami, (Exhibit P. 4) expressing his
inability to attend the meeting and asking that this subject be deleted from
the agenda. Exhibit P. 5, an extract from the proceedings of the meeting of the
Board of Directors of the Link Industries held on 23rd April, 1949, reads as
follows :
“To consider
the question of making a second call of Rs. 2-8-0 on the 50,000 partly paid up
shares - Deferred for the present.”
On 27th July,
1949, the Link Industries Ltd. executed a mortgage, Exhibit P. 10, in favour of
the Industrial Finance Corporation of
Sometime after
this document was executed (the exact date was not mentioned to me) the
managing agency was transferred to a new firm called Goenka and Khaitan. On
29th April, 1953, Khaitan wrote to the applicant as follows :
“In accordance
with the resolution of the Board of Directors dated the 15th April, 1953, we
hereby give you notice that the balance of Rs. 5 payable on above shares is
being called up in the manner given below :
First call of
Rs. 2-8-0 to be paid on or before the 31st May, 1953; and
the second and
final call of Rs. 2-8-0 to be paid on or before the 30th June, 1953.
Please remit
the amount payable by you, i.e., Rs. 1,82,755 (Rs. one lakh, eighty-two
thousand, seven hundred and fifty-five only) respect of 36,555 (thirty-six
thousand five hundred and fifty- five only) shares held by you cheque or demand
draft payable in Madras or by cash.”
It appears
from Exhibit P. 7 that the applicant had a discussion on the subject with the
new managing agents and that they agreed to cancel the notice of call which had
been issued and take up the question two years later. On 27th May, 1953, the
applicant wrote Exhibit P. 8 to the new managing agents informing them that in
view of Exhibit P. 7 he was not making any payment. However, on 1st February,
1954, the company wrote Exhibit P. 9 to the applicant drawing his attention to
the notice Exhibit P. 6 which had been issued on 29th April, 1953, and
informing him that under the terms of the mortgage deed executed in favour of
the Industrial Finance Corporation, the corporation had a charge on the unpaid
money and that the corporation had written on 30th January, 1954, calling upon
the company to take all steps to recover all moneys from the shareholders.
After stating that the sum due from the applicant was Rs. 1,82,775 he was
called upon to make immediate arrangements for the payment of this money
together with interest at six per cent. On 24/25th April, 1953, the Industrial
Finance Corporation of India wrote to the Link Industries Ltd. drawing their
attention to certain clauses of the deed of mortgage and asking them to “open a
separate account with your bankers in the joint name of the company and the
corporation and deposit all call money in that account. The joint account will
be operated by the Madras manager of the corporation on behalf of the
corporation.” As already stated, the order to wind up the company was made on
8th February, 1956. On 29th June, 1956, the corporation wrote Exhibit P. 14 to
the Official Liquidator informing him that “we have an English mortgage over
all the freehold land, buildings, engines, plant, machinery.....and all other
assets and uncalled capital of the company for the total amount due to
us............and particularly under clauses (a)(xii) and (xiii) of the said
deed, the right of the company to receive the balance of Rs. 5 per share
remaining uncalled upon the shares of the company that have been issued, has
been assigned in our favour.
We are a secured
creditor of the company and are staying out of the winding up. In view of the
terms of the mortgage deed mentioned above, we are exclusively entitled to the
calls in arrears due from the contributories and hence request you to please
pay to us all the amount of the calls in arrears that you recover from the
contributories.
We thank you
in anticipation and assure you of our best co-operation in this behalf.”
On 14th June,
1956, that is to say, some 15 days before the date of Exhibit P. 14 the Official
Liquidator had passed an order settling and confirming the list of
contributories that he had prepared and overruling the objection of Ramanathan
Chettiar, the applicant. In paragraph 6 of his order he observed :
“In the
circumstances, I hold that A. C. K. Krishnaswami, the managing director of the
company, did not give any undertaking to treat the 36,555 shares held by
Ramanathan Chettiar as fully paid up, and, at any rate, there cannot be such an
undertaking given by him for the shares were issued only as partly paid up.
Further the managing director has no power to give such undertaking and even if
any such undertaking was given it cannot bind the company. There was also no
denial of liability on the part of AR. RM. Ramanathan Chettiar to pay the unpaid
share capital. He is, therefore, liable to pay to sum of Rs. 1,82,775 the
unpaid share capital in respect of these partly paid shares. His name will,
therefore, be included in the final list of contributories according to the
provisional list.”
The present
application has been taken out by Ramanathan Chettiar for removing his name
from the list of contributories as settled by the Official Liquidator.
Mr.
Thyagarajan, the learned advocate for the applicant, raised in the main three
points. The first was that when Ramanathan Chettiar took up the shares he was
given the most explicit assurance that he would be called upon to pay the
balance of the money on those shares till he was able to sell about 3/4 of his
holdings in the market, and, that the Official Liquidator is bound by those
assurances. He also remarked that the Industrial Finance Corporation had also
notice of this fact because in paragraph 2 of Exhibit P. 1, a letter written by
the managing agents of the Link Industries Ltd., to the Industrial Finance
corporation, it is stated :
“When we
requested the corporation to help us with finance, we had already tried to
float an issue of shares in the market and had not met with success. As you are
aware the issue had to be taken up by some of our directors, and they could do
so then only if we agreed not to make the shares fully paid up.”
The
probabilities of the matter are that A. C. K. Krishnaswami did give some
assurance of the kind which the applicant pleads, but in view of the conclusion
I have reached on the other parts of Mr. Thyagarajan’s arguments it is
unnecessary for me to decide how far this assurance is binding on the company
or the liquidator or the Industrial Finance Corporation.
The second
contention of Mr. Thyagarajan was this. In the present case what the Official
Liquidator is seeking to do is to recover from the applicant the money which
has been called up by the directors. He purports to act under section 186 of
the Indian Companies Act, VII of 1913. But section 186 explicitly excludes “any
money payable by him (contributory) for the time being settled on the list of
contributories or the estate by virtue of any call in pursuance of this Act.”
Under this section the only moneys that can be collected from a member are the
debts due from him excluding call moneys. So far as call moneys are concerned,
once a winding up has supervened, the procedure prescribed by section 187 must
be followed. Under that section the court is given power to make a call when it
considers that it is necessary to do so in order to satisfy the debts and
liabilities of the company and expenses of the winding up and for adjusting the
rights of the contributories among themselves. To support his argument Mr.
Thyagarajan relied in the main on the language of the statute itself which runs
as follows :
“Section
186(1). The court may, at any time after making a winding up order, make an
order on any contributory for the time being settled on the list of
contributories to pay, in manner directed by the order, any money due from him
or from the estate of the person whom he represents to the company exclusive of
any money payable by him or the estate by virtue of any call in pursuance of
this Act.”
He emphasised
the words that have been underlined and explained that they exclude moneys
payable by virtue of calls made under the Act.
He then
referred to the decision of the Privy Council in Hansraj Gupta v. Official
Liquidators of Dehra Dun Co. ([1933] 3 Comp. Cas. 207) At page 215 their
Lordships observed as follows :
“Now, in
considering the meaning and effect of section 186 it is impossible to overlook
the fact that it is verbatim identical with the corresponding section in the
legislation of this country, a section which dates back some 70 years to 1862,
and which has appeared in our company legislation ever since. It is therefore a
section with an ancestral history. Three features of the section call for
notice : (1) It is concerned only with moneys due from a contributory, other
than money payable by virtue of a call in pursuance of the Act. A debtor who is
not a contributory is untouched by it. Moneys due from him are recoverable only
by suit in the company’s name. (2) It is a section which creates a special
procedure for obtaining payment of moneys; it is not a section which purports
to create a foundation upon which to base a claim for payment. It creates no
new rights. (3) The power of the court to order payment is discretionary. It
may refuse to act under the section, leaving the liquidator to sue in the name
of the company and it will readily take that course in any case in which it is
made apparent that the respondent under this procedure, if continued, would be
deprived of some defence or answer open to him in a suit for the same moneys”.
It will be
noticed that in this elucidation of the section their Lordships say that the
money recoverable must be moneys other than those payable by virtue of a call
in pursuance of this Act.
The reply of
the official liquidator to this objection of Mr. Thyagarajan may be summarised
more or less in this way. When before the winding up supervenes the directors
of a company make a call on unpaid capital it is a call made by virtue of the
articles of association of the company, and not a call made in pursuance of the
Act; and so, it is not covered by the words of exclusion appearing at the end
of sub-section (1) of section 186. Moneys payable in pursuance of such a call
are contractual debts and all contractual debts due from a contributory are
recoverable under section 186 of the Act. On a proper construction of sections
186 and 187, it must be held that all that is excluded by the last words of
section 186(1) are moneys payable by virtue of a call made under section 187 of
the Act. To hold otherwise would produce this anomaly; a member who paid up
promptly would be placed in a more unfavourable position than a recalcitrant
member who refused to honour his obligations and pay up. The member in default
may be able to plead limitation when proceeded against by way of a suit or he
may be able to say when proceeded against under section 187 that there is no
need to make a call.
I see several
difficulties in this reasoning of the learned official liquidator. The articles
of association of a company are binding on members not because they have signed
those articles - in fact members may not have even seen them - but by virtue of
section 21 of the Act, the first sub-section of which runs as follows :
“21(1) The
memorandum and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by
each member, and contained a covenant on the part of each member, his heirs,
and legal representatives, to observe all the provisions of the memorandum and
of the articles, subject to the provisions of this Act.”
Sub-section
(2) explicitly enacts :
“All money
payable by any member to the company under the memorandum or articles shall be
a debt due from him to the company.”
To say, as the
official liquidator appeared to do, that something done under the articles is
not a thing done in pursuance of the Act is analogous to saying that what hangs
from a bough does not hang from the tree. The liability to pay the unpaid part
of the share capital is created by the Act itself. Only this : the time and
stage of the call and the quantum of the call are left to be decided by the
directors when the company is going and by the court when the company is being
wound up. It is no doubt true that when a call has been made by the directors
the liability to pay has been held to be a contractual debt to recover which an
action can be brought. But for that reason it does not cease to be money
payable by virtue of a call made under the Act. If a shareholder who is called
upon to pay what the official liquidator described as a contractual debt were
to enquire why he is bound to pay, the only answer that can be given to him is,
that he is a member of the company, that a call has been made and that it is a
call which the directors have a right to make under the Act. The anomaly
indicated by the official liquidator is more apparent than real. Of course, in
some instances the law of limitation favours the elusive debtor. If he can
dodge and evade payment till limitation has actually set in and barred the
remedy against him he would be better off than if he had paid when payment fell
due. Section 186(1) does not create any special anomaly so far as that aspect
of the matter is concerned. Besides, money cannot be recovered under section
186 of the Act when an action for it would be barred. It must be further borne
in mind that even though a right of suit against a defaulting contributory on
whom a call has been made by the directors has become time-barred, his
statutory liability is not extinguished and can in proper cases be enforced
under section 187 of the Act. It is no doubt true that under that section the
court has to be satisfied that it is necessary to make a call. But then, one is
entitled to proceed on the assumption that ordinarily the court would act in a
reasonable and just manner. It will not therefore refuse to exercise its power
in a proper case, and, under section 187(1) the court has power to enforce the
reserve liability of a shareholder by ordering him to make payments for the
adjustment of the rights of the contributories among themselves. If it finds
that some contributories have paid more and others have paid less than they
should properly have done, the court has power to require those who have paid
less to pay more so as to make the burden on all equal. The section is wide
enough to enable a court to issue a direction even to a single contributory.
The apprehension voiced by the official liquidator that the contention of Mr.
Thyagarajan would lead to anomalies appears to me to be groundless.
I shall now
examine some of the decisions which the learned official liquidator cited.
Jagannath Prasad v. U.P. Flour and Oil Mills Co. Ltd., is a case decided under
the Companies Act of 1882. The facts there were as follows : The U.P. Flour and
Oil Mills Co. was started in 1904 with 2,000 shares of Rs. 50 each. Jagannath
Prasad applied for and was allotted 25 shares and he paid Rs. 10 per share.
Subsequently the company made further calls for the balance of the share money
which he did not pay. Suits for the recovery of the unpaid calls had become
barred some time before 1913. In 1913 the company was ordered to be wound up on
a creditor’s application and a liquidator was duly appointed. A list of
contributories was prepared and the name of Jagannath Prasad was entered in
that list without any objection on his part and the amount of his liability was
stated there to be Rs. 1,000. When called upon by the court at the instance of
the liquidator to pay that sum into court Jagannath Prasad raised, inter alia,
an objection that the claim was time barred. The District Judge overruled the
objection. Jagannath Prasad appealed to the High Court and the appeal was
dismissed.
At first sight
this decision would seem to support the contention of the official liquidator.
But, when we read through the decision it will be seen that what the learned
Judges enforced on Jagannath Prasad was his liability to pay under section 151
of the Act which corresponds to section 187 of the Act of 1913. It has been
held that a claim for the recovery of which a suit is barred cannot be
collected under section 186 of the Indian Companies Act. The learned Judges in
the Allahabad case could not, therefore, have intended to make an order for
payment under section 150 of the Act of 1882 which corresponds to section 186
of the Act of 1913. Actually they seem to have rested their decision on section
151, and, if that is so, this decision will not help the official liquidator at
all. I quote the relevant passage :
“But the Act
says that for the purpose of recovery the amount shall be deemed to be a debt
payable at the time or respective times when calls are made, the section 151
gives a court power to make calls from persons on the list of contributories
for the amount for which they are shown as liable in the list prepared by the
liquidator; so that really it is not even the right of a company which is being
enforced by a liquidator. It is a statutory right of the creditors of a company
to enforce against the contributories of an insolvent company through the court
the obligation which the shareholders took upon themselves when they originally
subscribed in the event of insolvency subsequently overtaking the company.”
(page 350)
The passage in
Hansraj Gupta v. Official Liquidator of Dehra Dun Co. which explains section
186 of the Companies Act has already been quoted. When the facts of that case
are examined it will be found that no question arose there of requiring a
contributory to pay a call under the Act. The suit was for a debt due from a
member to the company and what the Privy Council decided was this :
“The court has
not power under section 186(1) of the Indian Companies Act, 1913, to order a
contributory in a winding up to pay a debt the recovery of which by a suit in
the name of the company would have been barred by limitation had it been
instituted at the date of the application to the court. In these circumstances
the debt is not ‘money due’ within the meaning of the section; the section
leaves open every defence which would have been open in a suit by the company.”
J. C. Chandiok
v. Pearey Lal, is a case directly in point and supports the view of the
official liquidator. That was a case in which a company falling under the
definition of a provident society in section 65 of the Insurance Act, went into
voluntary liquidation and the liquidator appointed by the superintendent of
insurance sought to collect calls which has been made by the directors but
which remained unpaid. Some of the respondents raised the point that it was
unnecessary to make a call. On page 33 the learned Judge observed :
“They all
raise the same point, which I understand to be this. They say that, if the
matter be inquired into, it will be found that the liquidator has no occasion
to levy these sums from them because, to put it shortly, he has over-estimated
the liabilities of the company. To my mind, that is a wholly irrelevant
argument as far as this application is concerned. A call, once it has been
validly made by the directors prior to liquidation and once the date for its payment
has passed, becomes a debt due from the shareholder to the company and is
indistinguishable from any other debt. When subsequently the company goes into
liquidation, that debt, or those debts, become assets of the company which have
to be realised by the liquidator. They have lost their character as calls and
have become debts and, as such, are realisable by the liquidator just as any
other debt or asset is realised. This court is not in the least concerned with
what he wants it for and, in my view, this court has not even any jurisdiction
to ask the liquidator what he wants it for and still less to withhold the
payment of it from him. When, of course, a liquidator comes to the court under
section 187 and asks for leave to make a call after the liquidation has
intervened, the position is quite different. There the court has jurisdiction
and indeed it is the very object of its being brought to the court at all to
consider whether the liquidator really needs the money he says he needs it or
not. In that case the liquidator is making a call himself and that is a step in
the liquidation over which the court has control.”
Now, this is a
decision of a single Judge, and, with great respect, I have some difficulty in seeing
how when a call is made by the directors and the money payable in pursuance
thereof remains unpaid it loses its character as money payable under a call. A
call can be made either before a company is ordered to be wound up or after.
The only provision under which a call can be made after a winding up is ordered
is section 187. All other calls must be made by the directors and if they
become debts merely by reason of the fact that a call has been made I would
expect section 186(1) to end with these words :
“exclusive of
any money payable by him or the estate by virtue of any call in pursuance of
section 187 of this Act.”
The reserve
liability of a shareholder is a statutory liability and how it loses that
character merely because an unsuccessful attempt has been made to enforce it,
is not quite easy to see. By describing it as a debt we cannot eliminate the
fact that it is payable in pursuance of the call. Besides it is not a debt for
all purposes in that for instance there cannot be a set-off.
The official
liquidator referred to Mohamed Akbar v. Associated Banking Corporation of
India. The facts of that case were as follows : The defendant was the holder of
876 shares of the company. On 24th July, 1945, the directors of the company
made a call of Rs. 25 on the shares, payable in two instalments. The first was
payable on 5th September, 1945, and the second on 2nd December, 1945. In spite
of notices issued the defendant failed to pay either instalment in respect of
375 shares. A provisional liquidator was appointed on 11th April, 1947, and a
winding up order was made on 1st October, 1947. On 9th July, 1948, the
liquidator made a demand upon the defendant to pay the amount of the unpaid
call. On 9th August, 1948, the defendant took out a chamber summons for
rectification of the list of contributories alleging that he was not a
contributory in respect of 375 shares. That summons was dismissed on 17th
September, 1948. The defendant appealed and the appeal was also dismissed. On
10th December, 1948, the liquidator filed a suit for recovering the amount of
the unpaid calls. As it was originally instituted it was a simple suit for
recovering the debt due from the defendant to the company in respect of the
unpaid calls. It was immediately realised that the suit was liable to be
dismissed by reason of the statute of limitation. Thereupon an amendment was
applied for and the application was granted whereby the plaint was amended.
Paragraph 9-A of the plaint set out the amended cause of action as being that
on the winding up order being made the liability of the defendant to pay the
amount of the calls became a statutory liability and such statutory liability
was not barred by the law of limitation. No call had been made by the court on
any of the contributories under section 187. It was held that the suit filed by
the liquidator, if looked upon as a suit to recover a contractual debt, was
barred by limitation. If looked upon as a suit to realise a statutory debt
created by section 156, then the suit was not maintainable because no call in
respect of that liability was made by the court, and, in the absence of any
such call the statutory liability could not be realised by the liquidator.
There is
nothing in this judgment to support the view that a call made by a company and
remaining unpaid on the date of the winding up can be recovered under section
186 of the Act. The last case which I need examine is reported in In re
Whitehouse and Co. The headnote to that case is as follows :
“Where a
limited company is in voluntary liquidation, a contributory cannot set off a
debt due to him from the company against calls made against him either by the
company before or by the liquidator after the resolution to wind up.”
On examination
this case does not seem to support the official liquidator. On the contrary, it
contains observations which are against him. The learned Judge, after quoting
section 38 of the old English Act which imposes on every past and present
member of a company the liability to contribute to the assets of the company an
amount sufficient for payment of the debts and liabilities of the company,
proceeds :
“That is a new
liability; he is to contribute; it is a new contribution. It is a mistake to
call that a debt due to the company. It is no such thing. It is not, as has
been supposed, in any shape or way a debt due to the company, but it is a
liability to contribute to the assets of the company; and when we look further
into the Act, it will be seen that it is a liability to contribution to be
enforced by the liquidator. It is quite true that a call made before the
winding up - and in this case before me a call was made before the winding up -
is a debt due to the company, but that does not affect this new liability to
contribution. But there are certain limits to the liability........... Now,
first of all, as regards the calls made in the winding up, they being calls for
something unpaid on the shares, that is a contribution due by the member under
the Act, and is not a debt due to the company. The contribution also under this
section applies to the unpaid calls made before the winding up; because, though
that is a debt due to the company, it is not the less an amount unpaid on the
shares in respect of which he is liable, and therefore he must be liable to
contribute all that is unpaid on his shares. As I said before, it is as much
unpaid if he had not paid the calls made before the winding up, as it is in
respect of the amount unpaid on the shares in respect of which no call has been
made before the winding up. It seems to me that the contributories’ liability
created by the 38th section being only limited to the amount unpaid, it is
immaterial, for the purpose of this section, whether the call was made before
or after the winding up, provided the amount is unpaid. That being so, it is a
liability to contribute which, in the case of an ordinary winding up, is of
course enforceable by the court; but so it is in a voluntary winding up.”
The
observations on page 541 in Buckley on the Companies Act, 12th Edn., made on this
case may be quoted :
“And,
premising this, the judgment in Re Whitehouse and Co. ((1878) 9 Ch. 595),
renders the true construction of this section a matter of much less difficulty.
The bases of that judgment are (1) that contributions under section 212 of this
Act are not debts to the company, but contributions to the assets enforceable
by the liquidator; (2) that such contributions include all that is unpaid on
shares at the commencement of the winding up, including, therefore, calls made
before, as well as made in the winding up; and (3) that this being so, there is
no set-off under the statutes of set-off because it is the liquidator who
enforces the calls, while it is not the liquidator but the company that owes
the debt, and therefore to establish a set-off the person asserting it must
find in the Companies Acts some provision giving a right of set-off.”
On this point
I am inclined to agree with Mr. Thyagarajan. Section 186(1), in plain terms,
says that an order may be made in respect of any amount due from a contributory
“exclusive of any money payable by him or the estates by virtue of any call in
pursuance of this Act.” I find it difficult to say that a call made by the
directors of a company is not a call made in pursuance of the Act. To get the
result which the official liquidator wants, the words and figures “of section
187” must be inserted before the last three words of that sub-section.
The next
objection of Mr. Thyagarajan was this. The right to enforce the reserve
liability of a shareholder is an actionable claim. By clauses (a)(xii) and
(xiii) of the deed of mortgage, Exhibit P. 10, there has been a complete
assignment of these rights in favour of the Industrial Finance Corporation. In
consequence it is only the corporation that can now seek to recover the money.
The official liquidator has no locus standi in this regard. Before he can
proceed he must obtain a re-assignment from the mortgagee. Mr. Thyagarajan
referred to sub-section (1) of section 130 of the Transfer of Property Act which
provides that the transfer of an actionable claim whether with or without
consideration shall be effected only by the execution of an instrument in
writing and that upon the execution of the instrument “all the rights and
remedies of the transferor, whether by way of damages or otherwise, shall vest
in the transferee...........” He remarked that all the rights of the company in
respect of unpaid capital having vested in the Industrial Finance Corporation
it is only that body which can seek to recover the money.
He then
referred to the decision of the Privy Council in Mulraj Khatau v. Viswanath
Prabhuram Vaidya. The appellant and the respondent in that case were rival
claimants to the proceeds of a policy of life insurance which had been paid
into court by the insurance company. The appellant relied on an assignment by
the debtor of the policy by an instrument in writing, and the respondent based
his claim on a deposit of the policy with him by the debtor unaccompanied by
any written instrument. On page 209, after referring to section 130(1) of the
Transfer of Property Act, 1882, their Lordships observed :
“It is
admitted that the right to the moneys becoming due under the policy is an
actionable claim. Their Lordships are also of opinion that the section covers
transfers by way of security as well as absolute transfers. If any doubt
existed on either these two points it would be set at rest by the second
illustration to the section which is given in the Act.”
Muthukrishnier
v. Veeraraghavier was a case in which there was a mortgage in writing of a
promissory note. It was held that the right of the promisee to sue on the note
became vested in the mortgagee, and the mortgagee alone was entitled to sue.
In Santuram
Hari v. Trust of India Assurance Co., Chagla J. has stated :
I, therefore,
hold that on the execution of the transfer of an actionable claim all the
rights and remedies of the transferor vest in the transferee and the transferee
alone is entitled to enforce the remedy; there is no interest left in the
transferor which would entitle him to maintain a suit in respect of the
actionable debt.”
The official
liquidator sought to surmount the difficulty raised by Mr. Thyagarajan by
pointing out that though the mortgage is an English mortgage, it does not totally
divest the company of all legal interests in the property mortgaged, and
referred to Ram Kinker Banerjee v. Satyacharan Srimani.
It is no doubt
true that by executing what is called an English mortgage the mortgagor does
not divest himself of all legal interest in the property; but from this it does
not follow that he is entitled to get the property into his hands or even to
sue for it.
The official
liquidator next stated that under Exhibit P. 14, the Industrial Finance
Corporation has constituted him its agent and authorised him to collect the
money. I find it difficult to discover in Exhibit P. 14 words conferring on the
official liquidator the requisite authority. In the first sentence of the
letter the Corporation merely states that it has learnt that the official
liquidator was taking steps to realise the calls in arrears. Then it goes on to
explain that it holds an English mortgage over all the assets of the company
including its uncalled capital. It next says that it is a secured creditor and
requests the liquidator to pay all the amount of the calls in arrears that he
might recover. And the letter ends with the customary formula: “We thank you in
anticipation and assure you of our best co-operation in this behalf.” There are
no words in Exhibit P. 14 conferring any authority on the liquidator; the
letter proceeds on the assumption that the liquidator has in himself the
requisite power to collect the money. He is reminded of the rights of the
Corporation and requested to pay into its coffers whatever moneys he may
realise. Proceeding for a moment on the assumption that the Corporation
intended to constitute the liquidator their agent, still I do not see how the
liquidator can proceed under section 186 of the Act. In so far as the
liquidator is the agent of the Corporation he can have no larger rights than
the Corporation itself and the only way in which the Corporation can recover
the money is by appropriate proceedings based on the mortgage it holds. But,
this is not what the liquidator seeks to do. He does not purport to take his
stand on the mortgage; what he seeks to do is to exercise his powers as
liquidator without seeking to act as the agent of the Corporation. This, it
seems to me, he cannot do. If the Corporation has properly constituted him the
agent - I do not think it has - then he must proceed on the mortgage. If it has
not, then he must proceed as a liquidator, pure and simple.
There is
another important fact. In Exhibit P. 14, the Corporation has explicitly stated
that it had decided to stand outside the winding up which of course it is
entitled to. See M. K. Ranganathan v. Government of Madras. But how when
standing outside the winding up the Corporation can obtain the remedies
available in a winding up, it is difficult to see.
I must uphold
also this objection of Mr. Thyagarajan.
In the result,
this application is allowed with costs, to be paid out of the estate.
Advocate’s fee Rs. 400.
This order is made without
prejudice to the rights, if any, of the official liquidator, to proceed under
section 87 of the Companies Act, 1913.
[1988] 64 COMP. CAS. 425 (MAD.)
Ramakrishna Industries (P.) Ltd.
v.
JULY 9, 1985
JUDGMENT
V. Ramaswami, J.—O.S.A. No. 128 of 1981 is against the order dated August
19, 1981, in Company Application No. 844 of 1981 and 0. S. A. No. 189 of 1981
is against the order dated December 7, 1981, in Company Application No. 843 of
1981. Both these applications were filed pending Company Petition No. 30 of
1981, which is a petition filed under sections 433(e) and (f), 434 and
439(1)(b), (c) and (d) of the Companies Act, 1956, for winding up of a company
by name Ramakrishna Industries Private Ltd. Company Application No. 843 of 1981
is for the appointment of a provisional liquidator pending disposal of the main
company petition and C.A. No. 844 of 1981 is an application filed under rule 11
of the Companies (Court) Rules, 1959, read with Order 39, rule 1, Civil
Procedure Code, for an order of injunction restraining the appellants herein
from borrowing any moneys from banks, financial institutions or others without
the prior permission of the court and from alienating and/or creating any
charge or encumbrance over any of the assets of the company in its various
enterprises, pending disposal of the winding-up petition.
On July 13, 1981, the
company petition and also the two
"In
the result, there will be an injunction restraining respondents Nos. 1 to 6
from borrowing any moneys from banks, financial institutions or others and from
alienating and/or creating any charge or encumbrances over any of the assets of
the first respondent company in its various enterprises except that the first
respondent company is entitled to honour any pending contracts entered into by
the company with third parties before the presentation of this application, all
its existing commitments vis-a-vis its staff and labourers, electric charges,
central excise duty, LIC premium, payments due to employees' co-operative
stores, telephone bills and sales tax due, availing of the existing bank
facilities with any of its bankers subject to the condition that the
particulars for all these payments and the source from which such payments were
to be met, are furnished in detail in the applications. It is made clear that
the company is always at liberty to approach the court for further directions
and that the applicants' right to impugn any such transaction under section
536(2) is left untouched"
Against
this order, O.S.A. No. 128 of 1981 has been filed. By another order dated
December 7, 1981, in C.A. No. 843 of 1981, the learned judge appointed the
official liquidator as the provisional liquidator pending the winding-up
petition. Against this order, O.S.A. No. 189 of 1981 has been filed.
Both
before the learned single judge and before us, learned counsel for the
appellants questioned the maintainability of the application for injunction. This
was on the ground that the main winding-up petition was not set for hearing on
that date and that, therefore, section 443 of the Companies Act cannot be
invoked by the applicants and that the applications cannot also be sustained
either under Order 39, rule 1, of the Civil Procedure Code or rule IX of the
Companies (Court) R0ules, 1959.
The
relevant portion of section 443(1) reads:
"(1)
On hearing a winding-up petition, the court may—
(a) dismiss
it, with or without costs; or
(b) adjourn
the hearing conditionally or unconditionally; or
(c) make
an interim order that it thinks fit; or
(d) make an order for winding up the company
with or without costs, or any other order that it thinks fit".
The argument of learned
counsel for the appellants is that on July 13, 1981, the learned judge has
ordered notice for the hearing of the company petition on August 11, 1981, and
only when the company petition was to be taken up for hearing on August 11,
1981, the court would get jurisdiction to make any interim order and not on the
date when the company petition was admitted and notice of hearing was ordered.
We are of the view that the hearing of the winding-up petition starts even on.
the day when the winding-up petition is admitted and entertained and the order of
notice for the hearing to the respondents after deciding to entertain would
amount to a hearing of the winding-up petition itself. The words "on
hearing a winding-up petition" would cover the entire period from the date
of entertainment and issuing of notice till an actual order of winding-up is
made or the winding-up petition is dismissed. "Hearing" does not mean
hearing the respondent to the company petition. Hearing of the petitioner for
the purpose of admitting the petition and issuing notice is also part of the
hearing of the winding-up petition. In fact, the Supreme Court in Hind Overseas
(P)Ltd.v. Raghunath Prasad Jhunjhunwalla [1976] 46 Comp Cas 91 held (at page
105):
"A prima facie case
has to be made out before the court can take any action in the matter. Even
admission of a petition which will lead to advertisement of the winding-up
proceedings is likely to cause immense injury to the company if ultimately the
application has to be dismissed. The interest of the applicant alone is not of
predominant consideration. The interests of the shareholders of the company as
a whole apart from those of other interests have to be kept in mind at the time
of consideration as to whether the application should be admitted on the
allegations mentioned in the petition".
Again, section 441(2)
specifically states that the winding-up of a company by the court shall be
deemed to commence at the time of the prosecution of the petition for
winding-up and, therefore, from the date of presentation of the winding-up
petition, the court gets jurisdiction. Section 450 also makes this very clear.
Sub-sections (1) and (2) of this section provide that at any time after the
presentation of the winding-up petition and before the making of the winding-up
order, the court may, for special reasons to be recorded in writing, dispense
with the notice to the company and appoint a provisional liquidator
straightway. These provisions clearly establish that the court's jurisdiction
to make interim orders is not postponed till the date set for hearing of the
company petition after notice to respondents. In fact, this point is concluded
by a Bench decision of this court in Ramakrishna Industries P. Ltd. v. P. R.
Ramakrishnan [1983] II MLJ 227. It may be mentioned that case also related to
the same company. On the same day along with CA Nos. 843 and 844 of 1981, the
respondents herein also filed CA No. 845 of 1981, for the appointment of a
Court Commissioner to take an inventory of the assets and accounts of the
company. That application also came up for orders along with these applications
which are the subject-matter of the appeals and by an ex parte interim order
made on July 13, 1981, the learned company court judge appointed a Commissioner
and that was questioned in the appeal. One of the objections of the appellants
was that the learned judge had no jurisdiction to pass an interim order under
section 443(1)(c) at the stage of admission of the winding-up petition and that
only at the time of the hearing of the winding up petition the company court
can make interim orders. While rejecting this contention, the Bench has
observed (at page 233):
"In our judgment, the
investiture of the court with the winding up jurisdiction, as of other powers,
must be interpreted as adding to the gamut of the court's existing
jurisdiction. It would be a mistake to interpret the statute as stripping the
court of all its powers first, and then conferring on it only such powers as
are permitted, say by section 443(1) and other related provisions. We are
satisfied that having regard to the scheme of the Companies Act, we cannot read
any provision in the statute which relates to jurisdiction of courts, as being
in derogation of the full plenitude of the court's powers under the common law,
unless we can find in it a clearly expressed, or equally clearly implicit, bar
of restriction of the court's jurisdiction.
We think it necessary for
courts to construe statutes, such as the Companies Act, according to the wisdom
of Parliament and not according to the folly of the draftsman. Section 443(1)
is a case in point. The section sets about enumerating the different ways in
which the court can tackle a winding-up petition when it comes before it for
hearing. The section, in this context, enumerates the court's powers. But there
are certain things which go without saying or ought to. Adjournment, for
instance, is one of them; you cannot regard it as a remarkable aspect of
judicial power. And yet, clause (b) of section 443(1) very seriously mentions
adjournment as one of the ways in which the court can give a disposal to the
petition on the day of the hearing. This is quite an insane provision. Even
without it, nobody would contend and certainly not practising lawyers, that a
winding-up court has no power to adjourn the petition, but must get on with it
even at the first hearing. Nor, for that matter, would any one argue that
because of clause (b), the court has lost its power, to grant adjournments on
other occasions. So too is the case with clause (c) of section 443(1) which
refers to the passing of interim orders. The presence of this clause in section
443(1) cannot mean that, but for it, the court will have no power to pass any
interim orders at any time, or, because of its presence in section 443(1), its
existence or exercise on other occasions must be ruled out. Courts and lawyers
should read Acts of Parliament sensibly. They should not match the denseness of
the draftsman with a dithering denseness on their part. We are satisfied that
section 443(1)(c) has not the hidden meaning which Mr. Biksheswaran attributes
to it, namely, that no interim order can be passed by a winding-up court at the
time of admission of the winding-up application"
In
National Conduits P. Ltd. v. S. S. Arora [1967] 37 Comp Cas 786 the Supreme Court was considering the question whether a
petition for winding-up cannot be placed for hearing before the court unless
the petition is advertised. In that case, a director of the company presented a
petition in the High Court of Delhi under sections 433 and 439 of the Companies
Act for an order of compulsory winding-up of the company. Notice of the
petition was ordered to the company. The company filed an application that the
winding-up petition filed by the director be dismissed and that the petition in
the meantime not be advertised. The company petition was dismissed without
advertisement on the ground that the proper remedy of the petitioner on the
allegations of mismanagement of the affairs of the company and oppression of
the minority shareholders was to file a petition under sections 397 and 398 of
the Companies Act and the petition was instituted with a view to unfairly
prejudice the interests of the shareholders of the company. After referring to
rules 24 and 96 of the Companies (Court) Rules, 1959, the Supreme Court
observed (at page 788):
"A petition for
winding-up cannot be placed for hearing before the court, unless the petition
is advertised; that is clear from the terms of rule 24(2). But that is not to
say that as soon as the petition is admitted, it must be advertised. In answer
to a notice to show cause why a petition for winding-up be not admitted, the
company may show cause and contend that the filing of the petition amounts to
an abuse of the process of the court. If the petition is admitted, it is still
open to the company to move the court that in the interest of justice or to
prevent abuse of the process of the court, the petition be not advertised. Such
an application may be made where the court has issued notice under the last
clause of rule 96, and even when there is unconditional admission of the
petition for winding-up. The power to entertain such an application of the
company is inherent in the court, and rule 9 of the Companies (Court) Rules,
1959, which reads: Nothing in these rules shall be deemed to limit or otherwise
affect the inherent powers of the court to give such directions or pass such
orders as may be necessary for the ends of justice or to prevent abuse of the
process of the court' ".
These are clear authorities
for the position that even at the stage of admitting the winding-up petition,
or entertaining the winding-up petition, the court has also an inherent power
to do that which is necessary to prevent the abuse of the process of the court
or to advance the cause of justice or make such orders which are necessary to
meet the ends of justice. That inherent power of the court is not taken away or
in any way restricted by section 443(1) of the Companies Act. We are,
therefore, unable to agree with the contention of learned counsel for the
appellants that till the date set for hearing of the petition, the hearing of
the company petition had not commenced and that the court had no jurisdiction
to pass any interim orders.
We may also point out that
in this case, the facts actually show that the hearing of the company petition
had, in fact, commenced on July 13, 1981. When the applications were moved
before the learned judge and the learned judge ordered notice of four weeks for
hearing in C. P. No. 30 of 1981, Miss Bhanumathi, an advocate of this court,
represented that she has instructions to appear and undertook to file vakalat
for the appellants herein and that they oppose the application and that time
might be granted to enable them to file their counter. It is admitted by
learned counsel for the appellants that such a practice of taking notice on
behalf of the respondents is in vogue and the courts have been adopting such a
practice. Therefore, when the learned advocate took notice and undertook to
appear for the appellants herein, it only means that the company, had appeared
before the court and the hearing of the winding-up petition itself had
commenced. In fact, the company had given a vakalat on July 14, 1981, and
counsel appeared for the hearing of the applications on the adjourned date on
July 27, 1981. In fact, that the appellants herein were represented by a
counsel and took notice of the applications and time was taken for filing
counter was never denied and, in fact, especially admitted in paragraph 4 of
the affidavit filed in support of CMP No. 7342 of 1981 in OSA No. 97 of 1981
and also in ground No. 4 of the grounds in that OSA. Therefore, it is clear
that the company had appeared before the court on July 13, 1981, and objected
to any order being made without giving them time for filing a counter and that,
therefore, in any case the hearing of the winding-up petition shall be deemed
to have commenced. We are, therefore, unable to accept the contention of
learned counsel for the appellants that the applications were not maintainable
under section 443 of the Companies Act.
The learned judge gave a
finding that the company is out and out a domestic one, that the shareholding
by each of the two branches of the founder's sons, namely, one belonging to
appellants Nos. 2 to 5 and respondent No. 6 and the other represented by
respondents Nos. 1 to 5, was almost equal, that the two brothers, namely, the
third appellant and the first respondent, have the right of equal participation
in the management and in the affairs of the company and that the right of equal
participation by the two branches represented by the third appellant on the one
hand and the first respondent on the other is guaranteed under the constitution
of the company. The learned judge was also of the view that the substratum of
the company is based on the cordiality and mutual trust and confidence expected
of both the brothers and when such cordiality and co-ordination anxiously
intended to be preserved by the constitution of the company is completely
undermined, there is complete and irrevocable deadlock in the company on
account of lack of probity. The learned judge further held that the company is
in reality a partnership concern under the garb of a corporate veil. He then
referred to article 38 of the articles of association and held that this
article enables any member to apply for immediate winding-up of the company
should there be any disagreement between the two brothers and, in fact, it is
the only solution contemplated. In view of the open differences and complete deadlock
and the virtual exclusion of the first respondent by the appellants in the
management, the learned judge was of the further view that the balance of
convenience is in favour of grant of an injunction and accordingly made the
injunction order as stated above. The learned judge also held that the
appellants are guilty of mismanagement of the affairs of the company and
diversion of the funds of the company to their personal use as also
manipulating the books of account and that by the appointment of a provisional
liquidator there will be a successful prevention of fraudulent preference and
appointed the official liquidator as provisional liquidator.
Learned counsel for the
appellants seems to have contended before the learned single judge that it
cannot be said that the shareholding by the third appellant's branch on the one
hand and the branch of the first respondent on the other was equal and that if
the shareholding was not equal there is no room for the contention that the
respondents had an equal right in the management of and participation in the
affairs of the company. This contention seems to have baen raised on the basis
that the third appellant got transferred to himself as managing trustee 300
shares held by V. Rangaswami Naidu Educational Trust and if that is taken into
account the respondents would be holding only 38.12 per cent of the issued
capital and the appellants' family would be holding 59.02 per cent. Learned
counsel seemed to have further placed reliance on the amended articles 30 and 31
of the articles of association also in support of the contention that it is not
possible to hold that the two branches have the right of equal management of
and participation in the affairs of the company.
The third appellant and the
first respondent are shown as the promoters of the company, though there is no
dispute that their father is the founder of the company. The nominal capital of
the company is Rs. 20,00,000 divided into 2,000 equity shares of Rs. 1,000
each. The issued, subscribed and paid-up capital is Rs. 15,95,000 divided into
1,595 equity shares of Rs. 1,000 each. The family of the first respondent is
holding 608 equity shares of the face value of Rs. 1,000 each. The family of
the third appellant is holding 642 shares of Rs. 1,000 each. A trust by name V.
Rangasvvami Naidu Educational Trust was holding 300 shares of Rs. 1,000 each.
The trust was founded by the father of the third appellant and the first
respondent. The third appellant, the first respondent and their father, V.
Rangaswami Naidu, were the founder-trustees for life. The father is now dead
and the third appellant and the first respondent are now the family trustees
for life. It was contended on behalf of the appellants that the third
respondent got transferred to himself as management trustee the 300 shares held
by the trust by virtue of a resolution passed through circulation to the
members of the company. The allegation of transfer was disputed by the
respondents herein.
The learned judge after
going into this question factually found that the appellants have failed to
establish that there was a transfer of 300 shares of the trust in favour of the
third appellant. This finding of fact is not canvassed before us and no
reliable evidence was also produced before us evidencing such tranfer. In the
circumstances, therefore, we have no hesitation in holding that the shares held
by the two branches are almost equal.
Articles 30 and 31 of the
articles of association before they were amended in 1971 in the extraordinary
general meeting of the company held on September 25, 1971, read as follows:
"30.The
general management of the affairs of the company shall vest in the two life
directors. The two life directors, their successors and nominees shall alone exercise
all the powers and be entitled to manage the affairs of the company.
31. Mr. P. R. Ramakrishnan shall be styled as the
managing director of the company and he shall be paid a remuneration of not
less than Rs. 1,000 a month during the tenure of his office".;
The amended articles 30 and
31 read as follows:
"30.
The general management and administration of the affairs and matters of the
company shall vest in two life directors who may be appointed from time to
time.
31. Sri V. Raj Kumar shall be the managing
director of the company and he shall be paid such remuneration as may be fixed
by the board of directors from time to time".
On the basis of these
amendments, learned counsel for the appellants seems to have urged before the
learned single judge that the management of the company vested in the sets of
directors, namely, two life directors and a resident director. After a
consideration of the arguments, the learned judge rejected the contention of
the appellants, that equality in participation which was provided in the
unamended articles 30 and 31 is destroyed by the amendment. The learned judge
also did not accept the contention that articles 20, 21 and 24 ruled out the
possibility of equal participation in the management of the affairs of the company
between the two life directors. We have to point out that this finding of the
learned judge was also not canvassed by counsel for the appellants before us.
In the light of these facts, we confirm the finding that the first appellant
company is out and out a domestic one, that the management of the company
vested in the life directors and continued to vest even after them in their
successors in interest and nominees, that the right of equal participation by
the two branches each represented by the first respondent on the one hand and
the third appellant on the other was guaranteed under the constitution of the
company and that the shareholding by each was almost equal.
Learned counsel for the
appellants contended that article 30 of the articles of association which was
heavily relied on by the learned judge in support of his finding that a prima
facie case has been made out for winding up the company under section 433(f),
is void under section 9 of the Companies Act on the ground that it is opposed
to the provisions of section 433(f) and also on the ground that it is opposed
to public policy. The learned judge has overruled this objection holding that
article 38 does not run counter to section 9 of the Act or the provisions of
section 433(f). Article 38 of the articles of association reads as follows:
"In the event of
disagreement between the directors at any time prejudicially affecting the
emoluments or the interests of any member of the board, then the aggrieved
party may either sell his shares to the other members at a fair value or
purchase the share of the other members at a fair price, thus settling the
matter between them. In case any member fails to agree to the method above said
to end the deadlock, then the company shall be wound up forthwith, and for the
purpose of realisation of assets, the assets may either be sold for monetary
consideration or may be distributed among the members in specie provided all
the debts and liabilities due by the company shall entirely be discharged. For
the purpose of the special resolution, every member shall vote in favour of the
resolution for winding up when such contingencies arise".
It is well-settled that the
articles of association will have a contractual force between the company and
its members as also between members inter se in relation to their rights as
such members. Therefore, the parties are bound by such contractual obligations.
Section 9 of the Companies Act provides that save as otherwise expressly
provided in the Act, the provisions of this Act shall have effect
notwithstanding anything to the contrary contained in the memorandum or
articles of a company and that any provision contained in the memorandum and
articles shall, to the extent to which it is repugnant to the provisions of the
Act, become void. It was contended, on behalf of the appellant, that the
provisions of article 38 are void in so far as they enabled the company to be
wound upon a ground which is not specified under section 433 of the Companies
Act. We are unable to agree with learned counsel that article 38 adds any
ground for winding up other than those specified in section 433. As may be seen
from the last sentence in that article, the company passes a special resolution
for winding up when such a contingency arises. Section 433(a) contemplates the
company resolving by a special resolution that it may be wound up by the court.
It is this resolution for voluntary liquidation that is provided under article
38 also and, therefore, it could not be contended that it adds any new ground
to section 433. It is also not contrary to and does not in any way affect the
power of the court to order a company to be wound up when it is of opinion that
it is just and equitable. The court may consider that in a case where article
38 is applicable, it will be just and equitable to wind up. The power of the
court is not in any way fettered in considering whether to pass an order of
winding up or not in exercise of its power under section 433(f). Necessarily,
the court may while considering the question whether it is just and equitable
that the company should be wound up (sic). But it cannot be contended that it
is in any way derogatory to the powers of the court under section 433(f) We
are, therefore, of the view that article 38 is valid and binding on the company
and its members.
It was then contended by
learned counsel for the appellants that till the provision in the first limb of
article 38 is complied with, the second limb will not come into operation, that
the conditions specified in the first limb of article 38 have not been complied
with by the respondents and that since it is the respondents who complained that the
appellants have acted detrimentally to their interests they should have offered
to sell the shares to the appellants, that the appellants have a right to
purchase the shares at a fair price to be fixed in conformity with the articles
and, that it is only when the appellants fail to agree to purchase the shares
at a fair value to be fixed that the contingency, namely, that the company
should be wound up would arise. In the instant case since there had been no
offer at all by the respondents to sell the shares, they are not entitled to
invoke to their aid the second limb of article 38. Learned counsel for the
appellants also contended that the learned judge erred in construing article 38
in isolation. The learned judge has overruled this contention of the appellants
and held that it was unnecessary to claim the relief under the second limb of
article 38 to go through the farce of the offer of selling the shares and
awaiting the rejection thereof. It is the disagreement that would matter. The
learned judge also held that the disagreement within the meaning of article 38
relates to the "method" as such but not to the several processes involved
in the said method such as a member offering his share for sale and the other
member refusing to purchase the share at the fair value to be fixed in
conformity with the articles. Since the respondents herein have stated that
they are not willing to adopt the method provided for in the first part of
article 38, automatically they are entitled to proceed on that basis and claim
that the company should be wound up forthwith.
We
are in agreement with the learned judge that the two limbs of article 38
provide for two different methods of settling the deadlock. It is open to the
party aggrieved to choose either of the methods to end the deadlock. If he
chooses the first method, he has to offer his shares to the other members at a
fair value or offer to purchase the share of the other members at a fair price.
If the other party agrees to sell or purchase, the deadlock is ended by such
settlement. This part uses the words that the aggrieved party may either sell
his shares or purchase the shares of the others and thus settle the matter. The
right is thus to purchase the others' shares or sell his shares. The word
"may" here cannot also be read as "shall"; if the word
"may" cannot be read as "shall", it is obvious that the
first part also deals with the method of settlement and not a condition for
invoking the second limb of article 38. If the member does not want to get the
matter settled by the process contemplated in the first part, then he is
entitled to invoke the method provided for in the second part.
It
may also be seen that the words "any member" in the second limb of
article 38 are wide enough to include any member who may or may not be an aggrieved party. The aggrieved party may
refuse to sell or purchase or it may be the other party who refuses to purchase
or sell at a fair price. The only condition is that he should be a person who
is not willing to follow the procedure prescribed in the first limb. In this
case, the respondents have stated that they are not willing to adopt the method
provided for in the first limb. They are entitled to state that they are not
willing to agree to the methods provided therein to end the deadlock. In fact,
the learned judge has referred to the wide and open differences between the
respondents' group and the appellants' group and has also catalogued the
complaints of the respondents against the appellants. In the light of those
circumstances there can be no doubt that it would be asking for the moon to
expect the parties to agree to the method contemplated under the first limb of
article 38. We also agree with the learned judge that it is unnecessary in
order to claim the relief under the second limb of article 38 to go through the
farce of offering to sell or purchase the shares and that it is the
disagreement that mattered. We may also point out that the respondents have
expressed that the appellants would not have the fair value fixed, when they
have the majority in the meeting and it would be a futile exercise to go
through the formality. In the light of the mutual distrust and lack of
confidence among the two warring groups, we are also satisfied that it is
highly improbable that there would be any agreement between the parties to
settle their disputes.
In consonance with the
right of equal participation in the management and in the affairs of the
company, article 38 also guarantees that should there be any disagreement
between the two brothers, the only solution is to have the company wound up.
The object and purpose of article 38 also seem to us to be to guarantee against
any undue advantage to any one branch and to ensure, under the threat of losing
the entire business itself, that better sense would prevail and the brothers
would co-ordinate with each other and that one does not exclude the other from
active participation in the management and affairs of the company. In the
circumstances, therefore, we entirely agree with the learned judge that the
substratum of the company is based on the cordiality and mutual trust and
confidence expected of both the brothers in the smooth running of the company.
When such cordiality and co-ordination is completely undermined as found by the
learned judge with which we agree, there could be no doubt that there is a
complete and irresolvable deadlock in the company on account of lack of probity
and there is no hope or possibility of smooth and efficient continuance of the
company as a commercial concern.
The Supreme Court in Hind
Overseas (P.) Ltd. v. Raghunath Prasad Jhunjhunwalla[1976]46 Comp Cas 91 (at
page 104), observed that:
"...when shareholding
is more or less equal and there is a case of complete deadlock in the company
on account of lack of probity in the management of the company and there is no
hope or possibility of smooth and efficient continuance of the company as a
commercial concern, there may arise a case for winding-up on the just and
equitable ground".
There could, therefore, be
no doubt that a prima facie case for winding-up under section 433(f) has been
made out.
The amendment to article 15
has in no way affected the scope or interpretation of article 38. Under article
15, as it originally stood, there was an embargo on selling the shares to an
outsider under any circumstances. The amended provision only enables the
selling of the shares to an outsider in certain circumstances.
Learned counsel for the
appellants then contended that no grounds have been made out in the common
affidavit, filed in support of C. A. Nos. 843 and 844 of 1981 and also in the
affidavit filed in support of the company petition itself for the appointment of
a provisional liquidator, that the application for such appointment of a
provisional liquidator should have been disposed of on the averments made in
those affidavits only and the court should not have taken into consideration
the subsequent events. The subsequent event, by itself, cannot be a ground for
appointment of a provisional liquidator; and, in the instant case, the learned
judge has not relied on any ground in the affidavit, but only on an alleged
subsequent event of diversion of funds of the company for personal benefit. In
support of this contention, learned counsel placed before us the following
decisions: Rajahmundry Electric Supply Corporation Ltd. v. A.Nageswara Rao
[1956] 26 Comp Cas 91 (SC), Vidhyasagar Cotton Mills Ltd. v. Nazmunnisa Begum
[1964] 68 CWN 782 and Mohta Brothers P. Ltd. v. Calcutta Landing and Shipping
Co. Ltd. [1970] 40 Comp Cas 119 (Cal). In Rajahmundry Electric Supply
Corporation Ltd. v. A. Nages-wara Rao [1956] 26 Comp Cas 91 (SC), the Supreme
Court held that (at page 95):
"The validity of a
petition must be judged on the facts as they were at the time of its
presentation, and a petition which was valid when presented cannot, in the
absence of a provision to that effect in the statute, cease to be maintainable
by reason of events subsequent to its presentation".
In that case, what happened
was that an application was filed for the winding up of a company. The
petitioner had stated that he had obtained the consent of 80 shareholders,
which was more than one-tenth of the total number of members, and had thus
satisfied the condition laid down in section 153C of the Indian Companies Act,
1913. Certain shareholders who had given their consent to the filing of the
application had subsequently withdrawn that consent and the number of persons
who had consented was reduced to 52. It was, therefore, contended that the
condition laid down in section 153C was not satisfied. It is with reference to
this point the Supreme Court made the above observation.
The decision in Vidhyasagar
Cotton Mills v.Nazmunnessa Begum [l964] 68 CWN 702; AIR 1964 Cal 335, does not
support the case of the appellants and in fact it was held therein that
subsequent events can be taken into consideration. In that case, a shareholder
who was having a large number of fully paid up shares died intestate on March
11, 1960, leaving his widow, Nazmunnessa Begum, and some other persons as his
heirs. His widow as the administratrix to the estate of her husband applied for
rectification of the share register by placing her name therein in the place of
the deceased. On December 24, 1960, the board of directors of the company
resolved to hold the annual general meeting on February 9, 1961, and notice was
also issued that the share transfer book of the company would be closed from
January 26, to February 9, 1961. The widow of the deceased shareholder obtained
letters of administration on January 20, 1961, and on the same date her
attorneys wrote to the company requesting registration of the shares of her
husband formally in her name, enclosing the original letters of administration
and other relevant papers. The widow and her attorneys desired the shares to be
transferred before January 25, 1961, by rectifying the share register so as to
enable her to vote on February 9, though the board of directors called for a
meeting on January 25, 1961, to consider her application for rectification of
the share register. They did not rectify the register but adjourned the
subject. The share register remained closed from January 26 to February 9,
1961. Thereupon the widow moved an application on January 30 to the court under
section 155 of the Companies Act, 1956, praying for the rectification of the
register. On February 8, the company court passed an order restraining the
company and its directors from holding the annual general meeting on February
9, except for the purpose of adjourning the same and directed the company to
hold a meeting of its board of directors on February 14, for the purpose of
considering the application of the widow for rectification of the share
register and taking a final decision thereon and giving liberty to file further
affidavits. It appeared from the further affidavits filed that one Manzoor
Ahmed had applied on February 14 for revocation of the grant of letters of administration
of the estate to the widow. On February 14, a meeting of the board of directors
was also held, but the meeting resolved that the application of the widow be
adjourned till the decision of the court in respect of Manzoor Ahmed's
application for revocation of the Letters of Administration. Manzoor Ahmed's
application for revocation was dismissed on April 10, 1961; but the
rectification of the register was not done. On September 28, 1961, the
application of the widow filed under section 155 was allowed and the court
directed the rectification of the share register by inserting her name as the
holder of the shares standing in the name of her deceased husband. In the
appeal filed against that order, one of the contentions on behalf of the
company was that there had been no default or unnecessary delay within the
meaning of section 155(1)(b) of the Act and, consequently, the court had no
jurisdiction to pass the order of rectification under section 155. This was on
the ground, namely, that on January 30, 1961, when the application under
section 155 was filed, the board of directors had not considered the
application, nor had they rejected it, nor could it be said that there was any
unreasonable delay before the application under section 155 was filed. On the
scope of section 155(1)(b), the Division Bench held that the section covers all
cases of improper refusal or neglect and that it has been held that default on
the part of the company is not essential and that if upon deciding the question
of legal title it appears that the right name is not registered, there is
jurisdiction to rectify. The facts disclosed in the further affidavits filed in
pursuance of the order of the court made on February 8, namely, that the
company had not considered the request for rectification in its board meeting
on February 14, and the board adjourning the decision till the decision of the
court in respect of Manzoor Ahmed's application for revocation and the fact
that the revocation petition was dismissed and still the company had not
rectified the register, were taken into account by the learned judges. These
events which took place subsequent to the filing of the application under
section 155 were taken into account for holding that there was a default and
unnecessary delay in entering on the register the fact of the widow becoming a
member and the fact of the deceased ceasing to be a member. Learned counsel for
the appellant contended that these subsequent events could not be taken notice
of by the court, relying on the decision in Rajahmundry Electric Supply Corporation
Ltd. v. A. Nageswara Rao [1956] 26 Comp Cas 91
(SC). The Division Bench of the Calcutta High Court held that the decision of
the Supreme Court is in no way inconsistent with the principles enunciated in
Raicharan Mondal v. Biswanath Mondal, AIR 1915 Cal 103; 20 Cal LJ 107 and that
the court may take notice of events which have appeared since the making of the
application and afford relief to the parties on the basis of these events where
it is necessary to base the decision on the altered circumstances in order to
do complete justice between the parties.
It may be seen from the
decision that on the date when the application was filed, there was no default
or unnecessary delay in the rectification of the register within the meaning of
section 155(1)(b). However, the subsequent facts disclosed there was default or
unnecessary delay which was relied on in support of the application for
rectification of the order.
In Mohia Bros. P. Ltd. v.
Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Cas 119 (Cal), a Division
Bench of the Calcutta High Court held (at page 127):
"In our view, this
question is well settled, namely, that, in a petition under sections 397 and 398
of the Companies Act, 1956, the court must confine itself to the case as made
out in the petition and to the allegations in the petition itself and
supporting affidavits, if any, and not look at other evidence with regard to
events that might have happened subsequent to the petition".
But this is not the whole
statement of the law as may be seen from the latest judgment of the Supreme
Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51
Comp Cas 743 (SC). In that case the Supreme
Court did take into account facts which came into existence after the company
petition was filed. The Supreme Court observed on the facts there (at page
797):
"It is true that in
saying this, we have partly taken into account facts which came into existence
after the company petition was filed. But those facts do not reflect a new
trend or a new thinking on the part of Coats, generated by success in the
litigation. Finding that they had succeeded in the High Court, Coats took
courage to pursue relentlessly their old attitude with the added vigour which
success brings"
The ratio of these
decisions, therefore, is that normally the court dealing with an application
should confine itself to the allegations in the petition itself and not embark
on a rambling enquiry into indefinite charges. However, there is no prohibition
to either rely on the subsequent events as pieces of evidence to sustain the
grounds already alleged or where having regard to the question to be decided if
the court considers it necessary to base a decision on the altered
circumstances in order to shorten the litigation or to do complete justice
between the parties.
In the instant case, though
the learned judge has relied on a subsequent diversion of substantial money of
the company to the personal benefit of the appellants, the learned judge
himself had stated that in the catalogue of charges contained in the main
petition itself, the respondents have charged applicants Nos. 2 and 3 with
diversion of the funds of the company to their personal benefit, but only
adduced events which had taken place subsequent to the filing of the petition
also as evidence thereof and, therefore, it is not contrary to law. The learned
judge has, after setting out briefly the charges in the petition filed for
winding up concentrated his attention on the charge of diversion of the funds
of the company by appellants Nos. 2 and 3. After referring to the evidence
available and the contention of the parties, the learned judge held that the
respondents have established that large funds of Rs. 11,10,000 are diverted
elsewhere by the appellants and not utilised for the benefit of the company. We
may point out that except making the legal submission, learned counsel for the
appellants did not canvass the finding of the learned judge on facts relating
to this diversion, though learned counsel for the respondents referred to many
documents supporting the finding of the learned judge. We do not think it
necessary, in the circumstances, to again trace all the evidence available
which shows the diversion of the funds of the company. We may also state that
learned counsel for the appellants is not fully correct instating that the
learned judge has relied only on this diversion of the company funds in support
of the claim for appointment of a provisional liquidator. The learned judge has
referred to the manipulation of records, particularly the minutes books
relating to the meeting of the board of directors, by making false entries in
the minutes book relating to the meeting, taking advantage of the custody of
minutes books in their hands, collusive transfer of share held by the company
in Radhakrishna Mills Ltd. to Sri Kanchanlal Hiralal Nanvathi and another at
the instance of Vysya Bank Ltd., making false entries in the general body
minutes book, transferring 300 shares held by the trust in favour of the third
appellant fraudulently and in illegal manner in order to gain superiority in
the strength of the shareholding, making feverish attempts to dispose of some of
the valuable assets of the company as could be seen from the resolution dated
September 25, 1979, and some other facts. We must also point out that though C.
A. Nos. 843 and 844 of 1981 were filed with a common affidavit in support of
the same, they came to be disposed of on two different dates and in C. A. No.
844 of 1981, which is for an injunction, the learned judge had made the order
on August 19, 1981, in which he had dealt with the question of mismanagement,
manipulation of accounts, etc., in detail and it was in those circumstances the
learned judge said that he is giving his supplemental or additional
justifications in this order for holding that appellants Nos. 2 and 3 are
guilty of mismanagement of the affairs of the company and diversion of funds of
the company to their personal use as also of manipulating the books of account.
The learned judge also held that, in order to prevent the fraudulent
preferences and malpractices, it is necessary to appoint a provisional
liquidator. We are in entire agreement with this view of the learned judge.
On the above findings there
is no scope for the contention that the respondents have an alternative remedy
of resorting to the provisions of sections 397 and 398 of the Companies Act and
the other argument that the applications for injunction and for the appointment
of a provisional liquidator would amount to interfering in matters of internal
administration of the company. There is also no substance in the contention of
the appellants that by reason of the institution of certain suits in civil
courts, the respondents should be deemed to have availed of the alternative
remedy in the form of suits and that consequently they cannot file the petition
for winding up. As pointed out by the learned judge, the relief sought for in
this court could not have been obtained in the suits instituted by the
respondents and, therefore, no question of election could arise.
For the foregoing reasons,
both the appeals are dismissed with costs.
[1975]
45 Comp Cas 429 (
HIGH COURT OF
v.
Globe United Engg. & Foundry
Co. Ltd.
V.S. DESHPANDE AND B.C. MTSRA, JJ.
November
25, 1974
G.L. Sanghi, B.P. Singh and K.K. Bhatia for
the Appellant.
D.S. Dang, R.C. Beri
and N.W. Goswami for the Respondent.
The question for
decision involving construction of sections 9, 36, 85, 100, 102, 205, 211 (read
with Schedule VI), 217 and 511 of the Companies Act, 1956 (hereinafter called
"the Act"), is whether the holders of preference shares carrying a
right to a fixed cumulative dividend payable when the company is a going
concern only out of profits earned and when dividend is recommended to be paid
by the directors in a general meeting are entitled during the winding-up of the
company to the arrears of the fixed cumulative dividend in view of article 7 of
the articles of association out of the assets of the company which did not make
any profits at any time at all.
The
appellant-company, Messrs. Globe Motors Ltd., are the equity shareholders of
respondent No. 1, Messrs. Globe United Engineering & Foundry Company Ltd.
Respondents Nos. 2 to 7 are the holders of the company's (respondent No. 1)
preference shares carrying a fixed cumulative dividend as per article 7(i) of
the articles of association which is as follows:
"The
preference shares shall confer on the holders thereof the right to a fixed
cumulative preferential dividend of 9.5% per annum free of company's tax but
subject to deduction of taxes at source at the prescribed rates on the capital
paid up thereon, and in the event of winding up, the right of repayment
of capital and arrears of dividend whether earned, declared or not, up to the
commencement of the winding-up in priority to the equity shareholders."
As the expected foreign technical collaboration did
not materialise, the company did not go into business at all but went into
voluntary liquidation which was later put under the supervision of the court.
The liquidator made a reference to this court under section 518 of the Act as
to whether the preference shareholders of the company were entitled to the
payment not only of their share capital but also of the arrears of the fixed
cumulative dividend thereon before any payment is made to the equity
shareholders out of the assets of the company in liquidation. The learned
company judge answered the question in the affirmative relying mainly on the
unanimous opinions of writers on British company law based on English
decisions. Hence this appeal by the equity shareholders.
Shri G.L. Sanghi for the appellant urges that the
answer to the above question should be governed not so much by the weight of
the British text books and precedents but by the provisions of our Companies
Act which may be dissimilar. Shri D.S. Dang for the respondents submitted that
the provisions of our Companies Act would lead to the same conclusion. In the
light of their arguments and our own further thinking, we shall consider the
question in depth primarily on the construction of the relevant provisions of
the Companies Act and article 7 and then see if the British precedents and the
opinions of well-known authors lead to the same conclusion.
We first start with the premise that the company and
its shareholders are two different legal entities. When the company was
incorporated, it adopted its memorandum and articles of association including
article 7. These were the statutory terms of contract governing the
relationship between the company and the shareholders. Persons who contributed
the preference share capital became members of the company on these terms. The
effect of the memorandum and articles of association is stated in section 36(1)
of the Act as follows:
"Subject to the provisions of this Act, the
memorandum and articles shall, when registered, bind the company and the
members thereof to the same extent as if they respectively had been signed by
the company and by each member, and contained covenants on its and his part to
observe all the provisions of the memorandum and of the articles."
The expression "subject to the provisions of
this Act" recalls section 9 of the Act which is as follows :
"Save as otherwise expressly provided in the Act—
(a) the
provisions of this Act shall have effect notwithstanding anything to the
contrary contained in the memorandum or articles of a company, or in any
agreement executed by it, or in any resolution passed by the company in general
meeting or by its board of directors, whether the same be registered, executed
or passed, as the case may be, before or after the commencement of this Act;
and
(b) any
provision contained in the memorandum, articles, agreement or resolution
aforesaid shall, to the extent to which it is repugnant to the provisions of
this Act, become or be void, as the case may be."
At the first blush, one may think that every
provision of the Act would override every provision in the articles to the
extent of repugnancy between the two. We would like to emphasise that this is
not so. The reason is that the Companies Act, like all law relating to companies,
consists of two distinct parts, namely, (1) relating to the formation and the
management of a company as a going concern, and (2) relating to its winding-up.
The difference between the two is the same as between running and stopping. The
memorandum of a company sets forth the objects to be achieved by the working of
the company during its lifetime. It does not usually provide for what is to
happen during its winding-up. Parts I to VI of the Companies Act contain
provisions regulating the formation and the management of companies. Part VII
relates to the winding-up of companies. Similarly, the majority of the articles
of association are concerned with the formation and working of the company
while article 7 consists of two parts, the first part relating to the company
as a going concern and the second part relating to its winding-up. The
existence of two distinct provisions in the same article strikingly brings out
the contrast between the working of the company and its winding-up. The effect
is that some provisions of the company law and of the articles would apply
exclusively to a company which is a going concern while the other provisions
would apply only to a company in liquidation.
It is in this background that section 511 has to be
read which is as follows:—
"Subject to the provisions of this Act as to
preferential payments, the assets of a company shall, on its winding-up, be
applied in satisfaction of its liabilities pari passu and, subject to such
application, shall, unless the articles otherwise provide, be distributed among
the members according to their rights and interests in the company."
Subject to the making of preferential payments (e.g.,
under sections 520 and 530), the assets of the company are distributed among
the members according to their rights and interests in the company unless the
articles otherwise provide (emphasis
supplied). The rights and interests of the members in the company are based
both on the provisions of the Act and of the articles of association. In
striking contract with sections 9 and 36, the articles prevail over the second
part of section 511. Since sections 9 and 36 ensure the superiority of the
provisions of the Act as against the provisions of the articles, the obvious
difference between them and the provisions of section 511 securing the
superiority of the articles over its second part can be understood only on the
hypothesis that sections 9 and 36 relate to those provisions of the Act which
apply to the working of a company as a going concern while section 511 refers
to those provisions of the Act which apply during the winding-up of the
company. This is why the former override the articles while the latter is subject
to the articles.
The prospectus was issued in 1967 long after the
terms of the contract between the company and the members were settled by the
articles which were finalised in 1963. The representation made in the
prospectus inviting the public to subscribe capital and buy the shares of the
company would not change the terms of the contract between the company and the
members which are already settled. The prospectus did not become a contract
between the company and the members inasmuch as the subscribers buying the
shares did so with the knowledge that the contract would consist of the
memorandum and the articles of association and not of the representations made
in the prospectus. Any variation between the language of the prospectus and
article 7(i) is, therefore, to be construed as the article prevailing over the
prospectus.
Originally, the statutes relating to companies in
"When the company is wound up, new rights and
liabilities arise............. While the company is a going concern no capital can
be returned to the shareholders, except under the statutory provisions in that
behalf............In the case of winding-up everything is changed. The assets
have to be distributed."
The distinction was also emphasised in a subsequent
leading decision of the House of Lords in Scottish Insurance Corporation Ltd.
v. Wilsons & Clyde Coal Company .
The counsel on both sides emphasised the distinction between "the rights
of the stockholders to dividends while the company is a going concern and their
rights in a liquidation, first, to return of capital and, secondly, to surplus
assets" (page 471) and "the status and rights of the preference
stockholders in the company as a going concern.............and the statement of
the rights of the preference stockholders in a liquidation" (pages 474 and
475). The contrast was put in a literary flourish as follows: "There is no
known status of a company being moribund or comatose. Either it is in
liquidation or it is not and the members when they join it contract on the
basis of those two alternatives. There is no half-way house—half law, half fact
and almost wholly picturesque language." (page 475).
The contract between the preference shareholders and
the company is contained in article 7(i) reproduced above. The first part of
article 7(i) obviously refers to the company as a going concern. What is the
meaning of "the right to a fixed preferential cumulative dividend" conferred
on the preference shareholders ? It means that the company must pay every year
to the preference shareholders dividend at a fixed rate. Why is the dividend to
be "cumulative" and "preferential" ? The reason is that
another primary principle of company law both in our country and in
"Etymologically a dividend is the 'dividendum',
the total divisible sum. But, in its ordinary sense, it means the sum paid and
received as the quotient forming the share of the divisible sum payable to the
recipient."
From the point of view of the company, the profits
are earned and divided. The profits or a part of the profits may, therefore, be
the dividend to the company. The word "earned" qualifying the word
"dividend" may, therefore, mean either of the two things depending on
whether it is used in relation to the company or in relation to the preference
shareholders. A company earns dividend in the sense of earning profits. A
preference shareholder earns dividend in the sense that the contract between
him and the company embodied in article 7(i) gives him the right to the
dividend. What is the nature of this right ? The phases through which a
contractual right passes till it is enforced by the receipt of a payment of
money are described by Hidayatullah C.J. in H.H. Madhav Rao Scindia v. Union of
India ,
in paragraph 63, as follows :
"The dynamic theory of obligations regards a
debt as a claim to 'an equivalent in value to a floating charge against the
generality of things which are the properties of the debtor'. From this is
developed the notion of a credit-debt where property rights arise from a
promise, express or implied, in respect of ascertained or readily ascertained
sums of money. Thus a debt or a liability to pay money passes through four stages.
First, there is a debt not yet due. The debt has not yet become a part of the
obligor's 'things' because no net liability has yet arisen. The second stage is
when the liability may have arisen but is not either ascertained or admitted.
Here again the amount due has not become a part of the obligor's things. The
third stage is reached when the liability is both ascertained and admitted.
Then it is property proper of the debtor in the creditor's hands. The law
begins to recognise such property in insolvency, in dealing with it in fraud of
creditors, fraudulent preference of one creditor against another, subrogation,
equitable estoppel, stoppage, intransitu, etc. A credit-debt is then a debt
fully provable and which is fixed and absolutely owing. The last stage is when
the debt becomes a judgment debt by reason of a decree of a court. Thus an
American judge held 'outstanding uncollected accounts' as property (Standard
Marine Insurance Co. v. Board of Assessors ).
It is because of this that the French law includes such obligations in
mobiles."
What is the reason why in the first part of article
7(i) only the word "dividend" is used while in the second part of article
7(i) the words "arrears of dividend" are used ? The answer is given
by Professor R. R. Pennington in his Company Law, 3rd edition. The learned
author deals with the company as a going concern at page 180 and observes as
follows :
"It is common to speak of the unpaid balance of
preference dividend as 'arrears' but this is misleading because it conveys the
impression that the unpaid balance is a sum of money which the company already
owes the preference shareholders. The preference dividend only becomes owing
when (a) there are profits available to pay it, and (b) it has been properly
declared in accordance with the articles, unless they dispense with a
declaration, and when there are arrears of preference dividends ex hypothesi
one or other or both of these things have not happened."
This is why the first part of article 7(i) does not
talk of arrears of dividend but merely emphasises that the dividend is
cumulative. That is to say, even if a dividend is not declared and paid in one
year, the right to it continues to accumulate till the whole accumulation is
declared and paid later. Strictly speaking, when the company is a going
concern, unearned and undeclared dividend is not due and does not amount to
arrears. But the situation is completely changed during the winding-up. At page
186 Professor Pennington comments on an article under which arrears of
preference dividend are payable in a winding-up in the following words:
"Under such a clause unpaid preference dividends
are payable for periods up to the repayment of the preference capital, even
though the dividends have not been declared, and even though the company did
not earn sufficient profits to pay them while it was a going concern."
The learned author does not dispute the use of the
word "arrears" as applied to a company in liquidation and thus
recognises the fundamental difference between the two situations. The same
dividend which is not payable during the life of a company as not having been
earned or declared becomes payable with
all the arrears during liquidation even if it is not earned or declared.
Section 85 of
the Act defines "preference share capital" and expressly recognises
the distinction between the right of a preference shareholder to the payment of
a dividend when the company is a going concern and to the same right when the
company is in liquidation. It reads as follows :
"Preference
share capital means, with reference to any company limited by shares, whether
formed before or after the commencement of this Act, that part of the share capital
of the company which fulfils both the following requirements, namely :
(a) that as respects dividends, it carries or
will carry a preferential right to be paid a fixed amount or an amount
calculated at a fixed rate, which may be either free of or subject to
income-tax ; and
(b) that as respects capital, it carries or will
carry, on a winding-up or repayment of capital, a preferential right to be
repaid the amount of the capital paid up or deemed to have been paid up,
whether or not there is a preferential right to the payment of either or both
of the following amounts, namely :
(i) any money remaining unpaid, in respect
of the amounts specified in clause (a), up to the date of the winding-up or
repayment of capital; and
(ii) any fixed premium or premium on any
fixed scale, specified in the memorandum or articles of the company."
The words
"whether or not there is a preferential right to the payment
of...........any money remaining unpaid in respect of the amounts specified in
clause (a)" are decisive. They recognise that a contract between the
preference shareholder and the company may provide for the payment of unpaid
preferential dividend on a preference share capital during the winding-up.
Because they apply only during the winding-up proceedings, they are not subject
either to section 205 or to section 217 which restrict payment of dividends to
earning of profits and to the declaration of dividends. Article 7(i) is,
therefore, clearly authorised by section 85(1)(b)(i). It is to be noted that
the words the amounts specified in clause (a) in section 85(1)(b)(i) simply
mean the amount of preferential dividend calculated at the fixed rate. They do
not import the restrictions imposed by sections 205 and 217 on the payment of
such amount. These restrictions would be implied in section 85(1)(a) which
refers to the company as a going concern but not in section 85(1)(b) which
refers to it during liquidation. Had section 85(1)(b)(i) been subject to
sections 205 and 217, it could not have permitted a contract to provide for
payment of dividend to preference shareholders during winding-up. Such a
provision could be permitted by contract only because sections 205 and 217 are
not applicable during winding-up. Section 205(1) says "no dividend shall
be declared or paid by a company for any financial year except out of the
profits of the company for that year arrived at after providing for
depreciation in accordance with the provisions of sub-section (2)". The
determination of profits for a particular year after providing for depreciation
can only be the act of a company which is a going concern. Section 217(1)
refers to a report by the board of directors placed before a general meeting.
But the board of directors becomes extinct and is replaced by the liquidator
during the winding-up proceedings. None of these sections can, therefore, apply
during winding-up. They do not, therefore, restrict or affect the right of the
preference shareholders to payment of arrears of dividend during winding-up.
The reason
why article 7(i) is so worded is historical. Formerly, the English judges were
also dominated by the idea that dividends not being payable except out of
profits could not be paid during winding-up if no profits had been made. This
view was expressed in In re W.J. Hall & Co. Ltd.
The distinction between the company as a going concern and a company during
liquidation was, however, soon realised and this decision was dissented from successively
in the subsequent decisions in In re New Chinese Antimony Co. Ltd.,
in In re Springbok Agricultural Estates Ltd.
and finally in In re Wharfedale Brewery Co. Ltd.,
all of which suggested or concluded that arrears of dividend were payable to
the preference shareholders during winding-up irrespective of profits having
been made. This view was followed in
"Prima
facie a preference dividend is payable only out of the profits made whilst the
company is a going concern, and it wants special provision to give the holders
a right to have the arrears paid out of assets in winding-up........If by the
articles arrears are to be paid, they may be payable although no profits have
been made."
Shri Sanghi
suggested that the words in article 7(i) "arrears of dividend whether
earned, declared or not" should not be literally construed. He put forward
the distinction between the earned and the unearned income, the former being
due to appreciation of the assets of the company. He argued that the latter
part of article 7(i) only meant that dividend was payable whether
profits were by way of earned or unearned income or not. He maintained,
therefore, that if the profits were not made by a company at all, then dividend
was not payable in winding-up. Firstly, the expression "earned, declared
or not" is not accidental but deliberate. The juxtaposition of the words "earned"
and "declared" recalls the two limits on payment of dividend when the
company is a going concern, namely, non-earning of profits and non-declaration
of dividends referred to in sections 205 and 217 of our Act. The word
"earned" is not, therefore, used in contradistinction to the word
"unearned".
While the company is a going concern, it has to
prepare a balance-sheet annually as per section 211 and Schedule VI to the
Companies Act-The left side of the balance-sheet shows the liabilities and the
right side shows the assets. As remarked by Professor Pennington at page 600 of
his book referred to above, "the left hand side of a balance-sheet is
often misleadingly referred to as the liabilities side ; it is certianly true
that the company's debts and liabilities appear there but so also do other
items such as paid up capital and reserves which are not liabilities owed by
the company but represent the interest of its shareholders in its undertaking.
The left hand side of the balance-sheet should be regarded as a statement of
the way in which the company's assets shown on the right hand side would be
applied if the company were wound up immediately". Item No. (13)(3) under
the heading "Provisions" on the side of the liabilities in the
statutory form of balance-sheet in Schedule VI is as follows :
"Arrears of fixed cumulative dividends". An
explanatory note added to it says that "the period for which the dividends
are in arrears.......shall be stated". This is a statutory recognition of
the fact that in the balance-sheet of a company, provision has to be made for
payment of the liability consisting of the arrears of fixed cumulative
dividends. This may or may not mean that there is an enforceable debt due to a
preferential shareholder against a company while it is a going concern. But it
does mean that a provision has to be made by the company for the payment of the
arrears of cumulative dividend in its balance-sheet with a view to provide for
payment of such cumulative dividends in the event of winding-up.
Shri Sanghi then argued that the English decisions
should not be allowed to influence the construction of article 7(i) inasmuch as
there was no provision in the English Companies Act, 1948, corresponding to
section 205 of our Companies Act. This argument ignores the fact that article
116 of Table A of Schedule I of the English Companies Act corresponds to
section 205 of our Companies Act.
The reason why the distinction between profits on the
one hand and the capital and the other assets of the company on the other hand
so important when the company is a going concern disappears when the company is in liquidation is that in
liquidation the whole of the property of the company is treated as its assets
without any difference between the sources from which the assets have accrued
to the company. Shri Sanghi contended that even during liquidation a
distinction between the different sets of assets could be made according to
their sources. He relied on the special definition of a "dividend" in
the Income-tax Acts by which income-tax could be imposed on that part of the
assets of a company in liquidation which could be traced to the profits made by
the company (Hari Prasad Jayantilal & Co. v. Income-tax Officer ,
Bharat Fire and General Insurance Co. v. Commissioner of Income-tax
and Kantilal Manilal v. Commissioner of Income-tax ).
But these very decisions show that such a distinction could be made during
winding-up only for the purposes of taxation and that it was not relevant for
the purposes of the distribution of the assets of the company.
On the other hand, in J.K. (
"..................the very object for which the
company existed and which also was the assumption on which the scheme was
framed ceased to exist......... The effect of a winding-up order is that except
for certain preferential payments provided in the Act the property of the
company is to be applied in satisfaction of its liabilities pari passu. Pari
passu distribution is to be made in satisfaction of the liabilities as they
exist at the commencement of the winding-up."
Applying this principle to our case, it is apparent
why some but not all rights created during the working of the company survived
after the winding-up order is made. Those rights which concern the working of
the company do not survive. For, the very objects of the company ceased. On the
other hand, those rights which are expressly meant to be worked out only during
the winding-up of the company survived and become enforceable after the
winding-up, e.g., the right to the preferential payment of cumulative dividends
to preference shareholders being a right which becomes enforceable only during
the winding-up.
Lastly, Shri Sanghi stressed that this was a very
exceptional case. The company did not go into business at all. In such a case
cumulative dividends to preference shareholders should not be paid out of
capital. We do not see, however, any difference between such a company and a
company which has made no profits and which may have run into losses. In either
case, the cumulative dividend shall have to be paid out of the capital of the
company. The rule against reduction of capital or nonpayment of dividends
except from profits ceases to apply during winding-up simply because the very object
of winding-up is to obliterate all distinctions in the kinds of assets and to
apply the assets under section 511 of the Companies Act.
For the above reasons, the answer given to the
reference made by the liquidator by the learned company judge, namely, that the
arrears of dividends on preference shares are payable during the winding-up
under article 7(i) is upheld. The appeal is dismissed. The parties to bear
their own costs.
[1953] 23 COMP. CAS. 90 (MAD.)
HIGH
COURT OF
v.
Grandhi Anjaneyulu
MACK AND KRISHNASWAMI NAYUDU, JJ.
OCTOBER 29, 1952
Tiruvenkatachari, for the
Appellant.
Thyagarajan, for the Respondents.
Mack J.—Appellant, Mothey
Krishna Rao, is the plaintiff, whose suit for a declaration that "he is
the secretary and treasurer of Sri Krishna Jute Mills Ltd., Eluru," has
been dismissed with costs by the learned Additional Subordinate Judge of Eluru.
Defendants 1 to 4 were directors of this company when on 1st July, 1950, a
meeting of the board ended in disorder and confusion which necessitated police
intervention to restore order. According to the plaint, after the regular
business on the agenda had been done, defendants 1 to 4 wanted other matters
brought up, which led to this fiasco. After the plaintiff left the room,
defendants 1 to 4 passed a resolution co-opting the fifth defendant as
director, suspending the plaintiff from the post of secretary and treasurer and
appointing the second defendant to look after the duties of secretary and
treasurer temporarily. Plaintiff filed a petition under Section 144 of the
Criminal Procedure Code in the Stationary Sub-Magistrate's Court and obtained
an order in his favour, which was vacated by the High Court on the 24th of
August, 1950. Exhibit A-5 is a letter written by the second defendant as
chairman of the board and as secretary and treasurer to the plaintiff
forwarding to him copy of the board's resolution, which found him guilty of
certain charges, suspended him from acting as secretary and treasurer, with a
recommendation for his outright dismissal to an extraordinary general body
meeting to be convened for the purpose along with the annual general body
meeting to be held during the year. This course, however, was not adopted and
on 25th July, 1950, the board removed the plaintiff from the post of secretary.
This suit was filed on 1st October, 1950.
The scope of the suit is very limited and confined to the
articles of association of the company. Plaintiff has not sued for damages for
wrongful removal or dismissal, but for a declaration that he still continues to
be the secretary and treasurer on the ground that the board had no power to
remove him under the articles of association. There has been no argument before
us at all on the merits of the removal of the plaintiff or as regards any
alleged misconduct by him, which justified his removal. Mr. Thiruvenkatachari
for the appellant took his stand on this pure question of law that under the
articles of association the board of directors was not competent to remove the
plaintiff, and that the only competent authority, which could remove him was
the general body of shareholders by a special resolution at an extraordinary
general meeting.
To appreciate this contention, it is necessary to consider
the relevant articles and the genesis of the plaintiff's appointment as
secretary and treasurer. This company was formed in 1904 and, under article
111, plaintiff's uncle Mothey Gangarazu and Venkata Subbarao were the first
joint secretaries and treasurers of the company. The article contained an
important proviso, that it shall be lawful for the company to remove them and
appoint others in their place by resolution passed at an extraordinary general
meeting by a majority of not less than three-fourths of the shareholders of the
company. Article 114 regulated the remuneration of the joint secretaries,
treasurers and manager. In 1935 at an extraordinary general meeting, a new
article 114 was substituted fixing the remuneration for secretaries and
treasurers at 9 per cent. on the net profits or Rs. 4,000 a year, whichever is
higher. Under article 114-A, the plaintiff Mothey Krishna Rao was appointed
working secretary and treasurer entitled to draw the whole of this
remuneration. Article 111 was not itself amended till 12th March, 1948, also by
a resolution at an extraordinary general meeting. In its place was substituted
the following:
"Mr. Mothey Krishna Rao, Zamindar, Eluru, shall be the
sole secretary and treasurer."
At that same meeting, there was an amendment to article 114
entitling him to remuneration of only a commission of 9 per cent. on the net
profits of the company. It is noteworthy that the proviso to article 111 that
the original joint secretaries and treasurers could not be removed, except by a
resolution at an extraordinary general meeting, was specifically deleted when
the plaintiff was appointed sole secretary and treasurer.
The plaint case is based entirely on the legal position
sought to be made out of the fact that by this combination of circumstances the
appointment of the plaintiff as sole secretary and treasurer was in fact from
1938 under Article 111 of the company. It is common ground that plaintiff is
himself a substantial shareholder and that the company did not itself run the
jute mills from 1940 since when it has been annually leased out to the East
India Commercial Company, Calcutta. There was, therefore, apparently not much
day-to-day business for the sole secretary to do.
The short point for consideration is the legal effect of
the memorandum and articles of association. Under Section 21 of the Indian
Companies Act,
"The memorandum and articles shall, when registered,
bind the company and the members thereof to the same extent as if they respeletively had been signed by
each member and contained a covenant on the part of each member, his heirs and
legal representatives, to observe all the provisions of the memorandum and of
the articles subject to the provisions of this Act."
There is a long catena of English
decisions, which have unhesitatingly laid down that not only a third party, but
even a shareholder cannot sue the company on anything contained in the
articles, treating the articles as a contract by the company with him, and that
it is incumbent on the party suing to make out a contract outside and
independently of the articles. In the earliest case, Eley v. Positive
Government Security Life Assurance Co., the articles contained a clause
providing that Eley should be employed for life as solicitor for the company
and should not be removed except for misconduct. He took office and later
became a shareholder. The company discontinued his employment. While still a
shareholder, he sued in damages for breach of contract. It was held that no
action lay. The Court of Appeal disposed of the matter summarily, Lord Cairns
L. C. refusing the plaintiff relief observing that the articles were an
agreement inter socios whereas the appointment of Eley as solicitor for life in
the articles so far as he was concerned was res inter alios acta. Eley had
advanced a sum of £ 200 to be expended in the formation of the company and the
company-promoter arranged that he should be appointed permanent solicitor for
life. This view was followed in Brown v. La Trinidad, Hickman v. Kent or Romney
Marsh Sheep-breeders' Association, and Beattie v. Beattie, and in a number of
other decisions, which need not be specifically cited. In Hickman v. Kent or
Romney Marsh Sheepbreeders' Association, the authorities as to whether the
articles constitute contract as between the company and its members were
reviewed by Astbury J. who decided that the result of apparently conflicting
decisions and dicta was that though the articles can neither constitute a
contract between the company and an outsider, nor give any individual member of
the company special contractual rights beyond those of the members, generally,
they do in fact constitute a contract between a company and its members in
respect of their ordinary rights as members (See Buckley's Companies Act, 11th
Edn., page 35).
Palmer has at pages 30 and 31 of
his Company Law, 19th Edn., indicated the difficulty of reconciling the rule in
these cases with Section 20 of the English Act. of 1948 which corresponds to
Section 21 of our Act. There have been a series of cases in which courts have
inferred from the articles themselves implied contracts. In the case of Swabey
v. Port Darwin Gold Mining Co., the articles provided for the payment to each
director by way of remuneration of a specified sum per annum. The company
reduced this by a special resolution, whereupon the plaintiff resigned and sued
the company for three months' remuneration for services prior to the date of
his resignation. The court held that he was entitled to recover on the footing
of an implied contract in the terms of the clause. "The articles",
said LORD ESHER, "do not themselves form a contract but from them you get
the terms upon which the director is serving." The articles undoubtedly
constitute evidence in a wide field such as the terms of remuneration of
managing director, secretaries, treasurers and so on Palmer has observed at
page 31 that the question whether an implied contract so entered into was
capable of being varied by the company against the will of the other party has
not been finally decided and he has cited decisions which appear to take
different views. A discussion of those decisions would not be relevant for
purposes of the present appeal. We have been referred to no decision either in English
or in Indian law in which a shareholder has succeeded, after removal from an
office in the company, in obtaining a declaration that such removal was invalid
and that despite it he continues to hold the office.
Mr. Thiruvenkatachari for the
appellant has taken his stand on the basis that as the plaintiff was appointed
by a special resolution at an extraordinary general body meeting, that is the
only authority which can legally remove him according to the articles of
association. Mr. Thyagarajan for the defendants has argued contra that the
directors of the company have full powers to remove the secretary by virtue of
article 112, which defines the wide powers of joint secretaries and treasurers,
inter alia, to appoint, to remove or suspend managers, engineers, clerks and so
on upon such terms and conditions as they shall think proper, subject of course
to the general control of the board of directors. Article 99 confers on
directors all powers, which are not expressly directed to be exercised by the
company in general meeting. Mr. Thyagarajan urges that the proviso to the
original article III having been specifically omitted, the plaintiff is bereft
of any protection even under the articles, and that the board had full powers
to remove him as secretary. He also argued that managing agents can under
Section 87-B(f) of the Companies Act be removed only subject to approval by a
resolution at a general meeting of the company and that no such statutory
protection is given to a mere secretary. As regards the contention that the
plaintiff, having been appointed by a special resolution at an extraordinary
general meeting can only be removed by the authority who appointed him and not
by the board of directors, it would indeed appear that this was also the view
taken by the board itself when in their original resolution contained in the
letter Exhibit A-5 communicating to the plaintiff his suspension, they
recommended his outright dismissal to be given effect to at a general body
meeting. This recommendation however was not implemented before this suit was
filed and we have instead the board itself just suspending "him" and
then removing him outright.
The plaintiff is also, by virtue
of his position as secretary, an ex-officio director under article 82. A
director may be removed under article 96 only by a resolution at an
extraordinary general body meeting with a three-fourths majority in accordance
also with Section 86-G of the Companies Act. We do not think that it is
necessary for us to decide in this suit as framed whether the board of
directors at a meeting was competent to remove the plaintiff from the post of
secretary and treasurer and whether this can only be validly done by a special
resolution at an extraordinary general body meeting. The plaintiff has sued only
in his capacity as secretary and treasurer and, as Mr. Thyagarajan has urged,
his position as director is derived from his appointment as secretary. We find
on the pure question of law, on which this appeal is pressed, that the
plaintiff has no cause of action against the company as such on the basis of
the articles of association and that his appointment as secretary must be
regarded as one de hors the articles and governed by an independent contract as
between the plaintiff and the company, as regards which there is no other
evidence apart from the articles themselves.
In Ramkumar Potdar v. The
Sholapur Spinning & Weaving Co., Ltd., a Bench of the Bombay High Court
held that the court does not interfere with the internal management of the
affairs of a company and that, if a majority of shareholders consider that a
particular contract of employment should be terminated, the court would not
ordinarily consider the matter at the instance of a minority of shareholders.
It further held that the memorandum of association of a limited company does
not constitute a contract between the company and the third party, who may be
mentioned therein and that the court would not make an order, the effect of
which would be to enforce specifically a contract of personal service. In this
suit filed for a bare declaration, there are two other hurdles in the way of a
court giving plaintiff any relief. Plaintiff has not sued for damages in breach
of contract but for a declaration without any consequential relief, which is in
prima facie violation of the proviso to Section 42 of the Specific Relief Act
Section 42 gives the court discretion to declare a person entitled to any legal
character or to right as to any property, with a proviso that no court shall
make any such declaration where the plaintiff being able to seek further relief
than a mere declaration of title omits to do so. In the present suit, the
plaintiff has not asked for relief by way of damages consequent on the wrongful
termination of his services as secretary and treasurer, which is a normal
relief claimed in cases where the services of a servant or employee are
wrongfully terminated. Mr. Thiruvenkatachari has sought to draw a fine
distinction between the case of a person who has been removed by an authority
incompetent to do so and by a person wrongfully removed by a competent
authority. In the present case, however, the incompetence of the board of
directors is sought to be inferred from the articles of association themselves,
which plaintiff cannot, for this purpose, invoke so as to give him a cause of
action. The learned Subordinate Judge found that the suit for a mere
declaration was maintainable on the very curious ground that as the company
property was in custodia legis of the Sub-Divisional Magistrate, Eluru, in
Section 145 proceedings in M.C. No. 53 of 1950, it was not in the possession of
the defendants and, therefore, it was not possible for the plaintiff to ask for
consequential possession. The proviso to Section 42 of the Specific Relief Act
cannot be by-passed in this manner. When a dispute between two parties gives
rise to proceedings under Section 145 of the Criminal Procedure Code the
property falls only temporarily under magisterial control subject to the rights
of the parties being determined by a civil court. The pendency of those
proceedings will not make this suit for mere declaration maintainable.
It is urged that there are some
decisions in which courts have granted relief by way of mere declaration in
case of removal from an office. We have been referred to the Privy Council
decision in High Commissioner for
This is Section 21 of the
Specific Relief Act which sets out contracts, which cannot be specifically
enforced. One such category is Section 21(b) which is so dependent on the
personal qualifications or volition of the parties or otherwise from its nature
is such that the court cannot enforce specific performance of its material
terms. The declaration sought by the plaintiff with the consequential relief he
belatedly asks for is really tantamount to specific performance of a contract
of personal service.
It is regrettable that the board
did not call for an extraordinary general body meeting to ratify their action
in accordance with their own declared intention in Exhibit A-5. It is brought
to our notice that on a petition filed by the appellant, a commissioner was
appointed by this court on 2nd May, 1951, to prepare a list of all documents
and registers and that he was discharged on 2nd August, 1961, by PANCHAPAKESA
AIYAR J. In an appeal against that order, GOVINDA MENON J. and RAMASWAMI
GOUNDER J. appointed a receiver, who called a general body meeting at which six
directors were re-elected. It is sufficient to say that during all this period,
the second defendant continue to function as secretary and treasurer. What
happened subsequent to the suit is quite immaterial and cannot affect its
merits.
For reasons given supra, it is
quite impossible for us to give the plaintiff any relief in the plaint as
framed and on the footing on which he has come to court. We dismiss his appeal,
but we consider this to be a fit case in which the parties should be directed
to bear their own costs throughout and direct accordingly.
[1957]
27 COMP. CAS. 255 (BOM.)
v.
Bansidhar Jagannath.
GAJENDRAGADKAR
AND GOKALE, JJ.
SEPTEMBER
16, 1955
GAJENDRAGADKAR
J. - On 26th April, 1951,
the appellant had applied to the
Both the
appellant and the respondent were and are members of the East India Chamber of
Commerce. It appears that this association had established a market or exchange
for effecting forward transactions inter alia in silver pieces. Consistently
with the articles of association, bye-laws were framed to regulate the
transactions effected by members of the association in the said exchange in
respect of several commodities including silver pieces. In about January, 1945,
a syndicate of five persons was formed for dealing in silver pieces. On or
about 5th February, 1948, according to the respondent one Lawjibai as
representing the said syndicate had instructed the respondent to purchase 6,615
tukdas of silver from the market and accordingly the respondent did make the
said purchase for and on behalf and as an agent of the said syndicate.
Thereafter one Chandulal Ravjibhai and one Kishan Gopal Bagdi instructed the
respondent to allot and assign the said 6,615 pieces of silver to four parties
in the proportion mentioned by them. 3,000 pieces were allotted to Messrs.
Radhakishan Shivkisan ; 1,298 pieces to Messrs. Jotram Kedarnath ; 1,817 pieces
to Messrs. M. Gulamali Abdullusein ; and 500 pieces to the appellant. The rate
at which these 500 pieces were allotted to the appellant was Rs. 160-14-6 per
100 tolas. It would appear that on 7th February, 1948, an emergency was
declared by the authorities of the association and on 10th February, 1948, the
board of directors issued instructions for squaring up all transactions at Rs.
154 per 100 tola. In respect of this transaction the respondent claimed from
the appellant Rs. 24,226-9-0 and on 15th April, 1948, the respondent applied
for reference of this dispute to arbitration under the relevant articles of
association and bye-laws. The Lavad Committee to whom this dispute was referred
by the association held several meetings and in the end on 20th September,
1950, the committee made an award. It may be mentioned at this state that in
the meanwhile three Lavad Committees came to be appointed, as under the
articles of association the life of a Lavad Committee appointed by the
association is only a year. The first Lavad Committee was appointed on 24th
October, 1947, the second on 27th October, 1948, and the third on 24th October,
1949. It was the third Lavad Committee that made the award in the present
dispute. The award was filed on 27th February, 1951, and the appellant was
given notice of the filing of the award on 3rd April, 1951. Thereafter the
appellant filed his petition to set aside the award and his petition was
followed by the respondent’s petition for extention of time to make the award.
Ultimately the appellant’s petition was dismissed and the respondent’s petition
was allowed.
The learned
Judge before whom the consolidated applications were heard has held that on the
facts of this case it was necessary in the interests of justices that time for
making the award should be extended. He has also held that the relevant
articles of association read in the light of the association’s bye-laws
constitute an agreement in writing to refer the dispute to arbitration and that
the said articles and bye-laws dispute. He was disposed to take the view that,
though the appellant disputed the existence of the contract itself, that did
not oust the jurisdiction of the Lavad Committee. According to him, it was
within the competence of the Lavad Committee to adjudicate even upon this
dispute. It was urged before the learned Judge by the appellant that the
proceedings before the Lavad Committee were affected by many irregularities ;
but the learned Judge was not impressed by this argument. He relied upon the
conduct of the appellant in that he appeared before the Lavad Committees for
more than two years, took a chance of the decision of the Lavad Committee going
in his favour, and when he found that the award was passed against him, he
chose to raise these technical objections. In the opinion of the learned Judge,
this conduct showed acquiescence on the part of the appellant and it was not,
therefore, open to him to raise these technicalities against the validity of
the award at that stage. That is why the learned Judge rejected the appellant’s
prayer for setting aside the award.
In the present
appeal Mr. K.T. Desai, for the appellant, has argued that even a superficial
examination of the irregular procedure adopted by the Lavad Committees in
dealing with the dispute would show that the committees were guilty of enormous
delay and he contended, that, if ever there was a case where a request for
extension of time should not be granted, it would be in the present case. It is
true that the proceedings before the arbitrators have taken place in a very
leisurely manner ; and the constitution of the committees were fluctuating
bodies. It appears that under the bye-laws of the association two Lavad
Committees are nominated from year to year and pending disputes are assigned to
these two committees respectively. Mr. K.T. Desai has taken us through the
details of the several meetings held by the Lavad Committees and has emphasized
the fact that the members of the committee have changed from time to time. But
the change of personnel of the Lavad Committees is inevitable and unless the
bye-laws framed by the association in regard to the constitution of the Lavad
Committee are themselves invalid or ultra vires, no serious or valid grievance
can be made against the changing constitution of the Lavad Committees
themselves. At on stage Mr. K.T. Desai seemed to suggest that the quorum of two
members prescribed by the bye-laws was itself not satisfied ; but he conceded
that this argument was based upon a misconception and that the rule as to
quorum has been complied with in all the meetings held by the Lavad Committees
in dealing with the present dispute. Whether or not the bye-laws prescribing
the constitution of the Lavad Committees and their procedure are ultra vires,
the contention that extension of time should not have been allowed by the
learned Judge cannot, in our opinion, be made by the appellant because under
section 39 of the Arbitration Act, an order passed by the trial Judge extending
time is not appealable. The Legislature has clearly contemplated that the
question as to whether time should be extended should be left entirely to the
discretion of the trial Judge and the order that the trial Judge may pass in
the exercise of his discretion should be regarded as final. It is true that the
application made by the respondent for extending time was consolidated with the
appellant’s application for setting aside the award. But this consolidation
cannot give the appellant a right to challenge an order which, under the law,
is not appealable. Therefore, in our opinion, it is unnecessary for us to
consider whether the learned Judge was right or not in extending time for
making the award.
Mr. K.T. Desai
has then argued that the learned Judge was in error in holding that the
articles of association could, in law, constitute an agreement in writing to
refer the dispute to arbitration within the meaning of section 2 of the
Arbitration Act. Section 2 of the Arbitration Act requires that the arbitration
agreement must be made in writing. If the contract which gives rise to a
dispute between the parties is itself reduced to writing and it includes an
arbitration agreement, there is no difficulty in holding that the requirements
of section 2 of the Arbitration Act are complied with. If the contract between
the parties is reduced to writing and makes the terms of the contract subject
to the provisions of the articles of association, there is no difficulty in
holding that the articles of association themselves are thereby made part of
the contract, and if the articles provide for an arbitration agreement, the
dispute between the parties arising from such a contract must be referred to
arbitration. This position also cannot be disputed. In the present case,
however, the alleged contract was not reduced to writing and the case for the
respondent is that, though the contract is oral, it is nevertheless subject to
the articles of association because under section 21 of the Companies Act, the
articles of association must be taken to constitute an agreement in writing
between the appellant and the respondent inter se as they are both members of
the said association. Since the articles of association represent a contract
between the appellant and the respondent inter se, any contract, entered into
between them subsequent to their joining the said association must inevitably
be subject to the provisions of the said articles of association and a dispute
like the present arising between them has to be referred to arbitration of the
Lavad Committee appointed under the bye-laws of the association. This view has
been accepted by the learned Judge and Mr. K.T.Desai for the appellant disputes
the validity and the correctness of this view. It may be mentioned at this
stage that the point thus raised by Mr. K.T.Desai is a vexed point of law on
which sharp difference of opinion has been expressed in judicial decisions.
In the
alternative, it has been urged for the appellant that even if the articles of
association are held to constitute an arbitration agreement between the
appellant and the respondent within the meaning of section 2 of the Arbitration
Act, in fact on a fair and reasonable construction, the relevant and material
articles do not confer jurisdiction on the Lavad Committee to deal with the
dispute as to the existence of the contract itself. In other words, if the
existence of the contract had been admitted by the appellant, it may have been
open to the respondent to refer the dispute to the arbitration of the Lavad
Committee. But since the appellant has disputed the very existence of the
contract even under the articles of association, the Lavad Committee had no
jurisdiction to deal with this part of the dispute. The decision of this point
would depend upon a fair and reasonable construction of the material articles
of association and bye-laws made by the association. It is necessary to
remember that this point has been raised alternatively on the assumption that
the articles of association can in law constitute a valid arbitration agreement
as a result of the provisions of section 21 of the Companies Act.
It would, we
think, be convenient to deal with this latter argument first and that would
naturally take is to the relevant articles of association and bye-laws framed
by the East India Chamber of Commerce. At the hearing of this appeal before us,
learned counsel for both the appellant and the respondent argued the matter on
the translation of the relevant articles of association and bye-laws which were
produced before the learned trial Judge. At the fag end of the hearing,
however, Mr. M. V. Desai, for the respondent invited our attention to the fact
that the articles of association which have been filed with the Registrar of
Societies appear to have been adopted in English and he sought to base his
argument on the words used in the relevant articles of association in a copy of
the said articles of association. In dealing with this point, we will refer
both to the English translation supplied to the learned Judge below and to the
English version on which Mr. M. V. Desai relied at the end of the hearing of
the appeal. But in doing so, it is necessary to remember that the arbitration
agreement must, even on the case of the respondent, primarily reside in the
articles of association.
It is true
that under article 91 the board had been given power to frame and pass such
bye-laws as they consider in the interest of and conducive to the objects of
the chamber or any of them, “and they may at any time and from time to time
rescind, alter or add to any of the bye-laws”. But the bye-laws must be
consistent with the articles of association and cannot validly alter or modify
the said articles. If, on a fair construction of the material articles of
association, it appears that the dispute as to the existence of the contract
itself was not intended to be referred to the Lavad Committee, no bye-law can
validly confer jurisdiction to entertain such disputes on the Lavad Committee.
It may be
conceded that, in construing the relevant articles of association, the court
may, before accepting any specific construction, take into account all the
relevant articles together with the bye-laws. If the words used in the relevant
articles are ambiguous attempt should be made to adopt such a construction of
the said words as would avoid a conflict between the articles and the bye-
laws. But if the words used are clear and unambiguous and they irresistibly
lead to the inference that jurisdiction to deal with the dispute as to the
existence of the contract itself was not intended to be conferred on the Lavad
Committee, then that meaning cannot be extended merely because words of wider
denotation may have been used in some of the bye-laws. In the very nature of
things, bye-laws are subordinate to the articles of association, and indeed
they are framed in order to carry out the provisions contained in the articles
themselves. As Halsbury says :
“A bye-law
must not be opposed to the constitution of the particular corporation nor can
it be made the means of remedying a defect therein..... A bye-law cannot
explain a charter, and although it may lessen or enforce the powers given to
the corporation, it cannot increase them.” (Halsbury, Vol. 9, para. 82).
It is the
light of this legal position that we must now proceed to consider the material
articles and bye-laws.
The main
article on which reliance was placed before the learned Judge below is article
20(a). It was translated before the learned Judge in this way :
“It shall be
obligatory on every member with reference to all the claims and disputes arising
out of or incidental to all the dealings or transactions entered into by him
with any other members in regard to gold, silver, wheat, money lending business
and hundis and chithis, that he shall, subject to the bye-laws that may be
framed from time to time and which may be in force and in case no such bye-laws
are there then subject to rules that the board may from time to time lay down,
get the same settled first by arbitration without resorting to a court of law.”
The English
version of the articles of association, which, according to Mr. M. V. Desai,
has been filed with the Registrar of Societies, sets out article 20(a) as
follows :
“It shall be
compulsory for every member in the first instance to have all claims and
disputes arising out of in course of all dealings and transactions in gold,
silver, seeds, wheat, sarafi business and hundi chithis between himself and any
other member settled by artbitration and without recourse to law subject to the
bye-laws such rules as the board from time to time prescribe.”
In construing
this article Mr. M. V. Desai has asked us to bear in mind one of the objects
for which the East India Chamber of Commerce Ltd. has been established. Clause
3(a) of the memorandum of association provides that one of the objects for
which the chamber has been established was to “remove all clauses of friction
between merchants inter se and between them and their constituents.” Clause
3(g) likewise provides :
“In case of
mutual disputes arising between merchants in the aforesaid business to act as
mediators or arbitrators between the members of the chamber and their
constituents in all sales and purchases and in all matters of difference or
disputes arising between the members of the chamber and between such members
and their constituents.”
It may be
conceded that the objects on which Mr. M. V. Desai relies are no doubt stated
in wide terms. But do we find the objects underlying the use of these wide
words effectively reproduced in the material articles of association ? It may
be useful at this stage to consider the scheme of the relevant articles of
association.
Article 1
defines the material terms used in the articles. Article 2 provides that the
chamber should be declared to consist of 500 members, unless the general
meeting of the chamber by resolution increases the number of its members.
Articles 4 and 5 deal with the classification and rights of members. The method
of admission is dealt with in articles 6 to 9. The rights and liabilities of
members are indicated in articles 10 to 20. Articles 20(a) and 21(a) deal with
arbitration. The subsequent articles deal with borrowing powers, general
meetings, board of directors, powers and duties of office- bearers, the vice
president, the secretary, the joint secretary and the treasurers, the powers of
directors, the accounts and the provident fund. It would thus be noticed that,
so far as the question of arbitration is concerned, the only articles which are
relevant are articles 20(a), 21(a) and 21(b).
Article 21(a)
deals with the arbitration committee and article 21(b) provides that disputes
shall be settled by arbitration as provided in the material articles and
bye-laws. Article 21(a) as contained in the English version which has been
filed before the Registrar of Societies reads thus :
“The
arbitration committee shall consist of 7 members. This committee shall dispose
of all disputes and differences arising between members or members and their
customers with respect to any transaction or rates or dues or anything out of a
transaction or in respect to any liability arising from any transaction.”
Article 21(b)
reads thus :
“All disputes
between members of the chamber shall be settled by arbitration as provided in
these articles and the bye-laws and rules made hereunder and no member shall
institute any legal proceedings against any other member of the chamber for
settlement of such disputes.”
Looking at
articles (20) (a), 21(a) and 21(b), it would be noticed that the obligation to
refer all disputes to arbitration is imposed by article 20(a). Article 21(a)
deals with the composition of the Lavad Committee and defines its powers, and
article 21(b) contains a general admonition to members of the association not
to take legal proceedings against any other member for settlement of disputes
which under the relevant articles of association and bye-laws have to be
referred to arbitration.
Before the
learned Judge below, reliance has been placed by the respondent only on article
20(a), and we think, rightly. An arbitration agreement as required by section 2
of the Arbitration Act can be said to reside only in article 20(a) which deals
with the obligation of members. It cannot be said to reside in either article
21(a) or in article 21(b) because the topic which these two articles are
intended to cover is not one of the obligations of members at all. It is,
therefore, necessary to consider carefully the terms of article 20(a). Under
this article, all claims and disputes arising out of or in course of all
dealings and transactions between one member and another shall be settled by
arbitration and without recourse to law. In the official translation, the
disputes which have to be referred to arbitration are mentioned as those
arising out of or incidental to all the dealings or transactions entered into
by one member with any other member.
Now, the short
point which this article raises for our decision is whether the expression
“disputes arising out of or in course of all the dealings and transactions
between members” includes a dispute as to the existence of the dealings or
transactions themselves. It is very difficult to hold that a dispute as to the
existence of the contract itself arises out of the contract or arises in course
of the contract.
A dispute as
to the existence of the contract itself is outside the contract altogether and
the decision of this dispute as an essential preliminary before dealing with
the disputes arising out of or in course of the said contract. Where a party
challenges the basic allegation made against him that he has entered into a
transaction with another member, the first point in limine which arises for
decision is whether a contract had taken place between the members or not. It
is only if an after it is held that the alleged contract had taken place
between the parties that claims and disputes arising out of the said
transaction or arising in course of the said transaction can fall to be
considered. Wherever arbitration agreements are intended to cover even disputes
in respect of the existence of contracts, appropriate words are used to make
the meaning clear.
We have enough
come across articles of association which in terms provide for the compulsory
arbitration of all disputes in regards to the existence or validity of a
contract and claims arising out of or incidental to the said contract. In
construing article 20(a), it may be relevant, as Mr. M. V. Desai has contended,
to remember that the objects mentioned in the memorandum of association are
very wide. But on the other hand, we cannot overlook the fact that an agreement
as to compulsory arbitration takes away a party’s right to have his dispute
with another member decided by a court of ordinary civil jurisdiction. Even so,
if the words used in article 20(a) are capable of two constructions, we may be
justified in adopting the construction that helps reference to arbitration of a
domestic tribunal appointed by the association.
But having
carefully considered article 20(a), we are unable to hold that the relevant
words used in this article can reasonably yield the meaning which has been
assigned to it by the learned Judge below. In our opinion, so far as this
article is concerned, a dispute as to the existence of the transaction or
dealing itself is not covered by it and no obligation has been imposed upon any
member to refer such a dispute to the arbitration of the Lavad Committee
provided for by the bye-laws.
It may be
useful at this stage to refer to some judicial decisions in cases where a
similar question has been considered. Heyman v. Darwins Ltd., is the first
decision to which we propose to refer. In this case, an arbitration clause in a
contract which referred to differences or disputes “in respect of” or “with
regard to” or “under the contract” was construed by the House of Lords. The
question which was raised for decision before the House of Lords was whether a
plea that the contract had been frustrated could be said to fall within the
purview of the arbitration clause. In deciding this question, VISCOUNT SIMON
L.C. has referred to the relevant decisions which had construed similar
arbitration clauses and has observed in his speech that it was of most
practical importance that the law should be quite plain as to the scope of an
arbitration clause in a contract where the clause is framed in wide and general
terms and he added that he trusted that the decision of the House in the appeal
before them might be useful for this purpose and would remove any
misunderstanding which had arisen out of the previous decisions to which he had
referred. Then the learned Law lord stated what in his opinion was the effect
of a true and reasonable construction of such a clause :
“If the
dispute is whether the contract which contains the clause has ever been entered
into at all, that issue cannot go to arbitration under the clause, for the
party who denies that he has ever entered into the contract is thereby denying
that he has ever joined in the submission. Similarly, if one party to the
alleged contract is contending that it is void ab initio (because for example,
the making of such a contract is illegal), the arbitration clause cannot
operate, for on this view the clause itself also is void.
But, in a
situation where the parties are at one in asserting that they entered into a
binding contract, but a difference has arisen between them whether there has
been a breach by one side or the other, or whether circumstances have arisen
which have discharged one or both parties from further performance, such
differences should be regarded as differences, which have arisen ‘in respect
of’, or ‘with regard to’, or ‘under’ the contract, and an arbitration clause
which uses these, or similar, expressions should be construed accordingly.”
It would thus
appear that the observations made by VISCOUNT SIMON support the view which we
feel disposed to take about the effect of the material articles of association
in the present case.
We may now,
refer to three reported decisions of this court. In Mahomed Haji Hamid v.
Pirojshaw R. Vekharia and Co. Mr. Justice WADIA had occasion to construe a bye-law
which referred to disputes arising out of or in relation to contracts. The
bye-law in question was bye- law No. 82 adopted by the East India Cotton
Association Ltd. “What the exact distinction, if any,” observed the learned
Judge, “there is between the words ‘arising out of’ and the words ‘in relation
to’ in that bye-law it is not easy to make out, but in my opinion disputes
between parties in relation to a contract the very factum of which is denied
are not disputes which the arbitrators have jurisdiction to decide. In other
words, the arbitrators have no jurisdiction to device whether in fact the
contracts were or were not entered into.”
It is
significant that the question as to the jurisdiction of arbitrators was raised
before Mr. Justice WADIA by reference to the words used in a bye-law of the
East India Cotton Association Ltd. and Mr. Justice Wadia held that the material
words used in the said bye- law did not confer any jurisdiction on the
arbitrators to deal with and decide the dispute as to the factum of the
contract itself.
In Shriram
Hanutram v. Mohanlal and Co., Mr. Justice KANIA had to decide a similar
question arising on a contract between two parties, and in discussing the point
Mr. Justice KANIA has cited with approval the observations of Mr. Justice WADIA
to which I have just referred.
In Ghelabhai
Mahasukhram v. Keshavdev Madanlal, CHAGLA C.J. and COYAJEE J. have held that
where a rule of an association is made a term of the contract between the
parties, and the term is neither against public policy nor illegal nor immoral,
the rule is binding upon the parties, even if it is subsequently attacked as
being ultra vires. In the course of his judgment the learned Chief Justice has
referred to the judgments of Mr. Justice WADIA and Mr. Justice KHANNA which
have been cited by us above, and he appears to have expressed his concurrence
with the conclusion that under an article like the one before us it would not
be competent to the arbitrators to decide the question as to whether the
contract itself had taken place between the parties. The dispute as to the
existence of the contract is a collateral dispute and it is only after it is
decided in favour of the existence of the contract that the jurisdiction of the
arbitrators to consider the other disputes arising between the parties under
the said contract can arise.
To the same
effect are the observations made by SIR SHADI LAL, C.J., and CAMPBELL J. in Jai
Narain Babu Lal v. Narain Das Jaini Mal, and GIVINDA MENON and CHANDRA REDDI.
J.J., in Dinasari Ltd. v. Hussain Ali, have also accepted the same view. These
decisions, in our opinion, support the view which we are disposed to take about
the true effect of the provisions contained in article 20(a) in the case before
us.
Mr. M.V.Desai,
however, preferred to put his case before us more on articles 21(a) and 21(b)
than on article 20(a) itself. He argued that the former articles used wider
words and they confer jurisdiction on the arbitration committee to deal even
with a dispute as to the factum of the contract itself. The arbitration
committee is authorised under article 21(a) to dispose of all disputes and
differences arising between members and members or members and their customers
with respect to any transaction or rates or dues or anything out of a
transaction or in respect to any liability arising from any transaction. Here
again, what the arbitration committee is authorised to deal with are disputes
and differences arising between members in respect of any transaction and that
seems to postulate the existence of an admitted transaction between the
parties. Besides, even if article 21(a) was capable of the wider construction
for which Mr. M.V.Desai contends, that, in our opinion, cannot be said to
constitute an arbitration agreement within the meaning of section 2 of the
Arbitration Act. Article 21 (a) clearly does not purport to impose an
obligation on the members. The obligation has already been imposed by article
20(a) and article 21(a) proceeds to take the subsequent step of defining and
describing the powers of the arbitration committee. If in describing the powers
of the arbitration committee, words are wider denotation are used, they cannot,
in our opinion, widen the scope of article 20(a) itself. An obligation to refer
a dispute even in regard to the existence or factum of a contract itself
cannot, in our opinion, be legitimately imposed upon a member in this indirect
way and by implication. That is why we are not impressed by the argument urged
before us by Mr. M. V. Desai that article 21(a) should be held to construe an
arbitration agreement between the parties and it should be so construed as to
include even a dispute as to the existence of the contract itself. What we have
said about article 21(a) applies with greater force to article 21(b). This
article mentions that all disputes shall be settled by arbitration as provided
in the articles and bye-laws and it enjoins upon members not to institute legal
proceedings for settlement of such disputes. This article must clearly apply to
disputes in respect of which an obligation has been imposed under article
20(a). It merely says that disputes which are required to be referred to
arbitration should be dealt with by the arbitration committee and should not be
dragged to a civil court. There is nothing in article 21(b) which can
legitimately help the construction of the material clause in article 20(a).
That takes us
to the bye-laws on which Mr. M. V. Desai has relied. The relevant bye-laws are Nos.
83, 84(a), 88 and 92(a). Bye-law 83 deals with the constitution and quorum of
the Lavad Committee. Bye-law 84(a) deals with the hearing of disputes and
differences by the Lavad Committee. It provides that the arbitration committee
shall decide any disputes or differences that may have arisen with reference to
any transaction which may have been entered into subject to the rules of the
institution or any difference in rates in respect thereof between members and
members or between members and non-members with reference to a purchase or sale
arising out of the transaction entered into.”
This bye-law
does not help the respondent because the dispute that is referred to in this
bye-law is one which has arisen with reference to a transaction which may have
been entered into “subject to the rules of this institution.” Mr. M. V. Desai
argues that the nature and categories of differences are indicated in this
bye-law and he suggests that, since a dispute as to rates has been specifically
mentioned in the latter part of the bye-law, the first part of the bye-law
should be taken to cover the dispute as to the existence of the contract
itself. We are not impressed by this argument. In our opinion, this bye-law
seems to postulate the existence of an admitted contract and that in our
opinion would be consistent with article 20(a) itself.
Bye-law 88
refers to the adjournment of meetings and the floating character of the Lavad
Committee. Its official translation reads thus:
“88. Disputes
such as the following, that the meeting which was convened for hearing the
disputes or for hearing the appeal was adjourned from time to time or that the
hearing was not finished or that the appeal was not finally heard at one
meeting, or that the very same members of the arbitration committee or of the
board were not present at all the meetings or that the members of the
arbitration committee or of the board who had given the final award were not
present at all meetings in which the hearing of the said dispute was taken up
or the appeal heard, shall not be allowed to be raised against the decision of
the arbitration committee or the board.”
This bye-law
has no material bearing on the question with which we are dealing at this
stage. The last bye-law on which Mr. M. V. Desai has laid considerable emphasis
is bye-law 922 which prohibit the hearing of certain disputes. There was some
dispute about the correctness of the translation of this bye-law, but
ultimately both the learned counsel agreed to the translation of the material
bye-law 92(b) as it is reproduced below. The whole bye-law 92 reads as follows
:
“92. (a) Disputes relating to souda which have been effected after the
bazaar has been closed will not be heard.
(b) Disputes in connection with a souda having
been effected, or with regard to difference in rates, or in the matter of
havalas, complaints as regards such disputes which have arisen will not be
heard two months after the date of the disputes arising.
(c) Complaints as regards the outstandings to be
paid will not be heard 6 months after the date of the said calan.
(d) If a dispute arises with regard to moneys paid at the valan without
signature taken, complaints as regards such disputes will not be heard.”
The whole of
Mr. M. V. Desai’s argument has centred on bye-law 92(b). It may be assumed in
favour of Mr. M. V. Desai that bye-law 92(b) seems to imply that, if a dispute
with regard to the existence of a souda arises between members within two
months after the date of the souda it may be tried by the Lavad Committee.
This, at the highest, can be said to be implicit in the provisions of the
bye-law. In fact, the bye-law prohibits the hearing of a dispute as to the
existence of a souda of it is raised more than two months after the date of the
souda. But can the implication arising out of the words used in this bye-law be
said to govern the construction of article 20(a). In our opinion, the answer to
the question must be in the negative. It is possible that this bye-law may have
in view cases where a difference arises between members as to the existence of
a contract and the members agree that even this dispute should be referred to
the arbitration committee. Bye-law 92(b) provides that, if such a dispute is
intended to be referred to the arbitration committee, it must be brought before
the committee within two months from the date of the alleged transaction. On
the other hand, Mr. M. V. Desai is entitled to contend that the more natural
implication of this bye-law is that the framers of the bye-law thought that
disputes even as to the existence of a contract were within the competence of
the arbitration committee and they purported to prescribe a period of two
month’s limitation for taking such disputes before the arbitration committee.
But the difficulty is accepting the respondent’s argument is that, even if this
bye-law is construed according to his version, it cannot in law widen the scope
of article 20(a). If the words used in article 20(a) has been ambiguous,
perhaps the existence of this bye-law might have strengthened the respondent’s
case in urging the acceptance of the wider construction of article 20(a). But
since the words used in article 20(a) do not appear to us to be ambiguous and
on a fair and reasonable construction they seem to yield only one meaning it is
impossible to hold that they should be given a wider meaning because bye-law
92(b) seems to be based on the said wider construction of article 20(a). It is
for the court to construe article 20(a), and if the court comes to the conclusion
that article 20(a) does not impose an obligation on members to refer their
disputes as to the existence of the alleged contract itself to arbitration,
then it would be valid argument to urge that the framers of bye-law 92(b) seem
to have adopted a different construction of article 20(a). That is why it may
perhaps be necessary to construe bye-law 92(b) by assuming that the limitation
of two months which has been prescribed has reference to cases where by
independent mutual agreement between members a dispute as to the existence of a
contract is intended by them to be taken to the Lavad Committee and in such a
case this bye-law provides that such a dispute should be taken to the Lavad
Committee within two months after the dispute arises.
The position,
therefore, is that, in our opinion, the material article which has to be
construed is article 20(a). The words used in this article are not ambiguous or
doubtful and so it is unnecessary to take the assistance of any other article
or bye-law in construing the said words. it is by this article alone that an
obligation has been imposed upon members to refer specific disputes to
arbitration and a dispute as to the existence of a contract is not one of the
disputes specified in this article. That is why we must hold that the learned
judge below was in error in taking the view that article 20(a) conferred
jurisdiction on the Lavad Committee to deal with the preliminary dispute as to
whether the contract had been entered into between the appellant and the
respondent or not.
In this
connection, we would like to add that, though bye-laws 84(a) and 92(b) were
cited before the learned Judge, his ultimate conclusion was based upon a
construction of article 20(a). He thought that “the wording of article 20(a) is
wide enough to cover all disputes arising out of the transactions and contracts
between the members of the Chamber of Commerce.” With this view we are unable
to concur. If the relevant articles of association did not constitute an
arbitration agreement in respect of a dispute as to the existence of the
contract itself, then the award made by the arbitrators has to be set aside.
The jurisdiction of the arbitrators is and can be derived only from an
arbitration agreement. Without an arbitration agreement there would be no
jurisdiction in the Lavad Committee to deal with the dispute as to the
existence of the contract. A plea of acquiescence cannot be raised in respect
of such jurisdictional points. The jurisdiction of the Lavad Committee being
conditioned upon the existence of a prior arbitration agreement, all
proceedings before the Lavad Committee must be held to be invalid
notwithstanding the fact that the appellant appeared before the Lavad
Committee.
It is well
settled that parties cannot confer jurisdiction on a tribunal by consent.
Jurisdiction is conferred on arbitrators by the provisions of the Indian
Arbitration Act on condition that there is a written arbitration agreement
between the parties in respect of the dispute referred to the arbitrators. If
the condition precedent is found to be absent there is no scope for holding
that the proceedings before the Arbitration Committee are with jurisdiction.
If that be the
true position, the order passed by the learned Judge below must be set aside on
this ground alone. An award has been made by a committee which had no
jurisdiction to deal with an essential part of the dispute between the parties,
and so the whole of the award must be set aside. In this view of the matter, it
would really not be necessary to consider the larger question of law as to
whether an arbitration agreement as required by section 2 of the Arbitration
Act, can reside in the articles of association. However, since this question
has been argued before us at some length, we propose to indicate very briefly
the nature and extent of the difference of judicial views expressed on this
point and our own conclusion on it.
Under section
2 of the Arbitration Act an arbitration agreement is defined as meaning a
written agreement to submit present or future differences to arbitration,
whether an arbitrator is named therein or not. The substantive provisions of
the Arbitration Act cannot be invoked and a dispute between two parties cannot
be taken to arbitration unless the said dispute is governed by an arbitration
agreement thus defined.
The appellant
and the respondent are members of the East India Chamber of Commerce Ltd. and
the respondent’s argument is that the articles of association which have been
registered constitute an arbitration agreement between all the members of the
association. This argument is based on the provisions of section 21 of the
Companies Act. Sub-section (I) of the section provides that the memorandum and
articles shall when registered bind the company and the members thereof to the
same extent as if they respectively had been signed by each member and
contained a convenant on the part of each member, his heirs, and legal
representatives, to observe all the provisions of the Act. The effect of this
sub-section is that, after the articles are registered, they not only
constitute a contract between the association or company on the one hand and
its constituent members on the other, but they also constitute a contract
between the members inter se. Since this sub-section provides that the article
can be deemed to have been signed by each member and contained a convenant on
the part of each one of them, his heirs and legal representatives, it supports
the view that these articles constitute a contract between the members inter
se.
So far the
problem does not present any difficulty. But when we reach the next stage of
considering the scope nature and extent of the rights and liabilities of the
members inter se under the articles of association, the problem gives rise to
two conflicting views. If the statement that the articles of association
constitute a contract between the members inter se is liberally construed, it
would mean that all the clauses contained in the articles virtually amount to
clauses contained in a contract between one member and another, and the
application of these clauses can be extended not only to the disputes arising
between the members as members of the association in respect of the business of
the association but also in respect of contracts separately and privately entered
into between them. In other words, the articles represent a general omnibus
contract between members inter se and the result of the material article of
association which provides for compulsory arbitration would, on this view, be
that, even if the members enter into a commercial transaction between
themselves, all disputes arising between them in respect of such commercial
dealings must be referred to arbitration. Both of them have agreed that all
disputes arising in respect of transactions between them shall be referred to
arbitration and this agreement would govern all transactions between them,
whether or not at the time of entering into them they specifically referred to
this arbitration agreement.
On the other
hand, if in construing the provisions of section 21, sub- section (1), we bear
in mind the scheme of the Act and the purpose which the said section is
directly intended to serve, it may become relevant to give effect to the last
clause in section 21,sub-section (1), which provides that the covenant between
the members inter se is to observe all the provisions of the memorandum and of
the articles and nothing more. On this alternative view, the articles of
association cannot be said to constitute a contract between members inter se in
respect of their rights outside what may be regarded as their company
relationship, and as such they cannot0t purport to regulate their rights
arising out of commercial transactions with which the company or other members
of the company would not be concerned. On this construction of the clause, if
two members of an association enter into a private commercial transaction
between themselves and disputes arise between them in respect of such a
commercial transaction, the arbitration clause contained in the articles of
association could not be invoked unless the commercial transaction has been
made expressly subject to the said clause or otherwise expressly imports an
arbitration agreement.
The first
construction has received the approval of Mr. Justice BHAGWATI in Mohanlal
Chhaganlal v. Bissessarlar Chirawala, whereas the second construction has been
accepted by Mr. Justice S.R.Das in Khusiram v. Hanutmal . Mr.Justice BHAGWATI’S
view has the support of the earlier decision of the Sind Court in Kotumal
Pokardas v.Adam Haji, whereas Mr.Justice SHAH would apparently have preferred
the view taken by Mr.Justice Das if the matter had been res integra when this
question was raised before him in Gordhandas Purshottam v. Natwarlal Chandulal
& Co.
On the plain
construction of section 21,sub-section (1),there does not appear to be any
difficulty in reaching the conclusion that the articles of association do
constitute a contract, not only between the company and its members, but even
between members inter se though as I have just stated difficulties arise in
determining the scope, nature and extent of the rights and obligations flowing
from such articles of association in respect of the private transactions of
members of the association.
In Radhakison Gopikison
v.Balnukund Ramchandra BEAUMONT C.J. has observed that section 21, sub-section
(1),of the Companies Act, has been taken from the English Act and that “it is
quite clear under that section that the articles are a contract between the
company and the members, and between the members inter se, but they do not bind
outside parties.” The same view has been taken by the court of appeal in the
Calcutta High Court in Ramkissendas v.Satya Charan.
Mr.Justice
GENTLE has compared the position arising from the provisions of section
21,sub-section (1), in respect of articles of association with that of an
agreement signed by several executors containing the term that each will carry
out and observe the stipulations in the agreement and he has added that, where there
are mutual promises between parties to an agreement which amount to
consideration moving from each to others, the terms in the document can be
enforced by and against each party. It is true that in this particular case the
dispute had arisen in respect of the business of the company. But the
observations made by Mr. Justice GENTLE seem to suggest that, when section 21,
sub-section (1),constitutes the articles into a contract between members inter
se, that contract is supported by the consideration of mutual promises made by
one member to the other and as such all the terms in the contract can be
enforced by and against each party. That is the view which Mr. Justice BHAGWATI
took in Mohanlal’s case. The learned judge held that in commercial transactions
entered into between members of an association whose articles of association
provide for compulsory arbitration of disputes between them in respect of such
transactions, it would not be open to any member to contend that any particular
transaction between him and another member is not governed by the arbitration
clause in the articles of association undoubtedly indicates the anxiety of the
association that disputes arising out of any transactions covered by the clause
should be speedily disposed of by a domestic tribunal and should not be
subjected to the formal process of adjudication in ordinary courts of law.
So far as we
have been able to ascertain, it appears to be the general practice in
commercial chambers or association in Bombay that have adopted similar articles
of association to assume that even private oral contracts made by one member
with another are subject to the general arbitration agreement contained in the
articles of association and the practice which has thus been adopted by
commercial associations or chambers was approved by Mr. Justice BHAGWATI and no
dissenting voice has been effectively raised against this practice at any time
in this court. That is why in Gordhandas Purshottam’s case,though Mr. Justice
SHAH was apparently inclined to doubt the correctness of Mr. Justice BHAGWATI’S
view, he had ultimately accepted and followed the said view because, as he
observed (and we think, rightly),on a question of the nature raised before him,
uniformity of judicial opinion contrary to opinions previously expressed upon
it.
It is
obviously difficult to express] preference for one view rather than another
with any emphasis on a point which has given rise to a sharp conflict, and
eminent Judges have delivered opinions which it is by no means easy to
reconcile. However, we are impressed by the plea made before us that the
practice in this court has been consistently in favour of the view taken Mr.
Justice BHAGWATI, and, if we may add, the said practice appears to be based on
valid and important practical considerations.
In the present
case, the transaction which has given rise to the dispute was in respect of a
commodity in which the chamber deals. The transaction is alleged to have taken
place between the two parties as members of the chamber and both the members
knew that the articles of association required that, in case any dispute arose
between them in respect of any of their transactions, that dispute would have
to be referred to arbitration. We do not find any difficulty in assuming that,
where members of an association like the parties before us enter into
contracts, may be oral, in respect of commodities like silver which are within
the purview of the chamber itself, they do so with the full knowledge and
consciousness that the contracts are made subject to the terms of the articles
of association. The fact that the contract is made orally and no reference to
the articles of association is expressly made at the time of such a contract
would not, in our opinion, justify the inference that the members had agreed
that the articles of association should not govern the said contracts.
Besides, on
the alternative view that the articles constitute a contract between the
members, but the rights and obligations from such a contract are confined only
to disputes arising between them from their company relationship as such, it
would not be easy to imagine cases of any dispute between members to which the
articles can apply. All the private transactions between the members inter se
would be excluded from the operation of the articles on this view and disputes
between members inter se to which the articles can apply would be very few, if
any at all. In other words, it may, it respect, be pointed on that the main
object of including an arbitration agreement in the articles of association may
be frustrated if the said agreement is not held to apply to the commercial
dealings between the members inter se. In a sense, it would even be permissible
to take the view that the enforcement of the arbitration agreement in respect
of private commercial dealing between members inter se is a matter in which the
association as such is interested.
One of the
objects mentioned in the memorandum of association of the East India Chamber of
Commerce is to avoid recourse to ordinary courts of law for settling disputes
arising between members and it would not be unreasonable to hold that the said
object prima facie covers all disputes arising between the members in respect
of transactions which fall within the purview of the association or chamber
itself.
It is true
that, if the two persons who are members of the association but as private
citizens, and the transaction is in respect of commodities not within the
purview of the association but outside it, then there would be no justification
for invoking the application of the articles of association to such a
transaction. But, in the present case, the transaction is in respect of a
commodity in which the Chamber was dealing and the transaction has been entered
into between the two parties as members of the Chamber. As such, it would, in
all other respects, be governed by the articles and bye-laws of the Chamber.
That is why, on the whole, we prefer to accept, with respect the view taken by
Mr. Justice BHAGWATI in Mohanlal’s case.
If the
provision of section 21, sub-section (1), of the Companies Act are literally
construed and it is held that a contract resulting from the articles of
association between members inter se is not subject to any artificial
limitation that its application is confined only to the company relationship
subsisting between the members or to disputes in respect of the management of
the association as such, then it would be possible to hold that it is a general
agreement containing several clauses between one member and another and the
article providing for compulsory arbitration is a general arbitration agreement
which would govern all the dealings which have been entered into between one
member and another in respect of a commodity falling within the purview of the
association. On this view, the articles of association would constitute a
general contract containing an arbitration clause and all contracts of the kind
just described would attract the provisions of such arbitration clause. The
position in respect of oral contracts made between one member and another
would, on this view not be materially different from the position of contracts
which are made expressly subject to the articles of association.
What is
expressly mentioned in this latter class of contracts can be said to be
included in all similar contracts by necessary implication having regard to the
articles of association which constitute a general contract between one member
and another.
Though we have
reached this conclusion, we must confess to a feeling of diffidence because the
question involved is not free from difficulties and the answers given to this
question by eminent judges are, as I have already mentioned, not easy to
reconcile. I would now refer to some of the English decisions bearing on this
point.
Section 20 of
the English Companies Act in general corresponds to section 21 of the Indian
Companies Act. In Pritchard’s case, MELLISH L.J. has taken the view that in
themselves the articles of association are simply a contract as between the
shareholders inter se in respect of their rights as shareholders.
In Wood v.
Odessa Waterworks Co., one of the shareholders has used the company on behalf
of all the shareholders for an injunction restraining the company from giving
effect to a resolution by which the shareholders were given debenture bonds,
bearing interest and redeemable at par by annual drawing instead of paying
dividends in cash. The argument for the plaintiff was that the resolution in
question contravened the articles of association. STERLING J., in delivering an
interlocutory judgment, observed that the articles of association constitute a
contract not merely between the shareholders and the company, but between each
individual shareholder and every other.
The next case
to which reference may be made in Welton v. Saffery. In this case, a limited
company had issued shares at a discount or by way of bonus and this action was
authorised by the articles of association. On a question as to whether the
holders of shares so issued were thereby relieved from all liability in the
winding up the House of Lords, by a majority judgment held that they were not
relieved from their liability to calls for the amounts unpaid on their shares
for the adjustment of the rights of contributories inter se, as well as for the
payment of the company’s debts and the costs of winding up. The majority
judgment of the House of Lords agreed with the decision of the Court of Appeal
that the articles of association which had authorised the issue of the shares
in question on the terms mentioned were ultra vires of the limited company.
LORD HERSCHELL, however, did not agree with the view expressed by his
colleagues and delivered a dissenting judgment. “It is quite true, “ observed
LORD HERSCHELL, “that the articles constitute a contract between each member
and the company, and that there is no contract in terms between the individual
members of the company ; but the articles do not any the less, in my opinion,
regulate their rights inter se.” He, however, added that such rights can truly
be enforced by or against a member through the company or through the
liquidator representing the company. “I think” said LORD HERSCHELL,” that no
member has, as between himself and another member, any right beyond that which
the contract with the company gives.” LORD MACNAGHTEN, who had delivered a
separate judgment did into accept this view. “If directors, being duly
authorized in that behalf,” observed LORD MACNAGHTEN, “invite persons to take
shares on certain terms varying the rights of members inter se, acceptance of
the invitation must, I think, establish a contractual relation between the
members themselves.” The position, therefore, is that the view taken by LORD
HERSCHELL, under which articles of association do not confer upon a member any
right as between himself any member beyond that which the contract with the
company gives, was not shares by LORD HERSCHELL’S other colleagues, and by
necessary implication it has been dissented from in the majority decision.
In Salmon v.
Quin & Axtens Ltd. FARWELL L.J. expressed his concurrence with the view
taken by STIRLING J. in Wood v. Odessa Waterworks Co. but he added that the
statement of the law set out by STIRLING J. was accurate “subject to his
observation, that it may well be that the court would enforce the covenant as
between individual shareholder in most cases.”
In Hickman v.
Kent or Romney Marsh Sheep Breeders’ Association, ASTBURY J. had occasion to
deal with the same point. The learned Judge referred to the several decisions
cited before him and observed that it was difficult to reconcile the two
classes of decisions and the judicial opinions therein expressed, but that he
thought this much to be clear : “first that no articles can constitute a
contract between the company and third person ; secondly, that no right merely
purporting to be given by an article to a person, whether a member or not, in
capacity other that of a member as, for instance, as solicitor, promoter,
director, can be enforced against the company ; and, thirdly, that articles
regulating the rights and obligations of the members generally as such do
create and obligations between them and the company respectively.”
In Beattie v.
Beattie Ltd., the learned Judges had to consider articles 133 of the company’s
articles and the same point was raised for their decision. SIR WILFRID GREENE,
Master of the Rolls, referred to the fact that the question as to the precise
effect of section 20 of the English Companies Act had been the subject of
considerable difficulty in the past, and that it may well be that there would
be considerable controversy about it in future. But he added that it appeared
to him that this much, at any rate, was good law ; “that the contractual force
given to the articles of association by the section is limited to such
provisions of the articles as apply to the relationship of the members in their
capacity as members.” The learned Master of the Rolls then proceeded to observe
that the real matter which was being litigated in the case before them was a
dispute between the company and the appellant in his capacity as a director,
and so, when the appellant, relying on the arbitration clause, sought to have
that dispute referred to arbitration, it was that dispute and none other which
he was seeking to have referred and, by seeking to have it referred, it was
not, in the judgment of the learned Judge, seeking to enforce a right which was
common to himself and all other members. In other words, the appellant in that
case was seeking to enforce quite a different right and so the arbitration
agreement would not agree.
The last case
which may be cited is the decision in London Sack & Bag Co., Ltd. v. Lugton
Ltd. where the dispute had arisen from a contract of sale of Rs. 5,000 cotton
flour bagas by the defendant to the plaintiff. Both the parties were members of
the United Kingdom Jute Goods Association Ltd. The arbitration agreement on
which stay was claimed was based on one of the rules of the association which
had provided that all disputes arising out of transaction connected with the
trade shall be referred to arbitration. On the face of it, the transaction
which had given rise to the dispute was not connected with the trade of the
association at all and that really was enough to dispose of the matter. Indeed
MACKINNON L.J. based his decision on two grounds : first, that the two parties
were not members although each had a director, who was a member of the
association, and, secondly, that the contract, being for cotton bags, was not
connected with jute goods. SCOTT L.J., however, purported to put the decision
on a larger ground. Referring to the rule providing for compulsory arbitration
the learned Judge observed that “It may well be even as between ordinary
members of a company who are also in the nominal way shareholders, that section
20 adjusts their legal relations inter se in the same way as a contract in a
single document would if signed by all ; and yet the statutory result may not
be to constitute a contract between them about rights of action created entirely
outside the company relationship, such as trading transactions between
members.” Then the learned Judge proceeded to deal with the two points on which
MACKINNON L.J. had based his decision, and he agreed with the view taken by
MACKINNON L.J.
It would thus
be seen that the views expressed by eminent English Judges on the point with
which we are concerned are conflicting. That is why SIR WILFRID GREENE M.R.
almost in despair, made the observations to which I have already referred.
Incidentally, it may be pointed out, with very great respect, that the
observations of LORD HERSCHELL are embodied in a minority judgment and the
remarks of SCOTT L.J. appear to be obiter.
It now remains
to refer to the opinion expressed to text-book writers on this point ; and it
must be conceded that the opinion expressed by the text-book writers is, on the
whole, in favour of the narrow and limited construction which had found favour
with Mr. Justice S.R. Das in Khusiram v. Honutmal. This is what Halsbury says
on this point :
“While the
articles regulate the rights of the members, inter se, they do not, it would
seem constitute a contract between the members, inter se, but only between the
company and its members and, therefore, the rights and liabilities of members
as members under the articles can only be enforced by or against the members
through the company.” (Volume 6, paragraph 269, page 129).
In foot-note
(f) attached to this paragraph, Halsbury has added that doubt as to whether an
arbitration clause in the articles constitutes a written agreement for
submission to arbitration within the Arbitration Act, 1950, section4(1), as
between the parties concerned justifies the court in refusing to stay an
action, and this statement is sought to be supported by the observations of
SCOTT L.J. to which i have already referred.
Palmer, in his
Company Law, has referred to both the views expressed in relevant judicial
decisions, but on the whole the learned author appears to have indicated his
preference for the view taken by LORD HERSCHELL. The observations of LORD
HERSCHELL in Welton v. Saffery, are cited in the book and comment is made that
the view thus expressed by LORD HERSCHELL accords with the well-established
principle that it is for the company, save in exceptional cases, to sue for a
breach of the articles (page 29).
Buckley, in
his Companies Acts, has observed :
“As regards
the rights of members inter se, if the articles do constitute a contract
between them, the rights arising out of such contract can ordinarily only be
enforced through the company ; and the correct view is ; semble, that stated by
LORD HERSCHELL in Welton v. Saffery, namely, the articles, constitute a
contract between each member and the company, and there is no contract in terms
between the individual members of the company ‘ but the articles do not, any
the less, in my opinion, regulate their rights inter se.
Such rights
can only be enforced by or against a member through the company or though the
liquidators representing the company ; but I think that no member has, as
between himself and another member, any rights beyond that which the contract
with the company gives. (page 53).
Thus it would
be seen that the view which we have taken is inconsistent with the view
expressed by eminent text-writers. We would only conclude with the observation
that we have reached our decision on this point with some hesitation and not
without diffidence.
That leaves
only one point which was raised before us by Mr. K.T. Desai on behalf of the appellant.
He argues that the award was invalid because the dispute was heard by a
floating body of members and there has been no fair trial at all in the present
proceedings. I have already mentioned that, during the pendency of this dispute
before the Lavad Committee, three committees were formed and it is true that on
several days when the dispute was heard the same set of arbitrators were
naturally not present. But bye-law 88 of the chamber has specifically provided
that objections such as the one raised before us by Mr. K.T. Desai shall not
invalidate the award. Under this bye-law, it would not be open to a party to
challenge the validity of the award on the ground that the dispute was not
finally decided at one sitting or that the very same members of the arbitration
committee or of the board were not present at all the meetings or that members
of the arbitration committee or of the board who had given the final award were
not present at all the meetings in which the hearing of the said dispute was taken
up or the appeal heard. Mr. K.T. Desai argued that this bye-law is ultra vires
because it is opposed to natural justice, and in support of his argument he
invited out attention to two reported support of this argument he invited our
attention to two reported decisions of this court. In Fazalally v. Khimji,
RANGNEKAR J. had held that as the composition of the board of directors had
changed from time to time since the appeal went on before the board, and when
the award was given some of those who were present at the earlier meetings were
absent and did not form part of the board which made the award, the award was
not legal and could not be accepted and should be set aside. This question
arose before Mr. Justice RANGNEKAR under bye-laws 38 and 39 of the East India
Cotton Association Ltd. But in two placed the learned Judge has pointedly
referred to the fact that the existence of a fluctuating body of arbitrators
was not justified by any provision contained in the bye-laws themselves. In
other words, the judgment shows that, if a bye-law or rule made by the
association had specifically authorised a fluctuating body of arbitrators to
deal with the dispute, then the learned Judge may have taken a different view.
In Patel Bros.
v. Shree Meenakshi Mills Ltd., BEAUMONT C.J., who delivered the judgment of the
Bench, agreed with RANGNEKAR J.’s observations in Fazallally’s case, and held
that the parties would normally be entitled to the united judgment of the
board, and if a dispute was entertained by a fluctuating body of the board that
introduced a serious infirmity in the decision. But it would be noticed that in
stating his conclusion the learned Chief Justice has observed : “In the absence
of consent, I think, the rule is that the tribunal, which has commenced the
appeal, must continue, and if any member is obliged to withdraw, and the
parties are not willing to go on before the remaining members, then a fresh
board must be constituted.” In other words, if there is a rule or a bye-law of
the association specifically providing for the hearing of the dispute by a
fluctuating body of arbitrators then the plea that the same arbitrators have
not heard the dispute would not invalidate the award.
We must,
therefore, hold that infirmity in the award on which Mr. K.T. Desai relied
cannot invalidate the award because bye-law 88 expressly precludes the
appellant from raising such a contention. Nor can the bye-law be regarded as
ultra vires for the reason that it is opposed to natural justice. Indeed, the
hearing of a suit by one Judge and its decision by his successor is authorised
even under Order XVIII, rule 15, of the Civil Procedure Code.
However, it is
not necessary to pursue this point any further since Mr. K.T. Desai, did not
seriously contend that this bye-law was ultra vires. Besides, the decision on
this point would be a matter of academic importance in view of our conclusion
that the dispute as to the existence of the contract itself is not covered by
the arbitration agreement in the present case and the award made by the
arbitrators is invalid for that reason.
In the result,
the appeal must be followed, the order passed by the City Civil Court Judge
reversed, and the award made against the appellant set aside with costs
throughout.
Rule absolute
in Civil Application No. 1464 of 1955. No order as to costs.
Appeal
allowed.
supreme
court
companies act
[2005] 59 scl 414 (sc)
SUPREME COURT OF
v.
Sakal Papers (P.) Ltd.
MRS. Ruma Pal and P.
Venkatarama Reddi, Jj.
Civil Appeal Nos. 698-700
of 1995
March 18, 2005
Section
155 of the Companies Act, 1956 - Register of members - Power of Court to
rectify - N and his wife S were promoters of respondent No. 1 company - By his will,
N had appointed S and respondent Nos. 2 to 4 as executors and trustees of will
- In terms of will, all four executors had been entered in register of members
of company as joint shareholders of shares belonging to estate to N - As per
hierarchy of persons entitled to purchase shares on transfer under articles of
association, S was entitled to pre-emptive right to purchase shares, followed
by members who were willing to purchase shares, persons selected by director
and lastly, a person to whom transferor might choose to sell shares - As
respondent Nos. 2 to 4 were willing to sell their shares held in joint name,
they gave offer to S in accordance with pre-emptive right - S accepted said
offer through her nominee (appellant) provided that value of shares be fixed
afresh by auditors of company - Subsequently, appellant accepted price as fixed
by auditors but in meanwhile, said shares were sold to respondent No. 5 and his
group ‘P’ and by passing a resolution, their name was registered in register of
members - Further, additional shares were also issued to P group to increase
share capital of company - S and her nominee (appellants) filed petition under
section 155 - Single Judge decided petition in favour of appellants conditional
upon depositing certain amount by them in Court failing which petition was to
stand dismissed - They filed appeal against imposition of said condition -
During pendency of appeal, appellants filed suit for specific performance of
contract with respondent Nos. 2 to 4 in respect of transferred shares which was
pending - Appeal of appellants was dismissed by Division Bench which decided
issue in favour of respondents - On appeal to Supreme Court, respondents raised
preliminary objection that issues involved in civil suits and proceedings under
section 155 were overlapping - Whether dispute in question could be resolved
under section 155 - Held, yes - Whether if there was any issue in suit which
was required to be and had been determined in company petition, effect of that
determination would be subject matter of consideration by Civil Judge before
whom suits were pending and, therefore, possibility of overlapping of such
issues would not preclude filing of suits by appellants - Held, yes - Whether
when offer to purchase said shares was accepted by appellants, there was a
concluded contract which was breached by respondent Nos. 2 to 4 when they
purported to sell their shares to P - Held, yes - Whether further, irrespective
of whether there was a concluded contract between appellants and respondent
Nos. 2 to 4 in respect of said shares, shares could not have been sold to P in
violation of hierarchy given in articles of association - Held, yes - Whether
sale of share to P being bad, P did not legally have majority to push through
decision to increase share capital or to allot further shares to themselves -
Held, yes - Whether further, since there was no indication that there would be
any decision taken with regard to increase in issued capital and allotment of
shares in notice of AGM and since no offer was made to existing members of
company in writing and fresh shares were allotted on day they were issued
without waiting for expiry of specified period in violation of articles of
association, allocation of additional shares to P was invalid - Held, yes -
Whether however, in view of fact that there had been sea change in factual
scenario in company since 20 years and appellants had admittedly not paid value
of shares, ends of justice would be met by directing company to pay a lump sum
amount as compensation to appellant in full and final settlement of appellant’s
claims in respect of said shares - Held, yes - Whether company would also allot
shares to appellants out of additional shares issued on par proportionate with
appellant’s present shareholding - Held, yes
Section
108 of the Companies Act 1956 - Transfer of shares - Not to be registered
except on production of instrument of transfer - Whether compliance with
provisions of section 108 is mandatory - Held, yes - Whether, therefore,
requirement of execution of transfer form by each of joint share holders cannot
be met by execution of transfer form by one of shareholders even though between
shareholders inter se there is an agreement that one shareholder can sign on
behalf of all other shareholders unless executant signs for himself and for on
behalf of other shareholders/transferors - Held, yes - Whether where instrument
of transfer had been improperly executed insofar as it had been signed by only
three out of four executors, it was not lawful for company to register transfer
- Held, yes
FACTS
‘N’ and his wife ‘S’ were promoters of the
respondent No. 1 company. ‘N’ died in 1973. By his will, ‘N’ had appointed ‘S’
and respondent Nos. 2 to 4 as executors and trustees of the will. In terms of
will, all the four executors had been entered in the register of members of the
company as joint shareholders of 3417 shares belonging to the estate of ‘N’. As
per hierarchy of persons entitled to purchase shares upon transfer under
article 57A of the articles of association, ‘S’ was given pre-emptive right to
purchase shares followed by members who were willing to purchase shares,
persons selected by directors and lastly persons to whom transferor might
choose to sell shares. The respondents claimed that as a company offered to
purchase the shares held in joint names, they wrote letter to ‘S’ offering to
sell those shares to ‘S’ or her nominee at certain price. ‘S’ nominated her
daughter appellant herein and accepted to pay a price that might be recertified
by the auditors of the company in accordance with the articles. The respondent
Nos. 2 to 4 wrote to ‘S’ calling upon her to pay the sum certified by the
auditors immediately ‘time being of the essence’ failing which they would
dispose of the shares in such manner as they thought fit. The appellants
protested against the certification to the auditors both with regard to the
procedure followed as well as the value certified and also contended that there
was no question of time being of the essence either under article 57A or under
the offer letter and that stipulation of time could not be imposed
unilaterally. They also agreed to deposit an amount as an earnest of their bona
fide and to purchase the shares when the value of shares was fixed by the
auditors. Though the appellants subsequently agreed to pay the price as fixed
by the auditor, the respondents intimated that the shares were already sold to
respondent No. 5 and his group ‘P’. A resolution was also passed to register
said transfer. Further, a resolution for issuance of increased share capital
was also passed and the additional shares were also issued to ‘P’. Therefore,
the appellants filed an application for rectification of register of the
members of the company under section 155. The Single Judge held that the
transfer of shares was made contrary to the appellants’ rights of pre-emption
and that the transfers had been made in violation of the provisions of section
108 as the instrument of transfer was signed only by three out of four joint
holders. It was held that the respondent No. 5 and his group were not bona fide
purchasers of the shares as they were aware of the pre-emptive right of the
appellants and that the issuance and allotment of additional shares were also
invalid. Thus, the Single Judge set aside the transfer of shares to the
respondent No.5 and his group conditional upon the appellants depositing
certain sum in the Court failing which their petition would stand dismissed.
Being aggrieved with the condition imposed, the appellants filed an appeal
before the Division Bench. In the meanwhile, the appellants also filed civil
suits before the District Court against the respondents seeking specific
performance of the contracts of sale of the shares which was pending. The
Division Bench held, inter alia, that the violation of section 108 was a mere
irregularity which was curable; that the shares had been validly transferred to
‘P’; and that the irregularity in issuing increased share capital had been
cured by the subsequent ratification of the decision. Thereafter, the
appellants filed the instant appeal to the Supreme Court. The respondents
raised preliminary objection that issues involved in the civil suits and
proceedings under section 155 were overlapping insofar as the sale of shares
were concerned and that the appeal should be considered only with regard to
challenge to issuance and allotment of additional shares.
HELD
The power of
the Court under section 155 is limited to the rectification of the register of
members of a company in three situations (1) when the name of the person is
wrongly entered in such register (2) when the name of the person, whose name
having been entered in the register is omitted therefrom and (3) when default
is made in entering the name of any person who has already become or who has
ceased to be a member. None of the three situations envisaged under section
155(1) would allow the person, whose right as a member qua the disputed shares
is yet to be established, to apply for rectification by inclusion of such
person’s name. The appellants could not, therefore, have applied for transfer
of the disputed shares viz., the additional shares issued, in their favour
under section 155. They would have to establish that right by way of a separate
suit or otherwise. The appellants in the company petition correctly reserved
their right to file appropriate action for transfer of the impugned transferred
shares to themselves. The reliefs prayed for in the company petition were
different from the reliefs claimed in the civil suit filed by the appellants.
The civil suits arose out of and were consequent upon the findings of the
Single Judge on the petition under section 155 that there was a concluded
contract between the holders of the transferred shares and the appellants for
transfer of those shares to the appellants.
If there was
any issue in the suit which was required to be and had been determined in the
company petition, the effect of that determination would no doubt, be the
subject matter of consideration by the Civil Judge before whom the suits were
pending. But the possibility of overlapping of such issues did not preclude the
filing of the suits by the appellants. The appellants, advisedly, did not pray
for the transfer and registration of the disputed shares in their favour in the
proceedings under section 155. They could not have done so.
Further, that
the Court exercising jurisdiction under section 155 was competent to entertain
the applications filed by the appellants could not be disputed.
Assuming that
the jurisdiction of the
The articles
of association gave the hierarchy of the persons entitled to purchase shares
upon transfer. The first right was given to the pre-emptors under article 57A.
Next in the hierarchy was any member who was willing to purchase the shares at
a fair value. That followed from a reading of article 58 with article 64. The
third category was of any person or persons selected by the directors as being
desirable in the interest of the company to admit to membership. The last
category was the person to whom the transferor might choose to sell the shares.
As long as there was any person in higher category, there was no question of
sale or purchase by a person in a lower category. A person might fall within
any one or more of those four catogories and would, by virtue of those
articles, have distinct and separate rights to purchase the shares in each of
the four categories. So, even if a pre-emptor or a nominee of a pre-emptor did
not exercise his/her right under article 57A to purchase the shares at a price
certified by the company’s auditors, such person might choose to exercise the
right as an ordinary member and purchase the share at a fair value or the
transferor might choose to sell the shares to such persons under article 63. [
In the case
of a transfer to a person in the 2nd and 3rd categories of putative purchasers,
the directors were appointed as agents of the transferor. The notice of
transfer was required to constitute the directors as the transferor’s agents.
That notice was distinct from the other required to be given under article 57A.
In respect of those two categories, the price of the shares was at first to be
negotiated with the transferor. It was only in the case of a default in such
agreement being reached that the company’s auditors step in and fix a ‘fair
price’. The third distinctive feature of those two categories was that upon
refusal/default of the pre-emptor, the transferor was required to give a notice
in writing of his desire to transfer. Giving of that notice might necessarily
be subsequent to the failure of article 57A for whatever reason, as the
directors were required to find a willing person either in the 2nd and if not
the 3rd category within a period of 30 days. There was no time limit specified
for the completion of the pre-emptive transfer under article 57A. Therefore,
unless the transferor gave a separate notice of the failure of article 57A, a
willing member would not know whether he/she had a right or when the period
fixed for intimating their willingness to purchase was to lapse. Article 60
also required the directors to give a notice to the transferor after finding a
willing purchasing member or selectee under article 58. Giving of that notice
was important because if 30 days expired without such notice by the directors,
article 63 would come into play and the transferor would be at liberty to sell
the shares to any person and at any price, albeit also within a period of 30
days. It followed that a notice issued prior to the pre-emptor exercising or
failing to exercise the right under article 57A would not be in keeping with
articles 59 and 60 as that would make the period of 30 days uncertain if not
illusory. Thus, the notice by the transferor under article 58 must succeed the
factual failure of article 57A and notice, if any, under article 60 might
follow the failure of article 58. [Para 1.4-2]
Assuming
there was a willing purchaser under article 58, there was no time limit fixed
either for the parties to arrive at a negotiated price or for the auditor to
fix a fair value. But article 63 indicated that the entire transaction envisaged
by articles 59 to 62 would have to be completed within a period of 60 days
after article 57A failed to operate. [Para 1.4-3]
Section 36
makes the memorandum and articles of company, when registered, binding not only
on the company but also the members inter se to the same extent as if they had
been signed by the company and by each member and covenanted to by the company
and each shareholder to observe all the provisions of the memorandum and of the
articles. The articles of association constitute a contract not merely between
the shareholders and the company but between the individual shareholders also.
The articles are a source of powers of the directors who can as a result
exercise only those powers conferred by the articles in accordance therewith. Any
action referable to the articles and contrary thereto would be ultra vires.
[Para 1.4-4]
In the
instant case, the entire transaction of sale was riddled with illegalities.
[Para IV.1]
The notices
issued in respect of the transferred shares were not in keeping with the
articles as far as articles 58 to 63 were concerned. The notices to willing
members or to selected persons under article 58 might succeed and not precede
the actual operation of article 57A. The notices issued by the respondent Nos.
2 to 4 also did not constitute the directors as the transferor’s agents for the
purposes of selling the shares in terms of article 59. There was, in the
circumstances, no question of the transferors selling their shares to any 3rd
party under article 63 unless proper notice had been issued to the 2nd and 3rd
category of persons if any. There was also no question of the transferor
invoking article 61 by-passing the right of a willing member or selectee, if
any, to negotiate a fair price. [Para IV.1.1]
The Division
Bench erred in holding that none of the other shareholders showed any interest
in purchasing the shares. In fact the conclusion of the Division Bench was
contradictory. If the notices could be combined notices under article 57-A and
article 58, then the appellants’ acceptance of the offer as made in the notices
should also be construed as a combined assent under both the articles. The
Division Bench erred in holding that there was no material before the Court to
indicate that the appellant’s nominee had at any time informed the company that
she proposed to exercise her rights as a shareholder to purchase the shares.
The Division Bench should have considered whether there was any offer to the
appellant’s nominee as a shareholder to purchase the shares. If there was not
an offer to the shareholders, obviously, there was no question of the
appellant’s nominee accepting the offer. But whatever offer was made whether
under article 57A or under article 58 by the two notices, that offer was
accepted by the appellant. And upon such acceptance, there was a concluded
contract between the respondent Nos. 2 to 4 on the one hand and the appellant
on the other. [Para IV. 1-2]
Article 57A
did not, by itself, indicate when the contract was concluded between the
offeror and offeree. It was concurrently held by the Single Judge and the
Division Bench that with the acceptance of the offers of the respondent Nos. 2
to 4 by the appellants, the contract to purchase the shares was concluded.
Having regard to section 9(1) of the Sale of Goods Act, 1930, there was no
reason to differ from that conclusion. Section 10(1) of the 1930 Act also seeks
of avoidance of an agreement if the third party valuer either cannot or does
not fix the price of the goods to be sold. Apart from the fact that the third
party valuer, in the instant case, did in fact make the valuation, the section
proceeds on the basis that the agreement was already concluded otherwise there
would be no question of avoidance. [Para IV. 2-1]
Section 32 of
the 1930 Act has no relevance to the question as to whether there was a
contract at all between the parties. It pertains to a condition which is to be
implied, unless there is a provision to the contrary, in a contract. Indeed,
section 32 assumes the existence of a contract in respect of which such a term
may or may not be read in. [Para IV. 2-1]
The legal
consequence of a concluded contract will remain irrespective of how a
particular party in a given situation might abuse the rights flowing from it.
It is platitudinous that the possibility of abuse of a right cannot determine
whether the right exists as a matter of law. [Para IV.2-2]
There was,
thus, a concluded contract which was breach by the respondent Nos. 2 to 4 when
they purported to sell their shares to ‘P’. [Para IV.2-4]
If the
notices issued by the respondent Nos. 2 to 4 were not under article 58, then it
was not open to the respondent Nos. 2 to 4 to have sold the shares to ‘P’
without issuing such notices. Hence, irrespective of whether there was a
concluded contract between the appellants and the respondent Nos. 2 to 4 in
respect of the said shares, the shares could not have been sold to ‘P’. Apart
from the lack of notice under article 58, the right of a transferor in terms of
the articles of the company to sell the shares to a person of the transferor’s
choice was required to be exercised within the period specified in the
articles. That was clear from article 63. According to the respondents, the
appellants had repudiated the contract by challenging the certification of the
auditor. If that were so, then the directors were required to give the notice
to the transferor or if no such notices were given, the transferors could sell
within the period of 30 days thereafter. Those 30 days had long since expired
much before the date on which the sale of the shares was said to have taken
place between the respondent Nos. 2 to 4 and the ‘P’ Group. [Para IV.2-5]
Thus, there
was also no repudiation of the contract by the appellants on account of their
alleged failure to pay the price within the time fixed by the respondent Nos. 2
to 4 by their notices. [Para IV.3]
As there was
no time fixed either under article 57-A or in the offer letters, the question
of time being of the essence did not, at all, arise. If there is no stipulation
as to time, it is not open to a party to unilaterally stipulate a time and then
cancel the contract because of an alleged failure of the other party to act
within the time stipulated. [Para IV.3-2]
Of course if
time is fixed by the contract but it is not originally of the essence, a party
can by notice served upon the other called upon him to complete the transaction
within the time fixed and intimate that in default of compliance with the
requisition, the contract will be treated as cancelled. But where no time is
fixed for completion, it is not open to either the vendor or purchaser to serve
notice limiting a time at the expiration of which he will treat the contract as
at an end. [Para IV.3-3]
In the
circumstances, the contract for sale of the shares to the appellants could not
be avoided by reason of any alleged failure on the part of the appellants to
pay the price fixed by the auditor. [Para IV.3-4]
Repudiation
of a contract is ‘a serious matter, not to be lightly found or inferred’. From
the facts, it was clear that there was no such repudiation on the part of the
appellants. The letters exchanged, the suits filed did not show that the
appellants were renouncing the contract nor that they were absolutely refusing
to perform the contract. The question was not whether the valuation by the
company’s auditors was correct. The Division Bench held that it could not be
said to be incorrect. But it did not hold that the challenge was not
permissible in law and was not made bona fide? There was in fact no refusal to
perform the contract, but a questioning of the mode of performance. It might be
that they were mistaken in their challenge to the auditors’ certificate, but
that was a long way from saying that they were unwilling to pay. [Para IV. 4-1]
There would
have been no point in the appellants challenging the valuation of the shares by
the auditors if they were not interested in completing the transaction. There
would have been also no point in their offering to deposit Rs. 20 lakhs as
proof of their continued interest in purchasing the shares. The filing of the
civil suit was not conduct in keeping with an intention of not performing the
contract. If the offers were in terms of article 58, then the acceptance of
that offer might also be understood to be under article 58. In that case, it
was for the parties to negotiate the price for the shares and not for the
auditors to determine. The challenge to the certification might be taken as a method
of negotiating a fair value under article 58. Be that as it might, the
appellants in fact accepted the price subsequently as certified by the
auditors. [Para IV.4-2]
At the
executors’ meeting, the executors passed the resolution that one of the executors
could implement the sale and execute the transfer forms but did not name
anyone. Before the sale of the shares was made to ‘P’ by the Executors, it was
abundantly clear from the conduct of ‘S’ (i) that she had revoked consent she
might have given qua executor and trustee to the sale of the shares to
third parties and (ii) that the appellants were desirous of purchasing the
shares themselves in whatever capacity. [Para IV.5]
In any event,
the said executor’s resolution authorizing one of them to effect the transfer
of the shares could not override the provisions of section 108. For the
purposes of registration of the transfer under section 108 the instrument of
transfer must be executed by the transferor or it must be executed on behalf of
the transferor. But there must be execution. The Single Judge had found as a
fact that the instrument of transfer had been signed by only three of the joint
shareholders. ‘S’ had not signed. There were three signatures on the transfer
deed. Each transferor had, therefore, executed qua shareholders in respect of
their own interest. There was no 4th signature on behalf of the 4th joint
shareholder. That was also the finding of the Division Bench. But the Division
Bench held that it was a mere irregularity which did not vitiate the
registration. It was also held that the irregularity could be cured by one of
the executors signing on his behalf. [Para IV.5-2]
But
compliance with the provisions of section 108 was and is mandatory. [Para IV.
5-3]
The power to
act by majority qua executors and authorizing someone to act as a shareholder
on another’s behalf are distinct. There is no question of transferring shares
by signature of a majority. Whatever the agreement between the executors was
inter se, the agreement could not override the provisions of the Act and under
section 108 the company was bound to recognize only those transfers for the
purpose of registration which were executed in terms of that section. It is
true that they were in fact executors, and that, with regard to the
beneficiaries mentioned in the will, they would be trustee of the stock, but
the company would not take notice of any trust, and must act in accordance with
the Act of Parliament, under which it was constituted, with regard to placing
persons upon the register. [Para IV.5-4]
Even if the
four executors had wanted registration only in the capacity of executors and
the company also acquiesced in it, the four executors would continue to be
ordinary shareholders and the limitation would be illegal and of no effect.
Being on the register as joint shareholders, there was no escape from the
proposition that a transfer by one of them only would be an invalid transfer.
[Para IV.5-5]
As far as the
company was concerned, the requirement of execution of the transfer form by
each of the joint shareholders could not be met by execution of the transfer
form by one of the shareholders even though between the share holders inter se
there was an agreement that one share- holder could sign on behalf of all the
other shareholders unless the executant signed for himself and for on behalf of
the other shareholders/transferors. It would be of no consequence as far as
section 108 is concerned to exclude the reluctant shareholder on the ground
that the shareholder had refused to execute the form. The remedy of the other
joint shareholders to compel the reluctant shareholder to sign the transfer
form would lie elsewhere and not in a breach of the requirement of section 108.
[Para IV.5.6]
In the
instant case, the instruments of transfer had, admittedly, been improperly
executed. It was, therefore, not lawful for the company to register the
transfer. The principle that a Court will not interfere in the affairs of the
company if the defect complained of can be cured would apply if the defect is a
technicality and is curable. The non-compliance of section 108 is not a
technicality. [Para IV. 5-7]
Apart from
the violation of section 108 as far as the registration of shares was
concerned, the meeting of the board of directors at which the company recorded
the transfer was invalidly held. [Para IV. 6]
In the notice
for the meeting held on 21-9-1985, there was no mention whatsoever, let alone a
statement, relating to the transfer of the shares to ‘P’ as required under the
articles of association. At the same meeting, the respondent Nos. 5 to 7, were
appointed as additional directors although their shares were not yet entered in
the company’s register of members. [Para IV. 6-2]
The Division
Bench erred in holding that the violation of section 108 was ratified at the
board meeting subsequently. Ratification is possible in respect of an act which
is incompetent by a person who would have been competent to do such act. The
violation of section 108 could not be ratified by the board of directors as the
act was one which the board was incompetent to allow. The board of directors
never had the legal capacity to direct the registration of shares invalidly
transferred. [Para IV.8]
The
respondent submitted that neither of the appellants could have purchased the
shares under article 57A because ‘S’ was one of the named executors and
trustees of inter alia shares of ‘N’ under his will. [Para IV.9]
Article 57A
did not envisage ‘S’ purchasing the shares through her nominee. One of her
rights under article 57A was no doubt to purchase the shares herself. But she
could also nominate any other person to purchase the shares. The transferor
then would have to make an offer to such other person who would then,
independent of ‘S’, be entitled to a transfer of the shares. In the latter
case, there was no question of any conflict of interest between S in her
capacity as trustee under the will of N and as a nominator under article 57A. S
was not purchasing the shares. It was true that she could have done so in
exercise of her pre-emptive right under article 57A, but she did not and only
nominated her daughter as the person to whom shares should be sold. [Para IV.
9.3]
This was also
how the parties understood the situation as the correspondence exchanged
between the parties evidenced. The resolution, relied upon by the respondents
authorizing one of them to sell the trust shares, was taken in a meeting which
was attended only by two of the four executors. S could not attend because she
was ill. Her prayer for adjournment was rejected by the two executors on the
ground that her interest would not be jeopardized since she would be given
notice under article 57A. It was then resolved that notice should be given
under article 57A to S. If she exercised her right under that article, the
executor was to sell the shares to her. If she did not agree to purchase the
shares at the price fixed then the price should be fixed in accordance with
article 61. The resolution further recorded that only if S did not buy the
shares at such fixed price then the executors would sell the shares to any
other person or persons at or for the price fixed. Since the meeting was not
adjourned because article 57A protected S, it followed that if her rights were
not to be protected under article 57A, then the meeting should have been
postponed. [Para IV. 9-4]
Indeed the
matter was referred to the company’s auditors in purported compliance with
article 57A. Certification of the price was made by the auditors also under
that article. The notice of the respondent Nos. 2 to 4 calling upon the
appellants to pay the certified price was also under article 57A. The stand of
the respondent Nos. 2 to 4 with regard to the disqualification of S as a
purchaser of the shares under article 57A was, thus, wholly inconsistent with
their conduct ante litem. [Para IV. 9-5]
The
respondents said that article 57A had no application. If it did not then
article 58 would. In that event, the certification by the auditors was entirely
premature as the willing shareholder (the appellant) would be at liberty to
negotiate the price with the respondent Nos. 2 to 4 and it would only be in
default of any agreement being reached that a ‘fair value’ would have to be
fixed by the auditors. In the circumstances, the principle that the trustee not
directly or indirectly buying the trust property as contained in section 52 of
the Indian Trusts Act, 1882 would also not have any application because
irrespective of her right as a nominee of S, the appellant could undoubtedly
have purchased the shares being in the second category in the hierarchy of
purchasers provided under article 57A to 64. [Para IV.9-6]
So far as the
issuance of equity shares was concerned, it was resolved at the general meeting
to immediately issue increased share capital to any person whether a member of
the company or not. It was further resolved that the decision would be ratified
by convening a general body meeting after giving proper notice and explanatory
statement. [Para V.1]
The notice of
the AGM was given on 13-10-1985. Although details of ordinary business and
special business were given, there was no indication whatsoever that there
would be any decision taken with regard to the increase in the issued capital
and allotment of shares in the notice. According to the respondents, after the
notice of the annual general meeting had been issued, the Ministry of Finance
gave notice to the company extending the validity of a sanction for foreign
exchange loan and stating that no further extension would be granted. Thus, the
respondent No. 12 - Finance consultancy and a member of ‘P’ proposed that the
share capital of the company be increased and requested the issue to be decided
at an ensuing AGM. [Para V.2]
Thus,
according to the respondent, the increase was by reason of the urgent need of
the company to purchase machinery. However, the purchase of the machinery was
in contemplation of the company from much prior to the date of the notice. The
alleged letter from the Ministry of Finance was not even produced before the
High Court and could not be brought on record at this stage. [Para V.3]
Article 93
specifically provided inter alia, that every notice of a meeting of the company
should contain a statement of the business to be transacted thereat and no
general meeting, annual or extraordinary, should be competent to enter upon,
discuss or transact any business which had not been specifically mentioned in
the notice or notices upon which it was convened. [Para V.4]
The increase
in issuance of share capital did not fall within the exceptions carved out in
article 94 as not being special business. Article 94 reflected the substance of
section 173 and it was, therefore, incumbent for notice to be given not only
indicating the issuance of the share capital as a special item of business but
also giving a statement setting out all material facts relating thereto. The
violation of that article by the company was patent and the AGM was to the
extent of the violation vitiated thereby. [Para V.4-2]
The
respondents had relied on article 94(e) which said that the company should also
carry out the requirements of section 188 to contend that due notice was given
under article 94 because the letter of the Finance Consultancy had been
forwarded to the shareholders. [Para V.5-1]
Assuming that
Finance Consultancy’s letter was in fact circulated, that could hardly be
termed to be compliance with the requirement of section 188 which deals with
meetings called at the instance of requisitionist and circulation of a
statement by the requisitionist of a proposed resolution and statement in
support thereof. Moreover, such a notice in terms of the proviso of section
188(3) was required to be given in the same manner and, so far as practicable,
at the same time as notice of the meeting and where it is not practicable for it
to be served or given at that time, it shall be served or given as soon as
practicable thereafter. Further, it was clear from article 94(e) that
compliance with section 188 was in addition to the requirements with the other
parts of article 94 which admittedly had not been complied with. [Para V. 5-2]
Since it was
held that the sale of the shares to P was bad, P did not legally have the
majority to push through the decision to increase the share capital or to allot
the further shares to themselves. Further, the majority could not be permitted
to ride rough shod over the provisions of the articles and the Act merely
because they could, if they so desired, follow the proper procedure. The haste
with which P sought to ensure their position in the company was evident from
the fact that a board meeting was held immediately after the AGM at which the
board resolved to issue the additional shares at par to P. There was no notice
given of the board meeting at all. [Para V.5-4]
The respondent
company was bound to offer the further shares on a fresh issue of capital to
the existing equity shareholders in proportion to the capital paid up on the
shares at that date. [Para V.6-1]
Increase of
share capital was dealt with in articles 14 and 15. As per article 15 such new
shares should be offered to the persons who were, at the date of the offer,
members of the company in proportion as nearly as circumstances admit to the
capital paid up on their shares at that date and the offer should be made by
notice specifying the number of shares to which the member was entitled and
limiting a time not less than fifteen days from the date of the offer within
which the offer, if not accepted, would be deemed to have been declined and
that after expiry of the time specified in the notice or on the earlier
intimation from the member to whom such notice was given that he declined to
accept the shares offered, the directors may dispose of the same in such manner
as they think most beneficial to the company. [Para V.6-2]
However, no
offer was made by notice in writing in terms of article 15. The fresh shares
were allotted on the day, they were issued before the expiry of 15 days without
waiting for the expiry of the period. The allocation of shares to ‘P’ contrary
to article 15 was invalid. [Para V.6-3]
No Court
could possibly object to a decision on merits provided it is taken in
accordance with law. The decision to issue all the additional shares to ‘P’ at
par might not, by itself, have warranted interference were it not for the
manner in which the entire exercise was undertaken. [Para V.6-4]
RELIEFS
Having
effectively held on all issues in favour of the appellant the question remained
as to whether the Supreme Court should, in exercise of discretion under section
155, grant the appellant the relief of rectification of the shares as claimed.
Although the logical conclusion of the findings would be to set aside the
transfer and restore the status quo ante, the question was should the share
register of the company be directed to be rectified now in respect of shares,
the impugned transfer of which took place more than 20 years ago? There had
been a sea change in the factual scenario. ‘S’ had died. The company had become
a public limited company. The respondents had been at the helm of the company
more than two decades during the legal struggle. Many decisions must of
necessity have been taken and implemented. The situation could not be
unscrambled. It was a course of action which would make the company dysfunctional
harming the interests of the whole body of shareholders, affect company’s
employees, its creditors and customers. Further, appellant would still have to
pursue her remedies for effective relief in the two pending suits in the
District Court in which the appellant had prayed for specific performance of
the contracts for sale of the shares. The outcome of the suits was uncertain.
What was certain was that whatever the outcome of the litigation it would be
another long round of litigation. Yet another factor to be borne in mind was
that the appellant had her own role to play in contribution to the situation
which she had to face eventually. Admittedly, the appellants ultimately
accepted the chartered accountant’s report. No reason whatsoever was given for
the sudden change of attitude. If they could agree subsequently to pay the
price they could have done so earlier, paid the price and then challenged the
value. Further, the Single Judge also gave the appellant an opportunity of
paying the share price into the Court within a specified period. Had appellants
done so, they might have been in stronger position vis-à-vis ‘P’ in the Appeal
Court. [Para VI.3]
In those
circumstances and weighing the balance, the comparative advantages and
disadvantages of granting the appellant the relief of rectification, it would
not be appropriate at this stage to exercise discretion to grant the relief of
rectification. However, the fact remained that the appellant had been wronged
and she was entitled to be compensated. Section 155 allows the giving of
damages in addition to or in lieu of rectification. In the pending suits, the
appellant had put forward alternative prayers for payment of compensation in
the event specific performance of the contracts was not grantable. In order to
give a quietus to the litigation, the ends of justice would be met by directing
that the appellant should be compensated with a lump sum amount to be paid by
the company in full and final settlement of the appellant’s claims in respect
of the sale of shares. Additionally, the company would also allot shares to the
appellant out of the additional equity shares on par proportionate with the
appellant’s present share holding. [Para VI.4]
The appeals
were, accordingly, disposed of. [Para VI.5]
Cases referred to
Ammonia Supplies Corpn. (P.) Ltd. v. Modern
Plastic Containers (P.) Ltd. [1998] 7 SCC 105/17 SCL 463 (para 1), Canara Bank
v. Nuclear Power Corpn. of India Ltd. JT 1995 (3) SC 42/4 SCL 42 (para 1),
Hunter v. Hunter [1936] AC 222 (para I.4.5), Lyle & Scott Ltd. Scott’s
Trustee [1959] 2 All ER 661 (para I.4.6), Naresh Chandra Sanyal v. Calcutta
Stock Exchange Association Ltd. [1971] 1 SCC 50 (para I.4.6), H.P. Gupta v.
Hiralal [1970] 1 SCC 437 (para I .4.6), Sudbrook Trading Estate Ltd. v.
Eggleton [1982] 3 All ER 1 (para IV.2.3), Gomathinayagam Pillai v. Palaniswami
Nadar AIR 1967 SC 868 (para IV.3.2), National Co-operative Sugar Mills Ltd. v.
Albert & Co. AIR 1981 Mad. 172 (para IV.3.2), Freeth v. Burr (1874-80) All
ER 753 (para IV.4), Sweet & Maxwell Ltd. v. Universal News Services Ltd.
1964 QBD 699 (CA) (para IV.4.1), Mersey Steel & Iron Co. v. Naylor Benzon
& Co. [1884] 9 App. Cas. 434 (para IV.4.1), Ross T. Smyth & Co. v. T.D.
Balley & Co. [1940] 3 All ER 60 (para IV.4.1), Mannalal Khetan v. Kedar
Nath Khetan [1977] 2 SCC 424 (para IV.5.3), Jarnail Singh v. Bakhshi Singh
[1960] 30 Comp. Cas. 192 (Punjab.) (para IV.5.3), L. Janakirama Iyer v. P.M.
Nilakanta Iyer 1962 Suppl. (1) SCR 206 (para IV.5.3), Barton v. London &
North Western Railway Co. 1889 (24) QBD 77 (CA) (para IV.5.4), Pacific Coast
Coal Mines Ltd. v. Arbuthnot [1917] AC 607 PC (para V.4.3), Baillie v. Oriental
Telephone & Electric Co. Ltd. [1915] 1 Ch. D. 503 (CA) (para V.4.4), LIC of
India v. Escorts Ltd. [1986] 1 SCC 264 (Para V.4.4) and Needle Industries
(India) (P.) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC
33 (para VI.3).
Manoj Goel, Shuvodeep Roy, Wajeeh Shafiq
and Ms. Suruchi Agarwal for the Appellant. F.S. Nariman, K.K.
Venugopal, Ashok H. Desai, P.H. Parekh, Sandeep Parekh, Arun Francis, Sumit
Geol, Anip Sachthey, Shriniwas R. Khalap, E. Venu Kumar and Harshad V.
Hameed for the Respondent.
Judgment
Mrs.
Ruma Pal, J. - In 1933 Dr. N.B. Parulekar and his wife Shanta, started a
newspaper called Sakal. In 1948 Dr. Parulekar and Shanta promoted a company
known as M/s. Sakal Papers Pvt. Ltd., which is the respondent No. 1 and is
referred to hereafter as “the company”. Dr. Parulekar died in 1973. Shanta died
during the pendency of the appeal before this Court. The appeal which is now
being prosecuted by the daughter of Dr. Parulekar and Shanta, arises out of
proceedings initiated by Shanta and the appellant under section 155 (as it
stood in 1986) of the Companies Act, 1956 (referred to hereafter as ‘the Act’)
in the Bombay High Court.
The appellant was brought on record as
Shanta’s only legal heir and representative. As Shanta was alive during the
proceedings before the High Court, to avoid unnecessary verbiage, the appellant
and Shanta are referred to hereafter as ‘the appellants’.
One of the matters in dispute in this appeal
relates to the transfer of 3417 shares in the company belonging to the estate
of late Dr. Parulekar by three of the four executors of the will of Dr.
Parulekar. The executors named in the will were Shanta, the respondent No. 2,
the respondent No. 3 and the respondent No. 4. There is also a challenge to the
transfer of 93 shares by the respondent Nos. 3 and 4 in the company. The basis
of the claim of the appellant and Shanta with regard to the 3417 and 93 shares
was the failure to allow the appellants to exercise their undisputed right of
preemption in respect of the shares. The second branch of the appellants’
grievance pertains to the issue and allotment of 17,666 shares of the company.
The beneficiary of these transfers/allotments is the respondent No. 5 and his
group represented by the respondent Nos. 6 to 16 (hereafter referred to
collectively as the Pawar Group). According to all the respondents briefly
speaking, the appellants were precluded from exercising any right of preemption
and had in any event failed to exercise their right of preemption in respect of
the 3417 and 93 shares. As far as the issue of 17,666 shares are concerned it
is submitted that it was validly done and the allotment of the shares was duly
made to the Pawar Group.
The learned Single Judge held that the
transfer of the 3417 shares was made contrary to the appellants rights of
preemption. He also held that the transfers had been made in violation of the
provisions of section 108 of the Companies Act, 1956 and the Articles of
Association of the Company. It was held that the respondent No. 5 and his group
were not bona fide purchasers of the shares as they were aware of the
preemptive right of the appellants to the shares. On the issue and allotment of
17,666 shares the Trial Court held that they were invalid. Having effectively
held in favour of the appellants on merits, the Trial Court did not set aside
the transfer of the 3417 and 93 shares but set aside the transfer of 3417 and 93
shares to the respondent No. 5 and his group conditional upon the appellants
depositing a sum of Rs. 80,73,000 in the Court within a period of six weeks. As
far as the 17,666 shares were concerned, it was directed that they should be
allotted to such person or persons at such price as the Board of Directors may
decide. The Company was directed to pay back the Pawar Group a sum of Rs.
17,66,600 in respect of the 17,666 shares. It was then said that in the event
the appellants did not deposit a sum of Rs. 79,86,110 within six weeks the
entire petition filed by the appellants would stand dismissed. The appellants
filed an appeal from this order insofar as it was made conditional on the
deposit of the sum of Rs. 79,86,110. They also filed an application for extension
of time for depositing the amount in terms of the Trial Court’s order before
the Trial Court. The application was dismissed.
In the meanwhile the Appellants filed two
suits being CS 225 and 226 of 1988 before the Court in Pune against the
respondents seeking specific performance of the contracts of sale of 3417 and
93 shares to them. Alternatively for damages by way of compensation of Rs. 3
crore or 4 crore? The suits are pending. Also between the decision of the
Single Judge and the filing of the appeal by the appellants, the company became
a Public Limited Company by virtue of section 43A of the Act.
At the time of admission of the appeal an
interim order had been passed by the Division Bench on 21st December, 1989
directing that pending disposal of the appeal, the appellants’ right of
preemption was not to be disturbed and the company was directed not to issue or
invite any fresh capital.
The appeal filed by the appellants against the
judgment and order of the learned Single Judge as also cross appeals filed by
the respondents were heard and disposed of by a common judgment. The Division
Bench dismissed the appellants’ appeal and allowed the cross appeals filed by
the respondents holding inter alia that the violation of section 108 was a mere
irregularity which was curable that the sale of 3417 shares had been validly
made to the Pawar Group and that although there was some irregularity in
issuing the 17,666 shares, the irregularity had been cured by the subsequent
ratification of the decision. At the instance of the appellants the interim
order passed by the High Court on 21st December, 1989 was directed to continue
for 8 weeks.
Before the eight weeks expired, the appellants
filed the present appeal and an interim order was granted on 16th September,
1991 in terms of the order passed by the High Court on 21st December, 1989.
That interim order is operating till today. The matter has been pending before
this Court since 1991 and has been heard in part by different Benches from time
to time. Efforts for an amicable settlement were not fruitful. In the mean time
several of the parties including Shanta died. The applications for substitution
were allowed.
The respondents have raised a preliminary
objection questioning the entertainment of the appellant’s application under
section 155 of the Act in the first place. It is submitted that complex
questions of fact were involved and the ordinary procedure of a civil suit as
opposed to the summary remedy available under section 155 was more appropriate.
This was more so because not only had the appellant and Shanta reserved their
right to file a suit for transfer of the disputed shares to them in section 155
application, they had in fact filed suits being CS No. 225 of 1988 and 226 of
1988 before the Courts in Pune claiming specific performance of the contract
alleged to be existing in favour of the appellants for transfer of the 3417 and
93 shares. It is submitted that the issues involved in the Civil Suits and the
proceedings under section 155 overlapped insofar as the 3417 shares are
concerned and that this appeal should be considered only with regard to the
challenge to the issuance and allotment of 17,666 shares.
The appellants have submitted that they had no
alternative but to file the Company Petition for rectification of the company’s
Register of Members by deleting the names of the respondent No. 5 and his group
under section 155 of the Companies Act. Reliance has been placed on the
decision of this Court in the case of Ammonia Supplies Corpn. (P.) Ltd. v. Modern
Plastic Containers (P.) Ltd. [1998] 7 SCC 1051 in which this Court said that:—
“So far as exercising of power for rectification
within its field there could be no doubt the court as referred under section
155 read with section 2(11) and section 10, it is the Company Court alone which
has exclusive jurisdiction.”
It is also submitted that even if the
jurisdiction under section 155 was not exclusive and the Company Court had
concurrent jurisdiction with Civil Courts, this Court should not relegate the
appellants to the alternative remedy of a Civil Suit having regard to the facts
of this case, especially, the pendency of the matter before the different
courts from 1986.
The Trial Court had rejected the preliminary
objection and held that it was open to the parties to choose any one of the
remedies available to such party and that the remedy under section 155 of the
Companies Act was equally ‘efficacious, definitely more speedy and certainly
appropriate’. The Division Bench did not go into the issue having held in
favour of the respondents on the merits.
Section 155 of the Act (as it stood in 1986)
provided inter alia as follows:—
“Power of Court to rectify register of members.—(1)
If—
(a) the name of any
person—
(i) is without sufficient cause, entered in
the register of members of a company, or
(ii) after having been entered in the
register, is without sufficient cause, omitted therefrom; or
(b) default is made, or unnecessary delay
takes place in entering on the register the fact of any person having become,
or ceased to be, a member;
the person aggrieved, or any member of the
company, or the company, may apply to the Court for rectification of the
register.
(2) The Court may either reject the
application or order rectification of the register, and in the latter case, may
direct the company to pay the damages, if any, sustained by any party
aggrieved.
In either case, the Court in its
discretion may make such order as to costs as it thinks fit.
(3) On an application under this section, the
Court—
(a) may decide any question relating to the
title of any person who is a party to the application to have his name entered
in or omitted from the register, whether the question arises between members or
alleged members, on the one hand and the company on the other hand; and
(b) generally, may decide any question which
it is necessary or expedient to decide in connection with the application for
rectification.
(4)
From any order passed by the Court on the application, or on any issue raised
therein and tried separately, an appeal shall lie on the grounds mentioned in
section 100 of the Code of Civil Procedure 1908 (V of 1908)—
(a) if the order be
passed by a District Court, to the High Court;
(b) if the order be passed by a Single Judge
of a High Court consisting of three or more Judges, to a Bench of that High
Court.
(5)
The provisions of sub-sections (1) to (4) shall apply in relation to the
rectification of the register of debenture holders as they apply in relation to
the rectification of the register of members.”
The power of the Court under section 155 is
limited to the rectification of the register of members of a Company in three
situations (a) when the name of a person is wrongly entered in such register
(b) when the name of a person, whose name having been entered in the register
is omitted therefrom, and (3) when default is made in entering the name of any
person who has already become or who has ceased to be a member. None of the
three situations envisaged under sub-section (1) of section 155 would allow the
person whose right as a member qua the disputed shares is yet to be established
to apply for rectification by inclusion of such persons’ name. The appellants
could not, therefore, have applied for transfer of the disputed shares in their
favour under section 155 of the Companies Act. They would have to establish
that right by way of a separate suit or otherwise. The appellants in paragraph
26 of the Company Petition correctly reserved their right to file appropriate
action for transfer of the 3,417 shares to themselves.
The relevant prayers in the appellants Company
Petition 476/86 were as follows :
“(a) That this Hon’ble Court be pleased to order the
rectification of the Register of Members of the 1st respondent Company and
order that the names of Respondent Nos. 5, 6, 8, 11, 12, 13 and 14 be removed
from the Register of Members of the 1st Respondent Company in respect of 3,417
shares belonging to the estate of Dr. N.B. Parulekar and 93 shares belonging to
the 2nd Respondent;
(b) That this Hon’ble Court be pleased to
order rectification of the Register of Members of the 1st Respondent Company
and do order that the names of Respondent Nos. 11, 12, 13, 15 and 16 be removed
from the Register of Members of the 1st Respondent Company in respect of 17,666
shares;
(c) That Respondent Nos. 5, 6, 8, 11, 12, 13
and 14 be ordered and directed by a mandatory order and injunction of this
Hon’ble Court to deliver up to the 1st respondent the share certificates in
respect of the said 3417 shares and 93 shares for removal of their names
therefrom;
(d) That the Respondent Nos. 11, 12, 13, 15
and 16 be ordered and mandatory injunction of this Hon’ble Court to deliver up
to the 1st Respondent the share certificates held by them in respect of 17,666
shares allotted on 16-11-1985 to the 1st Respondent for cancellation;”
As had been noted by the learned Single Judge,
there was no prayer for transfer of the disputed shares to the appellants. The
only prayers related to the cancellation of the impugned transfers and the
rectification of the Register of Members of the Company by removal of the names
of the Respondent No. 5 and his group.
The prayers in the appellants’ suits pending
in Pune are, inter alia, as follows:
“(a) that this Hon’ble Court be pleased to
declare that there is a valid and subsisting contract entered into between the
Plaintiffs, on the one hand and the Defendants 2, 3 and 4 on the other for the
sale by the Defendants 2, 3 and 4 and purchase by the Plaintiffs of 3417 shares
of the 1st Defendant bearing distinctive numbers more particularly described in
Exhibit ‘—’
(b) that the Defendants 2, 3 and 4 be directed
to specifically perform the said contract by executing the necessary Transfer
Forms and doing all other acts necessary to effectually carry out the said
transfer;
(c) that the 1st Defendant be directed to
register the said shares upon such transfer under prayer (b) in favour of the
2nd Plaintiff;
(d) that in the alternative to prayer (b)
above, the Defendants 2, 3 and 4 be ordered and decreed by this Hon’ble Court
be pay to the Plaintiffs a sum of Rs. 3 crores or such other sum as this
Hon’ble Court may determine as damages for breach of the contract.”
Similar
prayers were made in respect of the 93 shares. Clearly the reliefs prayed for
in the Company Petition were different from for the reliefs claimed in the
Civil Suits filed by the appellants. The Civil Suits arose out of and were
consequent upon the findings of the learned Single Judge on the petition under
section 155 that there was a concluded contract between the holders of the 3417
and 93 shares and the appellants for transfer of those shares to the
appellants.
The learned Single Judge correctly held that:
“This suit was necessary as even if the
Petitioners had managed to deposit the amount and got an order of rectification
of the register in their favour, there was still no order of any Court which
directed the respondents to deliver these shares to the petitioners”.
If there is any issue in the suit which was
required to be and has been determined in the Company Petition, the effect of
that determination would no doubt be the subject-matter of consideration by the
Civil Judge, Pune, before whom the suits are pending. But the possibility of
overlapping of such issues does not preclude the filing of the suits by the
appellants. The appellants advisedly did not pray for the transfer and
registration of the disputed shares in their favour in the proceedings under
section 155. They could not have done so.
That the Court exercising jurisdiction under
section 155 of the Companies Act was competent to entertain the applications
filed by the appellants cannot be disputed. The only question is whether the
discretion to do so was properly exercised. Despite the respondents’
submissions to the contrary, we do not consider this case as an appropriate one
to decide whether this Court’s decision in Ammonia Supplies Corpn. (P.) Ltd.’s
case (supra) was correct insofar as it has held that the jurisdiction to grant
relief provided under section 155 was exclusive. It may be noted that the view
has been reiterated by a larger Bench in Canara Bank v. Nuclear Power Corpn. of
India Ltd. JT 1995 (3) SC 41 (para 31). But assuming that the decision is
wrong and that jurisdiction of the Company Court under section 155 of the
Companies Act and the Civil Court under section 9 of the Code of Civil
Procedure is concurrent, there is no reason for us to refuse to entertain the
application under section 155 of the Companies Act. The questions raised in the
petition for rectification were determined on the basis of the material
available both by the Single and the Division Bench. Neither of the courts were
of the view that the materials were inadequate or that the disputes were such
which could not be resolved under section 155. Apart from any other
circumstance, the fact that the matter has been awaiting disposal by the courts
at the different levels for almost 18 years would render it grossly inequitable
and be an improper exercise of judicial discretion if we were to turn the
appellants away at this stage to pursue an alternative remedy (if any)
available under the general law. The preliminary objection raised by the
respondents is accordingly rejected.
Moving to the merits of the appeals the
various issues raised relate to the appellants’ right to purchase the disputed
shares; the transfer of 3417 and 93 shares and the issue and transfer of 17,666
shares.
I.1 The preemptive right which is being claimed by the appellants
arises from Article 57A of the Articles of Association of the Company. The
right is admitted by the respondents, but as the extent of the right is in
dispute, it is quoted verbatim.
“57A. In the event of any member of Company
desires to transfer his shares he shall be bound to offer the same either to
Dr. N.B. Parulekar or to Madame Shanta Parulekar or such other person or
persons as Dr. N.B. Parulekar or Madame Shanta Parulekar may direct or may
nominate and in which event the transferee or transferees shall pay such price
as may be certified by the Auditors of the Company.”
I.2 Analysed, the right contains four elements
which are cumulative:
(i) the desire of any member to sell
his shares.
(ii) the offer by such member of the
shares to Dr. Parulekar or to Shanta or to their nominee.
(iii) the certification of the price by the
Auditors of the Company.
(iv) The payment of such price by the transferee/transferees.
I.3 The other relevant articles are Articles 58 to 64. All these
articles are under a group entitled “Transfer and transmission of shares”.
Article 57A is the first of the group. The remaining articles read as under:—
“58.Subject to clause 57A no shares shall
be transferred so long as any member or any person selected by the Directors as
one to whom it is desirable in the interest of the Company to admit to
membership, is willing to purchase the same at the fair value as mentioned herein
below.
59.
Except where the transfer is made pursuant to Article 58 hereof, the person
proposing to transfer any share shall give notice in writing to the Company
that he desires to transfer the same. Such notice shall constitute the
Directors his agents for the sale of the share to any member or persons
selected as aforesaid, at a fair value to be agreed upon between the transferor
and the purchaser and in default of such agreement to be fixed by the Auditors
of the Company. The notice may include several shares and in such case shall
operate as if it were a separate notice in respect of each share. The notice
shall not be revocable except with the sanction of the Directors.
60 .
If the Directors, shall, within the space of 30 days after being served with
the Transfer Notice, find a purchasing member or a person selected as aforesaid
willing to purchase the share and shall give notice thereof to the proposing
transferor, he shall be bound upon payment of the fair value fixed as aforesaid
to transfer the shares to the purchaser.
61.
In case any difference arises between the Transferor and the Purchaser as to
the fair value of a share, the Auditors of the Company shall certify in writing
the sum which in their opinion is the fair value and the same be binding on the
transferor and the purchaser. Provided, however, that the Auditors so
certifying shall not be considered to be acting as Arbitrators and the Indian
Arbitration Act, 1940 shall not apply. The Auditor shall be considered to be
acting as an expert.
62.
If in case the proposing transfer, after having become bound as aforesaid,
makes default in transferring the share, the Directors may receive the purchase
money and shall thereupon cause the name of the purchaser to be entered in the
Register as the holder of the share and shall hold the purchase money in trust
for the Transferor. The Directors may appoint any person to execute a transfer
of the said share on behalf of the defaulting transferor. The receipt of the
Directors for the purchase money shall be a good discharge to the purchaser and
after his name has been entered in the Register in purported exercise of the
aforesaid power the validity of the transfer shall not be questioned by any
person.
63.
If the Directors, shall not, within the time prescribed as aforesaid after
being served with the notice, find a purchasing member or select a person as
aforesaid willing to purchase the shares or any of them and give notice in
manner aforesaid, the transferor shall at any time within 30 days thereafter be
at liberty subject to Article 65 thereof to sell and transfer the shares to any
person and at any price.
64.
Every share specified in the notice given pursuant to the Article 59 hereof
shall be offered to the members in such order as shall be determined by the
Directors and in such manner as the Directors think fit. If no member is ready
and willing to take up such shares the same may be offered to any person
selected by the Directors as one to whom it is desirable in the interest of the
company to admit to its membership.”
I.4.1The Articles give the
hierarchy of the persons entitled to purchase shares upon transfer. The first
right is given to the preemptors under Article 57A. Next in the hierarchy is
any member who is willing to purchase the shares at a fair value. This follows
from a reading of Article 58 with Article 64. The third category is of any
person or persons selected by the Directors as being desirable in the interest
of the company to admit to membership. The last category is the person to whom
the transferor may choose to sell the shares. As long as there is any person in
a higher category, there is no question of sale or purchase by a person in a
lower category. Thus for example the right of a member or a person in the 2nd
category to purchase shares can arise only in the event there is a default or
refusal on the part of the preemptor and so on. A person may fall within any
one or more of these four categories and would, by virtue of these articles have
distinct and separate rights to purchase the shares in each of the four
categories. So even if a preemptor or a nominee of a preemptor does not
exercise his/her right under Article 57A to purchase the shares at a price
certified by the company’s Auditors, such person may choose to exercise the
right as an ordinary member and purchase the share at a fair value or the
transferor may choose to sell the shares to such person under Article 63.
I.4.2In the case of a transfer to
a person in the 2nd and 3rd categories of putative purchasers, the Directors
are appointed agents of the transferor. The notice of transfer is required to
constitute the Directors as the transferor’s agents. This notice is distinct
from the other required to be given under Article 57A. In respect of these two
categories, the price of the shares is at first to be negotiated with the
transferor. It is only in the case of a default in such agreement being reached
that the company’s Auditors step in and fix a “fair price”. The third distinctive
feature of these two categories is that upon refusal/default of the preemptor,
the transferor is required to give a notice in writing of his desire to
transfer. Giving of this notice must necessarily be subsequent to the failure
of Article 57A for whatever reason, as the Directors are required to find a
willing person either in the 2nd and if not the 3rd category within a period of
30 days. There is no time limit specified for the completion of the preemptive
transfer under Article 57A. Therefore unless the transferor gives a separate
notice of the failure of Article 57A how would a willing member know whether
he/she has a right or when the period fixed for intimating their willingness to
purchase was to lapse? Article 60 also requires the Directors to give a notice
to the transferor after finding a willing purchasing member or selectee under
Article 58. Giving of this notice is important because if 30 days expires
without such notice by the Directors, Article 63 would come into play and the
transferor would be at liberty to sell the shares to any person and at any
price, albeit also within a period of 30 days from the expiry of the first
period of 30 days. It follows that a notice issued prior to the preemptor
exercising or failing to exercise the right under Article 57A would not be in
keeping with Articles 59 and 60 as this would make the period of 30 days
uncertain if not illusory. Thus the notice by the transferor under Article 58
must succeed the factual failure of Article 57A and notice, if any, under
Article 60 must follow the failure of Article 58.
I.4.3Assuming there is a willing
purchaser under Article 58, there is no time limit fixed either for the parties
to arrive at a negotiated price or for the Auditor to fix a fair value. But
Article 63 indicates that the entire transaction envisaged by Articles 59, 60,
61 and 62 would have to be completed within a period of 60 days after Article
57A failed to operate.
I.4.4 Section 36 of the Companies Act, 1956 makes the Memorandum and
Articles of Company, when registered, binding not only on the company but also
the members inter se to the same extent as if they had been signed by the
company and by each member and covenanted to by the company and each
shareholder to observe all the provisions of the Memorandum and of the
Articles. The Articles of Association constitute a contract not merely between
the shareholders and the company but between the individual shareholders also.
The Articles are a source of powers of the Directors who can as a result
exercise only those powers conferred by the Articles in accordance therewith.
Any action referable to the Articles and contrary thereto would be ultra vires.
I.4.5Thus in Hunter v. Hunter
[1936] AC 222, the shareholders in a private company challenged the transfer of
shares by another shareholder to 3rd parties without compliance with the
provisions of Articles of Association. In terms of the articles a member could
not transfer his shares until he had given notice to the Secretary offering to
sell the shares at a price to be fixed by the auditor and until the Secretary
had offered them to the other members. It was found that in violation of this
article, one of the share-holders had sold the shares to nominees of a bank
from which that shareholder had obtained loans. The application for
rectification of the share register was resisted by the purchaser in whose
favour the shares had already been registered with the company. The House of
Lords came to the conclusion that the purchase was not in terms of the Article
and that the transfer in violation of the articles was inoperative.
I.4.6A similar situation arose in
the case Lyle & Scott Ltd. Scott’s Trustee [1959] 2 All ER 661. There was a
similar article which provided for inter alia the pre-emptive right in the
existing shareholders to purchase shares. There was no dispute that the article
had been violated.
“The purpose of the Article is plain: to prevent
sales of shares to strangers so long as other members of the appellant company
are willing to buy them at a price prescribed by the Article. And this is a
perfectly legitimate restriction by the Article. And this is a perfectly
legitimate restriction in a private company.” (p. 667)
The House of Lords was of the view that the
Article would have to be complied with in order to effect a valid transfer -
Naresh Chandra Sanyal v. Calcutta Stock Exchange Association Ltd. [1971] 1 SCC
50 107; H.P. Gupta v. Hiralal [1970] 1 SCC 437, 440 and 441. With this
prefatory statement of the relevant law we may now look at the facts.
II Facts
II.1The narration of facts starts
with the will of Dr. Parulekar by which he appointed the four Executors, viz.
Shanta and the respondents 2, 3 and 4 as Executors and Trustees of the will. The
will inter alia empowered the Executors and Trustees to sell or to postpone the
sale from time to time of all the properties vested in them by the will for
payment of estate duty and to invest the same as the Executors and Trustees
thought fit. After providing for specific legacies, the Executors and trustees
were directed to hold the rest and residue of the estate on trust (1) for the
spread of education through newspapers magazines and periodicals (2) for
effecting improvement of the quality and standard of journalism and training of
personnel in journalism (3) for purchase of shares of concerns, firms,
companies or from persons or persons interested in or concerned with
newspapers, magazines, periodicals and otherwise in journalism (4) for
publication of books and literature for masses at low and reasonable prices,
and (5) for such other objects and acts that may be necessary to bring about
improvement of information amongst the masses and also which may be incidental
or conducive to the above objects. The trust was to be known as “Sakal Papers
Trust”. Although the probate of the will had been granted in 1975 to the four
Executors and all four of them had been entered in the register of members of
the company as joint shareholders of the 3417 shares belonging to the estate of
late Dr. Parulekar on 26-4-1977, no steps were taken by the Executors to
convert the shares into money till 1984.
II.2It is the claim of the
respondent Nos. 2, 3 and 4 that in 1984 a company by the name of M/s. Jain
Plastic Pvt. Ltd. offered to purchase the 3417 and 93 shares at a price of Rs.
2250 per share. The offer is not on record. What is on record is a letter dated
10-11-1984 written by the respondent Nos. 3 and 4 as the holders of 93 shares
to Shanta as well as the Board of Directors of the Company offering to sell
those shares to Shanta or her nominee under Article 57A at a price of Rs. 2250
per share. The letter further stated that in the event Shanta was not agreeable
to pay the price, the letter should be treated as notice to the Directors
within the meaning of Article 57A to Article 61 who were called upon to take
steps to get the price fixed under Article 61. It was further stated that if
Shanta did not exercise her rights under Article 57A or was not willing to pay
the price or not willing to complete the transactions in accordance with
Article 61, then the respondent Nos. 3 and 4 would be free to sell the shares
to any other person in accordance with Articles of the company. Article 61, as
we have already seen, pertains to the valuation of shares when a shareholder
expresses his or her willingness to purchase the shares.
II.3 On 27-11-1984 the Board of Directors resolved that the 93 shares
held by the respondent Nos. 3 and 4 should be offered to the other members of
the company subject to the preemptive right of Shanta under Article 57A.
II.4 As far as the 3417 shares are concerned, a similar resolution was
taken that if Shanta did not exercise her rights of did not pay the shares at a
price fixed under Article 61 then the Executors could sell the shares to any
other person or persons for the price of Rs. 2250 per share. It was also
resolved that any one of the Executors was authorized to implement the
resolution and also to take steps to execute the transfer forms and complete
the transaction.
II.5 Notice was given on 29-11-1984 by the Executors to Shanta with the
respondent No. 2 signing on behalf of all the Executors. The contents of the
notice are materially the same as the notice given by the respondent Nos. 3 and
4 in respect of the 93 shares. The company similarly issued a notice to all
shareholders to indicate whether they were willing to purchase the shares
subject to Shanta’s right under Article 57A.
II.6On 14-12-1984 the appellants
wrote a letter accepting the offer to sell the 3417 shares. The letter stated
that Shanta was agreeable to buy the shares by herself/or her nominee and that
her nominee was her daughter, now the sole appellant. Shanta stated that she
was agreeable to pay such price as may be certified by the Auditors of the
company as stipulated in Article 57A. A copy of the letter was sent by Shanta
to the Board of Directors and countersigned by her daughter signifying her
assent.
II.7The Company’s Chartered
Accountant gave notice to Shanta on 20-1-1985 stating that he had received
several documents from the company pertaining to the valuation of the shares. A
list of such document was given. Shanta was also called upon to submit any
documents that she may desire in that connection within seven days. Shanta
asked for an extension of time to submit such information. This was granted by
the Auditors upto 20-2-1985. By a letter dated 20-2-1985 Shanta called upon the
Auditors to submit a draft report and draft certificate within seven days in
order to enable her to make her submissions in respect thereof. By a letter
written on the next date, Shanta asked for copies of the documents submitted by
the Company to the Auditors. There was no response to either of these letters
by the Auditors who straightaway issued a certificate on 21-2-1985 certifying
that the price of the 93 shares was Rs. 2,10,273 and of the 3417 shares Rs.
77,25,837.
II.8The respondent Nos. 3 and 4
then wrote to Shanta on the same date calling upon Shanta to pay the sum of Rs.
2,10,273 in respect of 93 shares on or before 2-3-1985 “time being of the
essence” failing which they would dispose of the shares in such manner as they
thought fit.
II.9In the meanwhile, the
appellants had protested against the certification to the Auditors both with
regard to the procedure followed as well as the value certified. The allegation
against the Auditor was that the valuation had been fixed collusively and was
not just, fair or reasonable according to the recognized principles of
valuation. The appellants called upon the Auditor to fix a fair valuation after
giving the appellants a proper opportunity of being heard. They also wrote to
the respondent Nos. 3 and 4 contending that there was no question of time being
of the essence either under Article 57A or under the offer letters. It was
alleged that the stipulation of time could not be imposed unilaterally. They
also stated that the time fixed was unreasonable and that in any event the
certificate issued by the Auditor could not be treated as a final certificate.
It was also stated that there was a final and concluded contract between the
parties for the purchase of the said shares. Without prejudice to all that was
stated and also without prejudice to their legal rights to take actions
relating to the Certificate dated 21-2-1985 issued by the Auditors, the
appellants wrote:
“We are willing to deposit with any stakeholders
of our mutual choice an amount of Rs. twenty lacs as an earnest of our bona
fides and genuine desire to purchase the said shares. The said amount will be
paid to the stakeholders within three days from the receipt of your
confirmation that you are ready and willing to accept this interim arrangement.
The stakeholder shall hold these monies until such time, but not later than one
month within which we hope the Company’s Auditors will submit a just, fair and
impartial Certificate and it will be accepted by us. In case a just, fair and
impartial Certificate is not issued by the Company’s Auditors, within the said
period, then the stakeholder shall return the said monies to us without any
objection immediately on a written demand by us.”
The appellant also protested against the
threat held out in the letter dated 21-2-1985, to sell the shares to third
parties.
II.10In response to this letter a
telegram was sent by respondent No. 3 stating “Will communicate action nothing
in your letter deemed as admitted.”
II.11On 2-3-1985 and 1-4-1985 two
suits were filed by the appellants before the Civil Judge, Pune praying for a
permanent injunction to restrain the respondent Nos. 2, 3 and 4 from selling
the shares contrary to the concluded contract with the appellants. The suits
were rejected on 5-8-1985 by the Civil Judge on the application of the
respondent Nos. 2, 3 and 4 on the ground that the subject-matter involved in
the suit was outside the pecuniary jurisdiction of the Court.
II.12According to the respondents,
the 3417 and 93 shares were then sold to the respondent No. 5 and his group on
9-9-1985. There is no record when the offer of the respondent No. 5 or his
group had been made either to respondent Nos. 3 or 4 or to the Executors prior
to the sale nor of any further notice being given in respect of the sale of the
shares to the respondent No. 5 and his group to the appellant.
II.13 On 16-9-1985 a notice was
issued by the Board of Directors of the Company that a meeting would be held on
21-9-1985. The appellants’ claim that the notice was given by a telegram late
in the night on 16-9-1985. On the next date, the appellants sent a telegram to
the Company protesting against holding the meeting of the Board of Directors at
such short notice and requesting for postponement. This was followed by a
letter dated 21-9-1985 written by the appellants. The day before the meeting
was held, on 20-9-1985, the respondent No. 5 and his group lodged transfer
forms in respect of the 3417 and 93 shares with the company. The request of the
appellant for adjournment of meeting was not heeded to and the meeting was held
on 21-9-1985 as scheduled. At the meeting, despite there being no item in the
agenda relating to the registration of the shares sold, a resolution was passed
to register the transfer of the 3417 equity shares standing in the name of the
four Executors as well as the 93 shares to the respondent No. 5 and his group
which included the respondent Nos. 11 to 16, all private limited companies. The
respondent No. 5 himself was appointed as an Additional Director of the Company
together with another member of the respondent No. 5’s group. The respondent
No. 2 was appointed as a Chairman upon the retirement of the respondent No. 3.
II.14 On 1-10-1985 the appellant wrote to the respondent Nos. 2, 3 and 4
stating that they were willing to purchase the shares at the price fixed by the
Company’s Auditors and would pay the same immediately upon the modalities for
such payment being intimated. No reason was put forward for this volte face by
the appellant. In response to this letter, two letters dated 2-10-1985 and
3-10-1985 were written by respondent No. 2 on behalf of the Executors and by
the respondent Nos. 3 and 4 as holders of 93 shares intimating the appellant
that the shares had already been sold. It was however not intimated as to whom
the shares were sold.
II.15 On 13th October, 1985 a Board Meeting was held at which the appellants
were present. The appellants affirm that they came to know of the transfers of
the shares to the Pawar group only when the Minutes of the earlier Meeting held
on 21-9-1985 were put up for approval. Despite their protest the Minutes were
approved.
II.16 It was in these circumstances that the application under section
155 of the Companies Act, 1956 was filed by the appellants.
II.17 Before we close this chapter of facts on the transfer of 3417 and
93 shares, it may be noted that the District Court at Pune recalled its order
rejecting the plaints in the two suits which had been filed by the appellants
on a review application filed by them. The respondents challenged the order
before the High Court. The High Court set aside the order of the District Court
and remanded the matter to the Trial Court for re-deciding the appellant’s
application for review afresh.
III Submissions
III.1 According to the appellants once Shanta had exercised her rights
under Article 57A, there was a binding contract in respect of the 3417 and 93
shares. With the exercise of the right, notice to the other shareholders as
required under Article 58 being a conditional one ceased to operate. It is
submitted that there was no question of the respondent Nos. 2, 3 and 4 fixing a
time frame for the implementation of the concluded contract unilaterally. It is
the case of the appellants that the contract had never been repudiated. The
conduct of the appellants spoke to the contrary. Furthermore there was no
acceptance of the repudiation by the respondent Nos. 2, 3 and 4. While denying
the alleged repudiation of the contract, the appellant contended that in any
event in accordance with Article 63, the Directors had to find a willing member
or desirable outsider to purchase the shares within 30 days. Only after that
could the transferor sell to any person within 30 days. The sale to the
respondent No. 5 and his group was beyond that date. As far as Shanta’s right
to purchase the shares offered, despite the fact that she was herself one of the
Executors/Trustees of the 3417 shares, it is the appellant’s contention that
section 153 read with Article 29 showed that the Company was not bound to
recognize any interest in shares other than that of the registered shareholder.
It is further averred that Dr. Parulekar did not by his Will, seek to deprive
Shanta of her right to preemption by appointing her Executor/Trustee. In any
event there was nothing which deprived the present appellant of her right to
purchase the shares independently, not only as a nominee under Article 57A but
also as a “willing member” under Article 58. According to the appellants there
was no bar either under the Bombay Public Trust Act, 1950 or under the Indian
Trusts Act, 1982 allowing Shanta to exercise her right under Article 57A. It is
contended that the three trustees could not by themselves make any offer of
sale of the 3417 shares to the Pawar group. The power of the Executor was not
delegatable under the Will and the authorization, if any, by Shanta to transfer
the shares stood revoked once she had exercised her option under Article 57A.
It was argued that the transfer to the Pawar group by three of the four joint
shareholders of the 3417 shares was in any event contrary to section 108 of the
Companies Act which mandatorily required all the joint shareholders to execute
the transfer forms. It is said that the respondent No. 5 and group were not
bona fide purchasers. This had been so held by the Learned Single Judge which
finding was not challenged before the Division Bench.
III.2 According to the respondents, as far as Article 57A is concerned,
it is said that the article could not be construed to provide for a concluded
contract merely upon the acceptance of the offer because in such event it would
be open to the transferee to file a suit challenging the price and effectively
subverting the transfer of shares as a result of which the transferor would be
deprived of the immediate use of the funds. According to the respondents, the
contract under Article 57A would be concluded only after payment of the price.
It is conceded that this particular argument had not been raised in the Courts
below but being an argument on the interpretation of Article 57A, it is
submitted that it should not be excluded from consideration. According to the
respondents the appellant’s conduct clearly showed repudiation of the contract.
The appellants had failed to perform their obligation by challenging the
certificate of the Auditor. It was submitted that the respondent Nos. 2, 3 and
4 were entitled to fix a time for the performance of the contract not only
under section 32 of the Sales of Goods Act but also under Article 57A. By not
paying the certified price for the shares, the contract came to an end. The
respondents have said that by the resolution of the executors dated 7-11-1984,
the three executors had been authorized to transfer the shares to a 3rd party
under section 108(1) of the Companies Act. The transfer could be made by or on
behalf of a shareholder. In fact the respondent Nos. 2, 3 and 4 need not have
signed the transfer forms and any one of them could have done so. The transfer
was in keeping with Article 63. The respondents then submitted that Shanta was
a trustee and she could not under any principle of law applicable to trusts
either herself or through a nominee purchase any trust property as this would
invariably lead to a conflict of duty and interest. In fact by challenging the
price fixed in the shares by the Auditor and contending that it was too high,
the conflict between the interest of the beneficiary and the interest of the
trustee was manifest.
IV. Conclusion
IV.1 In our opinion the entire transaction of
sale is riddled with illegalities.
IV.1-1 The notices issued in respect of the 93 and 3417 shares were not in
keeping with the Articles as far as Articles 58 to 63 were concerned. As we
have already observed, notices to willing members or to selected persons under
Article 58 must succeed and not precede the actual operation of Article 57A.
The notices issued by the respondent Nos. 2, 3 and 4 also did not constitute
the Directors as the transferor’s agents for the purposes of selling the shares
in terms of Article 59. There was, in the circumstances, no question of the
transferors selling their shares to any 3rd party under Article 63 unless
proper notice had been issued to the 2nd and 3rd category of persons if any.
There was also no question of the transferor invoking Article 61 bypassing the
right of a willing member or selectee, if any, to negotiate a fair price.
IV.1-2 The Division Bench held that the notices dated 29-11-1984 and
10-11-1984 issued by the respondent Nos. 2, 3 and 4 in respect of the 3417
shares, and the 93 shares respectively, were valid notices under Articles 57A
and 58 to the other shareholders in the company. But the Division Bench erred
in holding that none of the other shareholders showed any interest in
purchasing the shares. In fact the conclusion of the Division Bench is
contradictory. If the notices could be combined notices under Article 57A and
Article 58, then the appellants’ acceptance of the offer as made in the notices
should also be construed as a combined assent under both the Articles. The
Division Bench erred in holding that there was no material before the Court to
indicate that the second appellant had at any time informed the company that
she proposed to exercise her rights as a shareholder to purchase the shares.
The Division Bench should have considered whether there was any offer to the
second appellant as a shareholder to purchase the shares. If there was not an
offer to the shareholders, obviously, there was no question of the second
appellant accepting the offer. But whatever offer was made whether under
Article 57A or under Article 58 by the two notices, that offer was accepted by
the appellant. And upon such acceptance, there was a concluded contract between
the respondent Nos. 2, 3 and 4 on the one hand and the second appellant on the
other.
IV.1-3 The learned Single Judge correctly held
that :—
“The offers being both under Article 57A and
Articles 58 to 64, the acceptance by the second petitioner must be deemed to be
not only as a nominee, but also as a member of the first respondent-company
entitled to take up the shares in her own right. There is a concluded contract
to sell the shares to the second petitioner. The second petitioner was and is
not an executrix or a trustee. This contract cannot, therefore, be said to be
void or unenforceable.”
IV.2-1 Article 57A does not by itself indicate when the contract is concluded
between the offeror and offeree. It was concurrently held by the Single Judge
and the Division Bench that which the acceptance of the offers of the
respondent Nos. 2, 3 and 4 by the appellants, the contract to purchase the
shares under STA was concluded. Having regard to section 9(1) of the Sale of
Goods Act, 1930 we see no reason to differ from this conclusion. Section 10(1)
of the Sale of Goods Act also speaks of avoidance of an agreement if the third
party valuer either cannot or does not fix the price of the goods to be sold.
Apart from the fact that the third party valuer in this case did in fact make
the valuation, the section proceeds on the basis that the agreement is already
concluded otherwise there would be no question of avoidance. Section 32 of the
Sale of Goods Act provides :
“Payment and delivery are concurrent
conditions.—Unless otherwise agreed, delivery of the goods and payment of the
price are concurrent conditions, that is to say, the seller shall be ready and
willing to give possession of the goods to the buyer in exchange for the price,
and the buyer shall be ready and willing to pay the price in exchange for
possession of the goods.”
The section has no relevance to the question
whether there was a contract at all between the parties. It pertains to a
condition which is to be implied, unless there is a provision to the contrary,
in a contract. Indeed the section assumes the existence of a contract in
respect of which such a term may or may not be read in.
IV.2-2 The respondents’ argument that a contract could not be said to be
concluded until the price was in fact paid because it would then be open to an
offeree like the appellants to stall the transfer of shares to a third party
buyer and hold the offeror to ransom, is ingenious but not an argument which is
legally acceptable. The legal consequence of a concluded contact will remain
irrespective of how a particular party in a given situation might abuse the
rights flowing from it. It is platitudinous that the possibility of abuse of a
right cannot determine whether the right exists as a matter of law. Such
arguments are normally met by the aphorism “hard cases make bad law”.
IV.2-3 In Sudbrook Trading Estate Ltd. v. Eggleton [1982] 3 All ER 1, 64
a clause in the lease gave the lessees an option to purchase the reversion in
fee simple at a price to be agreed by two valuers, one to be nominated by the
lessors and the other by the lessees and, in default of agreement, by an umpire
to be appointed by the valuers, a minimum purchase price being specified in the
clause. When the lessees sought to exercise the option in December 1979 the
lessors claimed that the option clauses were void for uncertainty and refused
to appoint a valuer. The lessors also contended that the options were unenforceable
as there was no contract of sale since the purchase price had not been fixed.
It was held that since the contract between the parties provided that the price
was to be determined by valuers, it necessarily followed that the contract was
a contract for sale at a fair and reasonable price assessed by applying
objective standards, and “on the exercise of the option clauses a complete
contract for the sale and purchase of the freehold reversion was constituted”.
IV.2-4 There was thus a concluded contract which was breached by the
respondent Nos. 2, 3 and 4 when they purported to sell their shares to the
Pawar Group.
IV.2-5 If the notices issued by the respondent
Nos. 2, 3 and 4 were not under Article 58, then it was not open to the
respondent Nos. 2, 3 and 4 to have sold the shares to the Pawar Group without
issuing such notices. Hence irrespective of whether there was a concluded
contract between the appellants and the respondent Nos. 2, 3 and 4 in respect
of the 3417 and 93 shares, the shares could not have been sold to the Pawar
Group. Apart from the lack of notice under Article 58, as we have already
noticed, the right of a transferor in terms of the Articles of the company to
sell the shares to a person of the transferor’s choice is required to be exercised
within the period specified in the Articles. This is clear from Article 63.
According to the respondents the appellants had repudiated the contract by
challenging the certification of the auditor in February, 1985. If that were so
then the Directors were required to give the notice to the transferor or if no
such notices were given, the transferors could sell within the period of 30
days thereafter. Those 30 days had long since expired much before the date on
which the sale of the shares is said to have taken place between the respondent
Nos. 2, 3 and 4 and the Pawar Group.
IV.3 We are of the view that there
was also no repudiation of the contract by the appellants as contended by the
respondents on account of the appellants alleged failure to pay the price
within the time fixed by the respondent Nos. 2, 3 and 4 by their notices dated
21-2-1985.
IV.3-1 Section 11 of the Sale of Goods Act,
1930 expressly says :
“Stipulation as to time.—Unless a different
intention appears from the terms of the contract, stipulations as to time of
payment are not deemed to be of the essence of a contract of sale. Whether any
other stipulation as to time is of the essence of the contract or not depends
on the terms of the contract”.
IV.3-2 As there was no time fixed either under Article 57A or in the
offer letters, the question of time being of the essence did not at all arise.
As was held in Gomathinayagam Pillai v. Palanisami Nadar AIR 1967 SC 868
“...the stipulation must show that the intention was to make the rights of the
parties depend on the observation of the time limits prescribed in a fashion
which is unmistakable...” (p. 871) [Emphasis supplied]. If there is no
stipulation as to time, it is not open to a party to unilaterally stipulate a
time and then cancel the contract because of an alleged failure of the other
party to act within the time stipulated - National Co-operative Sugar Mills
Ltd. v. Albert & Co. AIR 1981 Mad. 172.
IV.3-3 Of course if time is fixed by the contract but it is not
originally of the essence, a party could by notice served upon the other call
upon him to complete the transaction within the time fixed and intimate that in
default of compliance with the requisition the contract will be treated as
cancelled (ibid p. 872). But where no time is fixed for completion, it is not
open to either the vendor or purchaser to serve notice limiting a time at the
expiration of which he will treat the contract as at an end.
IV.3-4 In the circumstances, the contract for sale of the shares to the
appellants could not be avoided by reason of any alleged failure on the part of
the appellants to pay the price fixed by the Auditor.
IV.4 Furthermore for an act to constitute a repudiation of a
contract it must be “...such an act as indicated an intention to refuse to
perform the contract and to set the other party free from performing his
part... an act by which the party renounced all intention to perform his part
of the contract, and thereby set free the other party... or an intimation that
it was no use for you to go on, because I tell you that I do not mean to keep
to the contract” - Freeth v. Burr [Lord Coleridge, CJ (1874-80) All ER 753].
The question to be asked “...is the act to be relied on as rescission, an act
which on the part of the person doing it amounts to an abandonment, or refusal
by him to perform his part of the contract?” (ibid at p. 754)
IV.4-1 Repudiation of a contract is “a serious matter, not to be lightly
found or inferred”. From the facts as narrated earlier, it is clear that there was
no such repudiation on the part of the appellants. The letters exchanged, the
suits filed do not show that the appellants were renouncing the contract nor
that they were absolutely refusing to perform the contract. The question is not
whether the valuation by the company’s auditors was correct. The Division Bench
held that it could not be said to be incorrect. But the question which should
have been asked was, was the challenge permissible in law and if so was it made
bona fide? The Division Bench did not answer this question in the negative.
There was in fact no refusal to perform the contract, but a questioning of the
mode of performance. It may be that they were mistaken in their challenge to
the Auditors’ certificate, but that is a long way from saying that they were
unwilling to pay. As was said in Sweet & Maxwell Ltd. v. Universal News
Services Ltd. 1964 QBD 699 (CA) 179 “their view might have been a wrong one,
but that does not justify it being treated as a repudiation of the contract” -
Mersey Steel & Iron Co. v. Naylor Benzon & Co. [1884] 9 App. Cas. 434;
Ross T. Smyth & Co. v. T.D. Balley & Co. [1940] 3 All ER 60. “...If A
and B, parties to a contract, form different views as to the construction and
effect of their contract, and A demands performance by B of some act which B
denies he is obliged to perform upon the true interpretation of the contract,
then, if B says ‘I am ready and willing to’ perform the contract according to
its true tenor, but I contend that what you, A, require of me is not obligatory
upon me ‘according to the true construction of the contract’, and if in so
saying he is acting in good faith, he does not manifest the intention to refuse
to perform the contract. On the contrary, he affirms his readiness to perform
the contract, but merely puts in issue the true effect of the contract.” (ibid
p. 737).
IV.4-2 There would have been no
point in the appellant challenging the valuation of the shares by the auditors
if they were not interested in completing the transaction. There would have
been also no point in their offering to deposit Rs. 20 lakhs as proof of their
continued interest in purchasing the shares. The filing of the suit in Pune is
not conduct in keeping with an intention of not performing the contract. If the
offers were in terms of Article 58, as is now contended by the respondents,
then, as we have said, the acceptance of that offer must also be understood to
be under Article 58. In that case, it was for the parties to negotiate the
price for the shares and not for the auditors to determine. The challenge to
the certification may be taken as a method of negotiating a fair value under
Article 58. Be that as it may, the appellants in fact accepted the price as
certified by the auditors on 1st October, 1985.
IV.5 The respondents have relied on the resolution at the Executor’s
meeting on 27-11-1984 at which it was determined that the sale of the shares
would be made. The resolution of the executors was that one of the executors
could implement the sale and execute the transfer forms but did not name
anyone. Before the sale of the 3417 shares was made to the Pawars by the
Executors, it was abundantly clear from the conduct of Shanta (i) that she had
revoked consent she may have given qua Executor and Trustee to the sale of the 3417
shares to third parties and (ii) that the appellants were desirous of
purchasing the shares themselves in whatever capacity.
IV.5.1 In any event the Executors’
resolution dated 27-11-1984 authorizing one of them to effect the transfer of
the shares could not override the provisions of section 108 of the Companies
Act which prohibits a company from registering or transferring of shares in the
company unless a proper instrument of transfer duly stamped and executed by and
on behalf of the transferor and by and on behalf of the transferee and
specifying the name, address and occupation if any of the transferee, has been
delivered to the company.
IV.5.2 For the purposes of registration of the transfer under section 108
the instrument of transfer must be executed by the transferor or it must be
executed on behalf of the transferor. But there must be execution. The learned
Single Judge has found as a fact that the instrument of transfer had been
signed by only three of the joint shareholders. Shanta had not signed. There
were three signatures on the transfer deed. Each transferor had therefore,
executed qua shareholders in respect of their own interest. There was no 4th
signature on behalf of the 4th joint shareholder. This was also the finding of
the Division Bench. But the Division Bench held that it was a mere irregularity
which did not vitiate the registration. It was also held that the irregularity
could be cured by one of the Executors signing on his behalf.
IV.5.3 But compliance with the provisions of section 108 was and is
mandatory. As held in Mannalal Khetan v. Kedar Nath Khetan [1977] 2 SCC 424 :
“...The words ‘shall not register’ are mandatory
in character. The mandatory character is strengthened by the negative form of
the language. The prohibition against transfer without complying with the
provisions of the Act is emphasized by the negative language. Negative language
is worded to emphasise the insistence of compliance with the provisions of the
Act....
23. The provisions contained in section
108 of the Act are for the reasons indicated earlier mandatory. The High Court
erred in holding that the provisions are directory.” (pp. 429-431)
(Halsbury’s Law of England, 4th edn., Vol. 7,
para 1632, Palmers Company Law, 24th Edn., P. 638, Jarnail Singh v. Bakhshi
Singh [1960] 30 Comp. Cas. 192 (Punjab), L. Janakirama Iyer v. P.M. Nilakanta
Iyer 1962 Suppl. (1) SCR 206.)
IV.5.4 The power to act by majority qua executors and authorizing someone
to act as a shareholder on another’s behalf are distinct. There is no question
of transferring shares by signature of a majority. Whatever the agreement
between the executors was inter se, the agreement could not override the
provisions of the Companies Act and under section 108 the Company is bound to
recognize only those transfers for the purpose of registration which are
executed in terms of that section. It is true that they were in fact executors,
and that, with regard to the beneficiaries mentioned in the will, they would be
trustees of the stock, but the company does not take notice of any trust, and
must act in accordance with the Act of Parliament, under which it is
constituted, with regard to placing persons upon the register - Barton v.
London & North Western Railway Co. 1889 (24) QBD 77 (CA).
IV.5.5 Even if the four executors had wanted registration only in the
capacity of executors and the company also acquiesced in it, the four executors
would continue to be ordinary shareholders and the limitation would be illegal
and of no effect. Being on the register as joint sharehol-ders, there is no
escape from the proposition that a transfer by one of them only would be an
invalid transfer - Barton v. London & North Western Railway Co. 1889 (24)
QBD 77 (CA).
IV.5.6 As far as the company is concerned, the requirement of execution
of the transfer form by each of the joint shareholders could not be met by
execution of the transfer form by one of the shareholders even though between
the shareholders inter se there was an agreement that one shareholder could
sign on behalf of all the other shareholders unless the executant signs for
himself and for on behalf of the other shareholders/transferors. It would be of
no consequence as far as section 108 is concerned to exclude the reluctant
shareholder on the ground that the shareholder had refused to execute the form.
The remedy of the other joint shareholders to compel the reluctant shareholder
to sign the transfer form would lie elsewhere and not in a breach of the
requirement of section 108 of the Companies Act.
IV.5.7 Here the instruments of transfer had admittedly been improperly
executed. Both the Courts have so held. It was therefore not lawful for the
company to register the transfer. The principle that a Court will not interfere
in the affairs of the company if the defect complained of can be cured would
apply if the defect is a technicality and is curable. The non-compliance of
section 108 is not a technicality.
IV.6 Apart from the violation of section 108 as far as the
registration of shares is concerned, the meeting of the Board of Directors at
which the company recorded the transfer was invalidly held.
IV.6.1
According to the Article 93 of the Articles of the Association of the Company:—
“Every notice of a meeting of the Company shall
specify a place, date and hour of the meeting, and shall contain a statement of
the business to be transacted thereat. No General Meeting, Annual or
Extraordinary, shall be competent to enter upon, discuss or transact any
business which has not been specifically mentioned in the notice or notices
upon which it was convened. In every notice there shall appear with reasonable
prominence a statement that a member entitled to attend and vote is entitled to
appoint a proxy or, where one or more proxies are allowed, to attend and vote
instead of himself and that the proxy need not be a member of the Company.”
IV.6.2 In the notice for the meeting held on 21st September, 1985, there
was no mention whatsoever, let alone a statement, relating to the transfer of
the 3417 and 93 shares to the Pawars. At the same meeting, the respondent Nos.
5 and 10, were appointed as Additional Directors although their shares were not
yet entered in the Company’s register of members.
IV.7 As we have found several legal infirmities in the sale of the
3417 and 93 shares to the Pawars, it is not necessary to consider whether the
respondent No. 5 and his group were purchasers of the shares.
IV.8 The Division Bench erred in holding that the violation of
section 108 was ratified at the Board Meeting held on 13th October, 1985.
Ratification is possible in respect of an act which is incompetent, by a person
who would have been competent to do such act. The violation of section 108
could not be ratified by the Board of Directors as the act was one which the
Board was incompetent to allow. The Board of Directors never had the legal
capacity to direct the registration of shares invalidly transferred.
IV.9 It is the respondent’s final submission that neither of the
appellants could have purchased the shares under Article 57A because Shanta was
one of the named executors and trustees of inter alia shares of Dr. Parulekar
under his will.
IV.9.1 A trust is created under section 6 of the Indian Trust Act, 1882 “...when
the author of the trust indicates with reasonable certainty by any words or
acts (a) an intention on his party to create thereby a trust, (b) the purpose
of the trust, (c) the beneficiary, and (d) the trust-property, and (unless the
trust is declared by will or the author of the trust is himself to be the
trustee) transfers the trust-property to the trustee.” According to the
appellant no valid trust was created as the beneficiaries had not been named.
We do not propose to go into this question in these proceedings.
IV.9.2 Under sections 51 and 52 of the 1882 Act a trustee may not use or
deal with trust property for his own profit or any other purpose in connection
with the trust. And no trustee whose duty it is to sell trust property may
directly or indirectly buy the same or any interest therein, on his own account
or through his agent or third person.
IV.9.3 Article 57A does not envisage Shanta purchasing the shares through
her nominee. One of hers rights under Article 57A was no doubt to purchase the
shares herself. But she could also nominate any other person to purchase the
shares. The transferor then would have to make an offer to such other person
who would then, independently of Shanta, be entitled to a transfer of the
shares. In the latter case there is no question of any conflict of interest
between Shanta in her capacity as trustee under the will of Dr. Paruleker and
as a nominator under Article 57A. Here, Shanta was not purchasing the shares.
It is true that she could have done so in exercise of her preemptive right
under Article 57A, but she did not and only nominated her daughter as the
person to whom shares should be sold.
IV.9.4 This was also how the parties understood the situation as the
correspondence exchanged between the parties evidences. As we have noted the
resolution relied upon by the respondents authorizing one of them to sell the
trust shares, was taken of a meeting held on 27th November, 1984 which was
attended only by two of the four Executors. Shanta could not attend because she
was ill. Her prayer for adjournment was rejected by the two executors on the
ground that her interest would not be jeopardized since she would be given
notice under Article 57A. It was then resolved that notice should be given
under Article 57A to Shanta. If she exercised her right under that Article, the
executor was to sell the shares to her at Rs. 2,250 per share. If she did not
agree to purchase the shares at the price of Rs. 2,250 then the price should be
fixed in accordance with Article 61. The resolution further records that only
if Shanta did not buy the shares at such fixed price then the executors “do
sell the shares to any other person or persons at or for the price of Rs. 2,250
per share”. Since the meeting was not adjourned because Article 57A protected
Shanta, it follows that if Shanta’s rights were not to be protected under
Article 57A, then the meeting should have been postponed.
IV.9.5 Indeed the matter was referred to the company’s auditors in
purported compliance with Article 57A. Certification of the price was made by
the auditors also under that Article. The notice of the respondent Nos. 2, 3
and 4 calling upon the appellants to pay the certified price was also under
Article 57A. The present stand of the respondent Nos. 2, 3 and 4 with regard to
the disqualification of Shanta as a purchaser of the shares under Article 57A
is thus wholly inconsistent with their conduct ante litem.
IV.9.6 The respondents now say that Article 57A has no application. If it
does not then Article 58 would. In that event, the certification by the
auditors was entirely premature as the willing shareholder (the appellant No. 2
in this case) would be at liberty to negotiate the price with the respondent
Nos. 2, 3 and 4 and it would only be in default of any agreement being reached
that a “fair value” would have to be fixed by the auditors. In the
circumstances the principle that the trustee not directly or in-directly buying
the trust property as contained in section 57A of the 1882 Act would also not
have any application because irrespective of her right as a nominee of Shanta,
the present appellant could undoubtedly have purchased the shares being in the
second category in the hierarchy of purchasers provided under Articles 57A to
64.
V. This bring us to the second branch of the appellant’s
challenge viz., the issuance of 17,666 equity shares.
V.1 The decision to raise the issued capital of the company and to
allot the shares at par was taken at an Annual General Meeting held on
16-11-1985. It was resolved at that meeting to immediately issue increased
share capital of Rs. 17,66,600 of 17,666 equity shares of Rs. 100 each to any
person whether a member of the company or not. It was further resolved that the
decision would be ratified by convening a general body meeting preferably in
the month of January/February, 1986 after giving proper notice and explanatory
statement.
V.2 The notice of the Annual General Meeting was given on
13-10-1985. Although details of ordinary business and special business were given,
there was no indication whatsoever that there would be any decision taken with
regard to the increase in the issued capital and allotment of shares in the
notice. According to the respondents, after the notice of the Annual General
Meeting had been issued on 13-10-1985, on 5-11-1985, the Ministry of Finance
gave notice to the company extending the validity of a sanction for foreign
exchange loan to 30-11-1985 and stating that no further extension would be
granted. On 9-11-1985 a letter dated 7-11-1985 was sent to the company by
Modular Finance and Consultancy Private Limited (the respondent No. 12 before
us and a member of Pawar Group) proposing that the share capital of the company
be increased and requesting the issue to be decided at an ensuing AGM. On
11-11-1985 a letter was also received by the company from the United Western
Bank advising the company in view of its expansion programme, to increase its
share capital.
V.3 According to the respondents, the increase was by reason of
the urgent need of the Company to purchase machinery. We are unable to agree.
The purchase of the machinery was in contemplation of the company from much
prior to the date of the notice. The alleged letter from the Ministry of
Finance was not produced before the High Court and we are not prepared to allow
the same to be brought on record at this stage.
V.3.1 The Division Bench affirmed the finding of the learned Single Judge
that the need to increase the issued capital from Rs. 7,33,400 to Rs. 25 lakhs
was not established. Indeed the Division Bench went on to find that the action
of issuing the increased share capital clearly indicated that the respondent
No. 5 and his group who were in control of the company, had decided to make a
fresh issue of share capital to themselves at par so as to strengthen their
control over the company.
V.4 We have already noticed that Article 93 specifically provides,
inter alia, that every notice of a meeting of the Company shall contain a
statement of the business to be transacted thereat and no General Meeting,
Annual or Extraordinary, shall be competent to enter upon, discuss or transact
any business which has not been specifically mentioned in the notice or notices
upon which it was convened.
V.4.1 Additionally, in terms of Article 94, the relevant extract whereof
is quoted hereunder :
“94.(a) In
the case of an Annual General Meeting all business to be transacted at the
meeting shall be deemed special except.....
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(b)** |
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(c) Where
any item or business to be transacted at the meeting is deemed to be special as
aforesaid, there shall be annexed to the notice of the meeting a statement
setting out all material facts concerning each special item of business,
including in particular the nature and extent of the interest, if any, therein,
or every Director, Secretaries and Treasurers, if any, and the manager, if
any.”
V.4.2The increase in issuance of
share capital does not fall within the exceptions carved out in Article 94 as
not being special business. Article 94 reflects the substance of section 173 of
the Companies Act, 1956 and it was therefore, incumbent for notice to be given
not only indicating the issuance of the share capital as a special item of
business but also giving a statement setting out all material facts relating
thereto. The violation of this Article by the company is patent and the Annual
General Meeting is to the extent of the violation vitiated thereby.
V.4.3 In Pacific Coast Coal Mines Ltd. v. Arbuthnot (1917) AC 607 PC,
the Privy Council was of the opinion;
“that to render the notice a compliance with the
Act under which it was given it ought to have told the shareholders, including
those who gave proxies, more than it did. It ought to have put them in position
in which each of them could have judged for himself whether he would consent,
not only to buying out the shares of directors, but to releasing possible
claims against them. Now this is just what it did not do and therefore, quite
apart from the fact that the meeting was held in half an hour from the time the
Act passed and before the shareholders could have had a proper opportunity of
learning the particulars of what the Legislature had authorized, their
Lordships are of opinion that the notice was bad, and that what was done was
consequently ultra vires”. (p. 282)
V.4.4Again in Baille v. Oriental
Telephone & Electric Co. Ltd. (1915) 1 Ch.D. 503 (CA) it was said by the
Court of Appeal :
“...I feel no difficulty in saying that special
resolutions obtained by means of a notice which did not substantially put the
shareholders in the position to know what they were voting about cannot be
supported, and insofar as these special resolutions were passed on the faith
and footing of such a notice the defendants cannot act upon them.”
(LIC of India v. Escorts Ltd.
[1986] 1 SCC 264 at p. 343)
V.5.1 The respondents have relied on Article 94(e) which says that “the
company shall also carry out the requirements of section 188 of the Act” to
contend that due notice was given under Article 94 because the letter of
Modular Finance had been forwarded to the shareholders.
V.5.2 Section 188 provides that a meeting could be requisitioned by the
prescribed number of members, after notice of any resolution which may properly
be moved and is intended to be moved at a meeting together with a statement
with respect to the matter referred to in any proposed resolution. Assuming
that Modular Finance’s letter was in fact circulated, this could hardly be
termed to be compliance with the requirement of section 188 of the Act which
deals with meetings called at the instance of requisitionist and circulation of
a statement by the requisitionist of a proposed resolution and a statement in
support thereof. Moreover, such a notice in terms of the proviso of sub-section
(3) of section 188 is required to be given “in the same manner and, so far as
practicable, at the same time as notice of the meeting, and where it is not
practicable for it to be served or given at that time, it shall be served or given
as soon as practicable thereafter”. Further it is clear from Article 94(e) that
compliance with section 188 was in addition to the requirements with the other
parts of Article 94 which admittedly have not been complied with.
V.5.3 The Division Bench found that there was no explanatory statement
annexed to the notice and held that the respondents certainly committed an
irregularity in not mentioning the proposal to increase and allot the share
capital on the agenda of the annual general meeting. However, it went on to
hold that the irregularity did not vitiate the decision because it could be
cured since the Pawar Group already had majority control and also because the
decision had been taken at the annual general meeting that an extraordinary
general meeting would be called after proper notice to ratify the fresh issue
of 17666 shares at Pawars.
V.5.4 We are unable to accept the reasoning of the Division Bench. The
two grounds which persuaded them not to interfere with the fresh issue are
questionable. For one, we have already come to the conclusion that the sale of
3417 and 93 shares to the Pawar Group was bad. The Pawar Group did not legally
have the majority to push through the decision to increase the share capital or
to allot the further shares to themselves. For another, the majority cannot be
permitted to ride rough shod over the provisions of the Articles and the
Companies Act merely because they could if they so desired follow the proper
procedure. The haste with which the Pawar Group sought to ensure their position
in the company is evident from the fact that a Board Meeting was held
immediately after the Annual General Meeting on 16-11-1985 at which the Board
resolved to issue the additional 17,666 shares at par to the Pawar Group. There
was no notice given of the Board meeting at all.
V.6.1 The Respondent Company was bound to offer the further shares on a
fresh issue of capital to the existing equity shareholders in proportion to the
capital paid up on the shares at that date. The Division Bench noted that this
was provided in section 81 of the Companies Act. However, because section 81(3)
does not apply to a private limited company (which the company was at that
stage) and since according to the Division Bench, the Articles of Association
did not require such further issue of shares to be allotted in any particular
manner to the existing shareholders, the allocation of the further issue to the
respondent No. 5 and his group was not illegal or contrary to law.
V.6.2 As a matter of fact the finding as to the absence of such a
requirement in the Articles of Association of the Company was erroneous.
Increase of share capital is dealt with in Articles 14 and 15. Article 15
says :
“Subject to the directions that may be given by
the meeting that sanctions the increase of capital (i) such new shares shall be
offered to the persons who are at the date of the offer members of the Company
in proportion as nearly as circumstances admit to the capital paid up on their
shares at that date, (ii) the offer aforesaid shall be made by notice
specifying the number of shares to which the member is entitled and limiting a
time not less than fifteen days from the date of the offer, within which the
offer, if not accepted, will be deemed to have been declined, (iii) after
expiry of the time specified in the notice aforesaid or on the earlier
intimation from the member to whom such notice is given that he declines to
accept the shares offered, the Directors may dispose of the same in such manner
as they think most beneficial to the Company.” [Emphasis supplied]
V.6.3 No offer was made by notice in writing in terms of this Article.
The fresh shares were, as we have seen, allotted on the day they were issued
before the expiry of 15 days without waiting for the expiry of the period. The
allocation of shares to the Pawars’ Group contrary to this Article was invalid.
V.6.4 No court could possibly object to a decision on merits provided
it is taken in accordance with law. The decision to issue all the additional
shares to the Pawar Group at par may not by itself have warranted interference
were it not for the manner in which the entire exercise was undertaken.
V.6.5 During the course of the hearing both before the Division Bench
and before this Court, the respondents offered to make an allotment of the
issued capital to the appellants to participate pro rata in the additional
issuance. The offer did no more than what the company’s articles required to
have been undertaken.
VI.
Having
effectively held in favour of the appellants, the question finally to be
determined is what reliefs can be granted to them.
Reliefs
VI.1 The respondents contended that the relief of cancellation of
17,666 shares cannot be granted in a petition under section 155 petition as any
reduction of capital must be made strictly in accordance with sections 100 to
104 or section 402 of the Companies Act.
VI.2 The issue need not detain us as there was no such prayer made
by the appellants. They have asked only for rectification of the share register
by deletion of the names of the Pawar Group as shareholders in the company. The
learned Single Judge merely directed the Board of Directors to dispose of the
fresh shares, one can only assume, in accordance with the Articles of the
Company and the Act.
VI.3 Having effectively held on all issues in favour of the
appellant the question remains as to whether we should, in exercise of our
discretion under section 155, grant the appellant the relief of rectification
of the shares as claimed. Although the logical conclusion of our findings would
be to set aside the transfers and restore the status quo ante, the question is
should the share register of the company be directed to be rectified now in
respect of shares, the impugned transfer of which took place more than 20 years
ago ? The respondents have submitted in the course of the hearing that this
Court should not in any event disturb the status quo but should mould the
relief by awarding compensation, if necessary as prayed for by the appellant.
They have referred to the decision in Needle Industries (India) (P.) Ltd. v.
Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 33 in support of this
submission. We agree. There has been a sea change in the factual scenario.
Shantha has died. The company has become a public limited company. The
respondents have been at the helm of the company more than two decades during
the legal struggle. Many decisions must of necessity have been taken and
implemented. The situation cannot now be unscrambled. It is a course of action
which would make the company dysfunctional harming the interests of the whole
body of shareholders, affect company’s employees, its creditors and customers.
It is not as if we are able to grant any relief directly to the appellant
except to the extent of setting aside the transfer. The appellant will still
have to pursue her remedies for effective relief in the two pending suits in
the District Court of Pune in which the appellant has prayed for specific
performance of the contracts for sale of the shares. The outcome of the suits
is uncertain. What is certain is that whatever the outcome of the litigation it
will be another long round of litigation. Yet another factor to be borne in
mind is that the appellant had her own role to play in contributing to the
situation which she had to face eventually. Admittedly, Shanta and the
appellant ultimately accepted the Chartered Accountant’s report. As we have
noted, no reason whatsoever was given for the sudden change of attitude. If
they could agree subsequently to pay the price they could have done so earlier,
paid the price and then challenged the value. Further, the Single Judge also
gave the appellant and Shanta an opportu-nity of paying the share price into
the Court within a period of six weeks. Had the appellant and Shanta done so,
they might have been in a stronger position vis-a-vis the Pawars in the appeal
Court.
VI.4 In these circumstances and weighing in the balance the
comparative advantages and disadvantages of granting the appellant the relief of
rectification we are of the view that it would not be appropriate at this stage
to exercise our discretion to grant the relief of rectification. However, the
fact remains that the appellant has been wronged and she is entitled to be
compensated. Section 155 of the Companies Act, allows the giving of damages in
addition to or in lieu of rectification. In the pending suits, the appellant
has put forward alternative prayers for payment of compensation of Rs. 3 crores
on account of the 3417 shares and Rs. 1 crore for the transfer of the 93 shares
in the event specific performance of the contracts was not grantable. It was
pointed out by some of the respondents’ counsel, without prejudice to their
contentions on merits, that the figure specified in the plaint, though on the
higher side, could form a rough and ready basis to quantify the compensation.
Having due regard to these submissions and in order to give a quietus to the
litigation we are of the view that the ends of justice would be met by
directing that the appellant should be compensated with an amount of Rs. 3
crores to be paid by the company to the appellant in full and final settlement
of the appellant’s claims in respect of the 3417 and 93 shares. Additionally,
the company will also allot shares to the appellant out of 17,666 shares on par
proportionate with the appellant’s present shareholding. We are told that the
appellant is at present employed by the company and is also a Director of the
company. The appellant shall continue in this capacity for the appellant’s life
time.
VI.5
The appeals are accordingly disposed of without any order as to costs.