[1959]
29 COMP CAS 501 (BOM.)
v.
Kamani Brothers Private
Ltd.
MODI,
J.
SUIT
NO. 300 OF 1957
JANUARY
6, 1958
MODY, J. - This is a suit filed by the plaintiff, who
admittedly was one of the joint managing directors and a director of the first
defendant company, against the first defendant company and his co-directors for
a declaration that the resolution dated 23rd September, 1957, passed by the
board of directors of the first defendant company is inoperative and that the
plaintiff continues to be the joint managing director and is entitled to act as
such managing director and to exercise all rights and powers to carry out all
duties assigned to him as such managing director.
The facts
relevant to the decision of the disputes herein are not in dispute, with the
result that no oral evidence whatever has been led. The only evidence led is
documentary evidence, the same being relevant and necessary for the purpose of
the decision herein. It is therefore not necessary to set out the contentions
as contained in the pleadings of the parties. It will suffice to set out the
facts which give rise to the disputes herein.
The first
defendant company is a private limited company. At all relevant times the
plaintiff and the defendants Nos. 2 to 8 have been directors of the first
defendant company. The first defendant company are the managing agents of two
public limited companies being the Kamani Metals and Alloys Ltd. and the Kamani
Engineering Corporation Ltd. The plaintiff and the eighth defendant are
directors of another private limited company called the Shanta Brothers Private
Ltd., the plaintiff being also the chairman of the board of directors, thereof.
A finance agreement which is recorded in writing dated 14th May, 1954, was
arrived at between the said Shanta Brothers Private Ltd. and the first
defendant company, whereby the former agreed to lend to the latter a sum of Rs.
28 lakhs on the terms and conditions recorded in that writing. That agreement
in writing is exhibit F before me.
Under the
finance agreement the first defendant company agreed, inter alia, to pledge in
favour of the said Shanta Brothers Private Ltd. 4500 ordinary shares of the
first defendant company along with the pledge of certain other shares and an
equitable mortgage of certain immoveable properties. Clauses 7(b), (c) and (e)
of the said finance agreement run as follows :
"7. So
long as moneys advanced by the lenders to the borrowers under these presents or
any interest thereon shall remain unpaid the borrowers shall ...
(b) have subject to the
approval of the Central Government if required one representative nominated by
the lenders and approved by the board of directors of the borrowers appointed
as a director on their board of directors with a monthly remuneration of rupees
one thousand and five hundred and all such allowances as are allowed by the
borrowers to their other directors in the same manner and to the same extent
and such remuneration and allowances shall be paid to him so long as he takes
active interest as a director in the management of the affairs of the borrowers
and of the said Kamani Metals and Alloys Ltd. and Kamani Engineering
Corporation Ltd. of which the borrowers are the managing agents and such
appointment shall be made immediately after the first advance is made by the
lenders under these presents and such remuneration shall commence from the date
of the first advance. Provided, however, that if any such representative shall
be a brother of Major General Shamsher Jung Bahadur Rana, the chairman of the
lenders or any relative or member of his family then and in such cases he will
not be required to be approved by the board of directors of the borrowers;
(c) get subject to the
approval of the Central Government if required Major General Shanta Shamsher
Jung Bahadur Rana the chairman of the lenders or any other person nominated by
the lenders appointed as a director on the boards of Kamani Brothers Ltd.,
Kamani Metals and Alloys Ltd. and Kamani Engineering Corporation Ltd. Provided
that no person nominated by the lenders and not being a relative or a member of
the family of the said Major General Shanta Shamsher Jung Bahadur Rana shall be
appointed as such director unless he is approved of by the respective board of
the said Kamani Brothers Ltd., Kamani Metals and Alloys Ltd. and Kamani
Engineering Corporation Ltd. on whose respective boards he is to be appointed a
director;
(e) see that the respective
holders of the said shares shall cast their votes at any meeting of the said
Kamani Brothers Ltd., Kamani Metals and Alloys Ltd. and Kamani Engineering
Corporation Ltd. in accordance with the directions of the lenders and not
otherwise and give their proxies to such person or persons as they the lenders
may nominate and procure to the lenders an undertaking in that behalf from the
respective holders of the said shares."
In pursuance
of the said finance agreement the said Shanta Brothers Private Ltd. lent and
advanced to the first defendant company the aggregate sum of Rs. 28 lakhs and
created the stipulated pledge and equitable mortgage. Towards the end of
February, 1956, the said Shanta Brothers private Ltd. nominated and the first
defendant company accepted the plaintiff as a director of the first defendant
company under the provisions of clause 7(b) of the said finance agreement and
similarly the said Shanta Brothers Private Ltd. nominated and the first
defendant accepted the eighth defendant a director under the provisions of
clause 7(c) of the said finance agreement. The said respective appointments of
the plaintiff and of the eights defendant became effective as from 1st March,
1956. On the 2nd of March, 1956, the board of directors of the first defendant
company passed a resolution (exhibit 2) which provides as follows :
"Resolution
No. 372 :
Resolved that
Major General Shanta Shamsher Jung Bahadur Rana be and is hereby appointed in
the whole-time services of the company on a monthly remuneration of Rs. 2,000
from March 1, 1956, in the grade of Rs. 2,000-10-2500-plus rent free
house."
On the 1st of April,
1956, the Indian Companies Act, 1956, came into operation. As the plaintiff
held an office of profit and as section 314 of the said Act required that the
plaintiff could not hold the said office of profit except with the provisions
consent of the first defendant company accorded by a special resolution, a
special resolution was passed at a general meeting of the first defendant
company held on March 29, 1956, according such consent. The appointment of the
plaintiff under the said resolution of the board of directors dated March 2,
1956, became effective from April 2, 1956. The second defendant was then the
managing director of the first defendant company and he, under his signature,
issued a memorandum on behalf of the first defendant company dated March 2,
1956 (exhibit A) stating that it had been decided that the plaintiff would, in
addition to the Secretarial and Legal Department, look after the General
Department with the functions mentioned in the said memorandum.
On June 15,
1956, the board of directors of the first defendant company passed a resolution
(exhibit 3) whereby the plaintiff who was then a director was appointed as
executive director of the first defendant company. Thereafter on June 27, 1956,
the second defendant as the managing director of the first defendant company
issued on behalf of the first defendant company a circular stating that the
plaintiff had been designated as the executive director of the first defendant
company on and from June 15, 1956, and that the functions and powers of the
executive director would be circulated in due course.
On September
26, 1956, the eleventh ordinary general meeting of the shareholders of the
first defendant company passed a special resolution whereby the then existing
articles 99 and 100 of the articles of association of the first defendant
company were amended. The said amended articles run as follows :
"99.
Directors may appoint managing directors and/or executive director. The
directors may from time to time appoint any one or more of their body to be
managing director or managing directors and or executive director for such
period and upon such terms as they think fit, and may vest in such managing
director or managing directors and/or executive director such of the powers
hereby vested in the directors generally as they may think fit and such powers
may be exercisable for such period or periods and upon such conditions and
subject to such restrictions, and generally upon such terms as to remuneration
and otherwise as they may determine. The remuneration of a managing director
and/or executive director may be by way of salary or commission or
participation in profits, or by any or all of those modes."
"100.
Special position of managing director and/or executive director.
A managing
director or managing directors and/or executive director shall not while he
continues to hold that office be subject to retirement by rotation and he shall
not be taken into account in determining the rotation and he shall not be taken
into account in determining the rotation of retirement of directors, but he
shall, subject to the provisions of any contract between him and the company be
subject to the same provisions as to recognition and removal as the other
directors of the company and if he ceases to hold the office of director he
shall ipso facto and immediately ceases to be a managing director."
The memorandum
and articles of association of the first defendant company are exhibit 1 before
me. Both the original and the amended articles 99 and 100 are to be found in
exhibit I. The original articles 99 and 100 made a provision for "a
managing director or managing directors." The only amendment made in the
said two articles by the said resolution dated September 26, 1956, is the
addition of the words "and/or executive director "wherever they
appear after the words "a managing director or managing directors" in
the above amended articles.
On June 24,
1957, the board of directors of the first defendant company held a meeting and
the relevant portions of the minutes of the said meeting have been put in as
exhibit 4. As appearing from the said minutes, the board passed a resolution
which reads as follows :
"Resolved
that the responsibilities of the management be divided between the managing
director who will look after the work of Kamani Metals and Alloys Ltd. this
company and its associates and the executive director who will look after the
work of Kamani Engineering Corporation Ltd. including its branches and other
activities thereto.
It is further
resolved that the executive director be designated as joint managing
director."
As a result of
this resolution the second defendant was designated as a managing director and
the plaintiff as a joint managing director of the first defendant company. The
responsibilities of the management were divided between them and the second
defendant was to look after the said Kamani Metals and Alloys Ltd. the first
defendant company and its associates and the plaintiff was to look after the
work of Kamani Engineering Corporation Ltd. By his memorandum (exhibit C) dated
June 28, 1957, issued by the second defendant gave intimation of the passing of
the said resolution dated June 24, 1957, and also intimated that the managing
director would look after the work of the Kamani Metals and Alloys Ltd. the
first defendant company and its associates and that the plaintiff as a joint
managing director would look after the work of the Kamani Engineering
Corporation Ltd. with immediate effect.
A meeting of
the board of directors of the first defendant company was scheduled to be held
on September 21, 1957. An agenda for the said meeting as also a supplementary
agenda for the same were circulated amongst the directors of the first
defendant company. The said agenda and the supplementary agenda have been put
in as exhibit D collectively. In view of the case as argued such agenda and
supplementary agenda are not at all relevant. For certain reasons which are not
relevant the said board meeting stood adjourned to September 23, 1957.
On September
23, 1957, the said adjourned board meeting was held. Agreed portions of the
minutes of that meeting have been put in as exhibit 5. As appearing from the
said minutes the said meeting passed the following resolution :
"In view
of the consensus of opinion of the majority of the board of directors that the
arrangements earlier resolved of division of responsibilities between the
managing director and joint managing director having not worked as desired by
the resolution dated June 24, 1957, the resolution of the board of directors
dated June 15, 1956, appointing General Shanta Shamsher J.B.R. as the executive
director of the company and the resolution dated June 24, 1957, appointing
General Shanta as joint managing director of the company be and are hereby
superseded and revoked. Further resolved that Shri P. K. Kamani do act as sole
managing director of the company and as such he is hereby vested with all the
powers of the board of directors under the articles of association of the
company under the law delegatable, and he do accordingly exercise the
same."
It is this
resolution the validity whereof has been challenged in this suit. A glance at
the minutes of this meeting dated September 23, 1957, shows that the plaintiff
and defendants Nos. 7 and 8 were on one side supporting the plaintiff and the
other directors being defendants Nos. 2 to 6 were on the other. Even at the
hearing of this suit also the defendants Nos. 7 and 8 have supported the
plaintiff whereas defendants Nos. 1 to 6 have opposed the plaintiff. What
transpired at the said board meeting was circularised by the third defendant as
the chairman of the first defendant company by his circular dated September 23,
1957, (exhibit E), but the same is not relevant for the purpose of this case.
The only other
document exhibited in this case is exhibit 6 which is a copy of the plaint in
the Bombay City Civil Court, Suit No. 2851 of 1951, wherein the plaintiff and
the seventh defendant are plaintiffs and defendants Nos. 1 to 6 and the eights
defendant are the defendants. As stated in that plaint (exhibit 6) the
subscribed and paid up capital of the first defendant company is Rs. 15,00,000
divided into 15,000 ordinary shares of Rs. 100 each. Out of the said 15,000
shares the seventh defendant owns 50 shares and the remaining 14,950 shares are
held by the defendants Nos. 2 to 6 and their relations and nominees, who form,
what may be called, "the Kamani group." Out of the said 14,950 shares
4,500 shares have been pledged as afore-stated to the said Shanta Brothers Private
Ltd., and by reason of the provisions of clause 7(e) of the said finance
agreement the voting rights in respect of 4,500 shares are controlled by the
said Shanta Brothers Private Ltd., of whose board of directors the plaintiff is
the chairman are the eights defendant is a member.
It is common
ground that at all relevant times as also at present the Kamani group
controlled the voting rights in respect of 10,450 shares whereas the group of
the plaintiff and the defendant Nos. 7 and 8 effectively control the voting
rights in respect of 4,550 shares.
At the hearing
of the suit, after the pleadings were read, five issues only were raised
originally, the same being as suggested by Mr. Munshi on behalf of the first
defendant company. The respective counsel appearing for the defendants Nos. 2
to 6 joined in these issues. A reading of the pleadings shows that the same
contains statements of fact on which the plaintiff wants to rely. But there are
very few submissions of law which would clearly indicate what exactly is the
plaintiff's cause of action. Undoubtedly it was not necessary that the plaint
should contain any submissions of law. The result, however, was that the
contesting defendants did not know that what would be the exact cause of action
which the plaintiff would formulate at the hearing on the basis of this plaint.
Paragraph 17 of the plaint does contain certain submissions of law on behalf of
the plaintiff. From these submissions and the prayers in the plaint at least
one thing is clear, viz., that the plaintiff challenged the said resolution
dated September 23, 1957, passed by the board of directors of the first
defendant company as being ultra vires the board of directors. Now, it should
be remembered that the plaintiff is not a shareholder of the first defendant
company, but was a special director of the first defendant company appointed
because of the provisions of the said clause 7(c) of the said finance
agreement. Not being able to ascertain from the plaint the exact cause of the
action which the plaintiff would make out at the hearing and as the plaintiff
was not a shareholder but still challenged the said resolution dated September
23, 1957, as ultra vires, certain technical defences were taken in paragraphs
1, 2 and 3 of the written statement of the first defendant to the effect that
the suit as framed is not maintainable. That contention is the subject-matter
of issue No. 1. The burden so far as issue No. 1 is concerned being on the
contesting defendants, Mr. Munshi the learned counsel for the first defendant
company argued first, confining his arguments to that issue only. Mr. Munshi
argued that the suit is not maintainable because courts have no jurisdiction to
interfere with the internal management of the company, that if the company acts
ultra vires, i.e., outside the ambit of its memorandum of association or in
defiance of its articles, the shareholder under certain circumstances is
entitled to have the act declared void and seek relief to compel the company to
act within its powers, that no such suit would lie even at the instance of a
shareholder in respect of unauthorised acts of the directors if the company
could ratify the same and that no such suit can lie at the instance of a person
who is not a shareholder as the cause of action of a non-member can only be in
breach of contract or tort, his remedy being in damage. Mr. Munshi further
argued that when a non-member is appointed a managing director the same amounts
only to a contract of employment and in such an event the appointment of the
managing director would be under that contract, but that no such contract,
express or implied, has been mentioned in the plaint. He cited several
authorities in support of his contentions and developed his point as to why the
suit was not maintainable. Thereafter Mr. Bhatt, the learned counsel for the
plaintiff, opened the case of the plaintiff and pointed out what according to
the plaintiff is the cause of action in this suit. According to him this suit
is under section 42 of the Specific Relief Act, that the plaintiff is entitled
to a "legal character" that that legal character of the plaintiff had
been denied and that therefore the plaintiff is entitled to the declaration and
injunction prayed for. He stated that the cause of action as read in the plaint
by Mr. Munshi was not the correct cause of action. Inasmuch as Mr. Munshi had
however advanced the said arguments, Mr. Bhatt advanced an argument to
distinguish the same by stating that the wrong complained of in the plaint was
an individual wrong, that the arguments advanced and the authorities cited by
Mr. Munshi had no application and that therefore the plaintiff was in any event
entitled to maintain the suit. In support of this contention that the wrong
suffered by the plaintiff was an individual wrong and that, therefore the
plaintiff was in any event entitled to maintain the suit Mr. Bhatt cited
another string of authorities. When Mr. Bhatt however stated that the only
cause of action, according to the plaintiff, was under the said section 42 of
the Specific Relief Act, Mr. Munshi pointed out that in view of that contention
of the plaintiff his own earlier contentions were no longer necessary.
Thereupon Mr. Bhatt stated that if Mr. Munshi was not relying upon his said
contentions in support of issue No. 1 it was no longer necessary for the
plaintiff to rely upon the said contention about the suit being maintainable
and the wrong which the plaintiff had suffered being an individual wrong. The
position that emerges is that issue No. 1 is now confined to the only cause of
action stated by Mr. Bhatt as having been made out in the plaint, viz., the one
under the said section 42 of the Specific Relief Act.
No oral
evidence has been led and only certain documentary evidence has been tendered
and admitted. On behalf of the various parties arguments were addressed by
their respective counsel. As arguments developed and proceeded from time to
time it became apparent that the issues as originally framed were not adequate.
As the arguments progressed applications were made on several occasions for
framing additional issues. I have separately noted such application as and when
made and my orders thereon. As a result of these applications several issues
have been added from time to time. What now appear as issues Nos. 6, 7 and 8
were added first. Thereafter issue No. 9 was added and thereafter the said
issue No. 8 was amended and two more issues were added, the same being issues
Nos. 10 and 11. When issues Nos. 6,7 and 8 were added, it was contended by some
of the parties that the addition of those issues may necessitate the taking of
further evidence. It appeared to me, however, that the addition of those issues
was merely for crystallising the contentions which emerged from the arguments
of counsel and that no further evidence would be necessary. As some of the
parties, however, contended that they may have to lead further evidence, I
specifically gave liberty to all parties to lead further evidence if the same
was relevant and necessary. I should record however that thereafter none of the
parties applied for leading any further evidence, either oral or documentary,
and that as a matter of fact towards the conclusion of the hearing I had to ask
the parties whether any of them desired to lead evidence in pursuance of the
said liberty given by me in that behalf. And it was at that stage that counsel
stated that none of them desired to lead any further evidence.
The first
point for consideration is whether the plaintiff is entitled to a "legal
character" within the meaning thereof in section 42 of the Specific Relief
Act. The said section 42 provides that any person entitled to any legal
character, or to any right as to any property, may institute a suit against any
person denying, or interested to deny, his title to such character or right.
This section therefore applies when a person is entitled to any legal character
or to any right as to any property. The phrase "legal character"
occurs in two statutes, viz., in section 42 of the Specific Relief Act and in
section 41 of the Indian Evidence Act, but that phrase has not been defined in
either of the said two Acts. There appears to be no decided case which defines
"legal character" or lays down general principles for determining the
same. I will therefore first reproduce the arguments of Mr. Munshi and Mr.
Bhatt as to what is legal character and the proceed to see whether it is
possible to define what is "legal character" or whether there are any
general principles which would help in determining what is "legal
character."
Mr. Bhatt in
his opinion relied upon paragraphs 9 to 14 of the plaint and exhibits 3, B,
articles 99 and 100 of the articles of the first defendant company (exhibit I),
and exhibits 4 and C. He pointed out that as stated in paragraph 9 of the
plaint and shown by exhibits 3 and B, the plaintiff was appointed executive
director from 14th June, 1956, and acted as such and that as stated in
paragraphs 12 and 13 of the plaint and exhibits 4 and C the plaintiff was
appointed joint managing director on 24th June, 1957, and acted as such. He
also referred to section 2(26) of the Indian Companies Act, 1956, which states
that "managing director" means a director who by virtue of an
agreement with a company or by a resolution passed by the company in general
meeting or by its board of directors or by virtue of its memorandum or articles
of association, is entrusted with any powers of management which would not
otherwise be exercisable by him and includes a director occupying the position
of a managing director, by whatever name called.
He contended
that under the circumstances the plaintiff was appointed and acted as managing
director and was entrusted with certain powers as such managing director and
that therefore the plaintiff was entitled to a "legal character"
within the meaning thereof in the said section 42. By way of an analogy he said
that the position of the plaintiff was exactly like that of a person who has
been appointed as a trustee, who is informed that he has been so appointed and
who accepts office as such trustee. Mr. Bhatt, however, did not point out in
detail how far the position of the plaintiff as the joint managing director was
analogous to that of as trustee under the said circumstances.
Mr. Munshi in
his reply argued that the plaintiff has no right to sue for the declaration
under prayer (a) of the plaint because as the joint managing director the
plaintiff has no legal character within the meaning thereof under section 42
nor had the plaintiff any interest in property. Now, so far as the latter is
concerned, the same does not at all arise for consideration in this case. Even
Mr. Bhatt has not claimed or argued that the plaintiff has, as joint managing
director, "any right as to any property" and in my opinion quite
rightly so because as joint managing director the plaintiff had certain rights
only to manage the property and the affairs of the first defendant company, it
being the first defendant company and not the plaintiff who owned the property.
As regards
section 2(26) of the Indian Companies Act, 1956, Mr. Munshi pointed out that
the entrustment of the smallest power, e.g., like signing cheques or being sent
to Indore for buying 100 bales of cotton, to a director of the first defendant
company would make him a managing director within the meaning thereof under
section 2(26). He further argued that the definition of "officer"
under section 2(30) of the Indian Companies Act, 1956, would not include a
managing director and that this shows that the office fundamentally is that of
a director only, that there is no separate office of a managing direct and that
only when certain extra powers are delegated to a director that the director is
for certain purpose termed a "managing director."
As regards the
meaning of "legal Character" Mr. Munshi relied upon Ramakrishna
Pattar v. Narayana Pattar which is a judgment of a Division Bench of the Madras
High Court. One of the contentions in that suit was that the plaintiff's suit
to declare that he had contractual rights as against the first defendant did
not fall under section 42 of the Specific Relief Act because it was not a suit
to declare a right to a legal character or a right to property. In respect of
this contention, the following passage from the judgment appearing at page 82
was relied upon by Mr. Munshi :
"We take
it that a man's 'legal character' is the same thing as a man's status. 'A man's
status or "legal character" is constituted by the attributes which
the law attaches to him in his individual and personal capacity, the
distinctive mark or dress, as it were, with which the law clothes him apart
from the attributes which may be said to belong to normal humanity in general.'
According to Holland, the chief varieties of status among natural persons may
be referred to the following causes :- (1) sex, (2) minority, (3) 'patria
potestas'and 'manus', (4) coverture, (5) celibacy, (6) mental defect, (7)
bodily defect, (8) rank, caste and official position (9) slavery, (10)
profession, (11) civil death, (12) illegitimacy, (13) heresy, (14) foreign
nationality, and (15) hostile nationality (see Banerjee's Lectures on Specific
Relief). We think that a declaration that a valid personal contract still
subsists between the plaintiff and the first defendant is not a right to
declare a title to a legal character or a title to right to property."
The above
passage contains a quotation from S. C. Banerjee's Law of Specific Relief in
Another case
relied upon by Mr. Munshi was that of Madanlal v. State of
Mr. Munshi
also cited two other cases, viz., Deokali Koer v. Kedar Nath and Sheoparasan
Singh v. Ramnandan Prasad Singh. Although the said two cases relate to section
42 of the Specific Relief Act, the decisions therein are confined to the facts
of the particular case. The judgments do not contain any general discussion as
to the meaning of "legal character" nor do they lay down any general
principles for guidance as to what amount to "legal character" under
the said section 42.
Mr. Munshi
then referred to section 41 of the Indian Evidence Act which provides as under
:
"A final
judgement, order or decree of a competent court, in the exercise of probate,
matrimonial, admiralty or insolvency jurisdiction, which confers upon or takes
away from any person any legal character, or which declares any person to be
entitled to any such character, or to be entitled to any specific things, not
as against any specified person but absolutely, is relevant when the existence
of any such legal character, or the title of any such person to any such thing,
is relevant."
In this
section also the words "legal character" have been used, although in
a different context. The said words "legal character" as occurring in
section 41 have been construed in Punjab National Bank v. Balikram Kissenchand.
In that case SEN J. in his judgement at page 227 of the said report observes as
follows :
"The
words used are 'declares any person to be entitled to a legal character.' A
declaration of a legal right is a different thing from a declaration of legal
character. The word 'character' means status, it is something more than a mere
right. The declaration of a person's right operates as against a particular
person or group of persons against whom the right is claimed, whereas a man's
status is something which defines his position not in relation to any
particular person or group of persons but in relation to the rest of the world;
his status distinguishes him from the rest of the world. To say that a person
is not a partner of a firm is not to declare his status or legal character, it
is merely to declare his position with respect to the particular firm."
This judgement
also says that "character" means status and that it is something more
than a mere right. Mr. Munshi also cited two English cases being Pulbrook v.
Richmond Consolidated Mining Co. and Hayes v. Bristol Plant Hire Ltd. In
neither of these two cases did the words "legal character" have to be
construed and neither is even of any help in construing the said words. Mr.
Munshi concluded his arguments on this point by stating that no definition of
"legal character" was possible but that it could only be negatively
said that the words "legal character" would not include any interest
in property or legal rights under a contract, and that legal character must be
a legal status against the whole world and not against an individual or a group
of individuals only, a status a declaration in respect whereof would be a
judgement in rem under section 41 of the Indian Evidence Act. He argued that a
managing director would be the creature of a contract between the managing
director and the company or a mere agency arising by reason of the delegation of
powers to a director and would not be "legal character" within the
meaning thereof under section 42.
Mr. Bhatt in
his reply to Mr. Munshi agreed with Mr. Munshi that it was difficult to define
"legal character." As regards the said three tests mentioned by Mr.
Munshi, he stated that a regards the test that an interest in property would
not be included in "legal character", he pointed out that the same
was obvious from the said section 42 itself, because that section provides for
a declaration being made for two categories of rights, viz., legal character
and any right as to any property, and, therefore, the said two categories of
rights were obviously meant to be separate and distinct from each other. As
regards the said second negative test suggested by Mr. Munshi, he pointed out
that the same also could not be correct because under most systems of law
marriage is a contract and therefore the status of husband and wife would be
the result of contract and yet, even according to Mr. Munshi, the status of husband
or of wife would be legal character. He argued that therefore all rights
arising under a contract were not in any event excluded from "legal
character." As regards the said test suggested by Mr. Munshi that legal
character would include only such status a declaration whereof would be a
judgement in rem under the said section 41, he pointed out that the same was
not at all a correct test because section 43 of the Specific Relief Act itself
provides that a declaration under Chapter VI of the Act, which chapter includes
section 42, would be binding only on the parties to the suit and persons
claiming under them. Mr. Bhatt also relied upon Sat Narain Gurwala v. Hanuman
Parshad. In that case the right of franchise and the right of being elected as
a Municipal Commissioner were held to be "legal character" within the
meaning of the said section 42 as appears from the following passage at page 94
of the report from the judgement of MAHAJAN J. (as a puisne Judge of the Punjab
High Court as he then was), viz :
"The only
other matter that I wish to mention before concluding this judgement is that in
my opinion the right conferred on a subject, i.e., a right of vote or a right
to stand as a candidate for being elected as a Municipal Commissioner is a very
valuable right and a suit for a declaration that a person's nomination paper
has been illegally rejected and that the defendant had not been elected as a
member of the Municipal Committee can be entertained by the civil court even
under the provisions of section 42, Specific Relief Act. The words, 'legal
character' are wide enough to include the right of franchise and the right of
being elected as a Municipal Commissioner. The defendant was the person
interested who denied the right of the plaintiff to a such a legal character. A
suit can, therefore, be properly brought under the provisions of section 42,
Specific Relief Act."
It will be
noticed that there are no general tests or reasons mentioned by reason whereof
the said right of franchise was held to be "legal character," the
only reasons stated being that the same was a very valuable right. Mr. Bhatt
further pointed that "managing director" is not only defined in
section 2(26) of the Companies Act, 1956, but that in section 316(3) of that
Act what a managing director occupies has been referred to as
"office", that managing directorship is an office recognised by law,
that therefore a managing director has by law been clothed with certain
attributes as stated by Banerjee and that therefore managing directorship is a
legal status or legal character. Mr. Bhatt also argued that the distinction
made by Mr. Munshi that in the case of a trustee the legal ownership would vest
in the trustee and that the trustee may, therefore, sue for a declaration under
section 42, because he would be entitled to a right as to property and not
because he was entitled to a legal character was not proper, because courts
have made declarations under the said section 42 even in the case of persons
who did not own any property but were entitled only to a right to management of
property, e.g., a director of policy-holders in a life insurance company in
Subramania Aiyar v. United India Life Insurance Co. Ltd., mutawalli in Mahommad
Jafar Husain v. Mohammad Taqi, and in Ali Shah v. Fateh Mohammad Mutwali, and a
trustee of temple who was entitled only to management, the ownership being in
the deity, in Swaminatha Iyer v. Ramier. Mr. Bhatt also cited Chapsey v.
Jethabhai, where the plaintiff and the defendants were trustees appointed under
a deed of trust executed by members of a caste. The defendants, relying upon a
resolution said to have been passed by the general committee of the caste
purporting to remove the plaintiff from the trusteeship, excluded the plaintiff
from the management of the trust properties. The plaintiff thereupon filed a
suit against the defendants as a co-trustees for a declaration of his
trusteeship and for an injunction to restrain the defendants from interfering
with his rights as a trustee. CHANDAVARKAR J. held that the plaintiff's legal
character being denied, he was entitled, according to section 42 of the
Specific Relief Act, to institute the suit against any person denying such
character. I may state that in this case there is no discussion at all as to
what is the meaning of "legal character" or as to why trusteeship is
"legal character." The judgement assumes that the trustee was
entitled to "legal character."
From the above
arguments and the cases cited on either side, it is clear that there has yet
not been formulated any definition of "legal character" or any
general test for ascertaining what the same is. Section 42 provides for a
declaration being made in respect of a "legal character" and a right
as to any property. These two categories, viz., legal character and a right as
to any property, have been separately mentioned and would therefore prima facie
appear to be distinct, separate and exclusive. Section 42 provides for making a
declaratory decree, i.e., making a decree declaring a man's rights, which would
mean legal rights, and it would therefore appear that the both the said
categories mentioned in section 42 are species of the same genus, viz.,
"legal rights". "Legal character", however, does not appear
to be a phrase common to jurisprudence nor does it appear to have been used in
statutes, except in section 42 of the Specific Relief Act and section 41 of the
Indian Evidence Act. In at least three judgments mentioned above, viz.,
Ramakrishna Pattar v. Narayana Pattar, Madanlal v. State of
Now, what is a
right" ?
According to
Salmond (Salmond on Jurisprudence, 10th Edition, page 229) :
"A right
is an interest recognised and protected by a rule of right. It is any interest,
respect for which is duty, and the disregard of which is a wrong.
All that is
right or wrong, just or unjust, is so by reason of its effects upon the
interests of mankind, that is to say, upon the various elements of human
well-being, such as life, liberty, health, reputation, and the uses of material
objects. If any act is right or just, it is so because and in so far as it
promotes some form of human interest. If any act is wrong or unjust, it is
because the interests of men are prejudicially affected by it. Conduct which has
no influence upon the interests of any one has no significance either in law or
morals.
Every wrong,
therefore, involves some interest attacked by it, and every duty involves some
interest to which it relates, and for whose protection it exists .....
The interest
which thus receive recognition and protection from the rules of right are
called rights."
According to
Holland (Holland's Elements of Jurisprudence, 12th Edition, page 82) a right :
"is one
man's capacity of influencing the acts of another, by means, not of his own
strength, but of the opinion or the force of society."
Now, what is a
"legal right" ?
According to
Salmond (page 230) :
"A legal
right is an interest recognised and protected by a rule of legal justice - an
interest the violation of which would be a legal wrong done to him whose
interest it is, and respect for which is a legal duty."
According to
Holland (page 83) :
"(A legal
right) ... is a capacity residing in one man of controlling, with the assent
and assistance of the State, the actions of others."
Therefore,
according to both Salmond and Holland, every interest or right which is
recognised and protected by the State, i.e., by the laws of the State, is a
legal right and every such legal right involves a legal duty or obligation.
Again,
according to both Salmond (page 233) and Holland (page 91), a legal right has
the following four characteristics or elements :
(1) A person who is the
owner of the right. The person in whom the right resides, or who is clothed
with the right. The person who is benefited by its existence. Salmond calls him
the person of inherence.
(2) A person against whom
the right is available. The person whose duty it is to act or forbear for the benefit
of the person who is entitled to the right. Salmond calls him the person of
incidence.
(3) In many cases, though not in all, an
object or subject-matter over which the right is exercised.
(4) Acts or forbearances
which the person in whom the right resides is entitled to exact. It obliges the
person bound to an act or omission in favour of the person entitled. Salmond
calls it the content of the right.
For the above
four, Salmond uses the word "characteristics" while Holland uses the
word "elements", but the analysis of a legal right of both Salmond
and Holland is identical. According to Salmond, however, there is a fifth
characteristic of a legal right, viz., every legal right has a title, that is
to say, certain facts or events by reason of which the right was become vested
in its owner. It is clear that the title to a right would be a characteristic
of a legal right, but it is not an element of a right.
Salmond
illustrates these five characteristics by the following example :
"Thus if
A buys a piece of land from B, A is the subject or owner of the right so
acquired. The persons bound by the correlative duty are persons is general, for
a right of this kind avails against all the world. The content of the right
consists in non-interference with the purchaser's exclusive use of the land.
The object or the subject-matter of the right is the land. And finally the
title of the right is the conveyance by which it was acquired from its former
owner."
But, as
pointed out by Holland, there are rights, in which the third element, viz.,
object or subject-matter, may be absent. For example, B is A's servant. Here A
is the "person of inherence", reasonable service is the
"act" to which he is entitled, and B is the "person of incidence"
against whom the right is available.
Now, the
possible modes of classifying rights as also legal rights are almost infinite,
but only some are of greater importance. Various modes of classifying rights
would, it should be observed, have nothing to do with one another; they would
be only cross divisions. If a certain type of distinguishing characteristics is
taken as the basis of classification, the rights would divide themselves into
two classes as judged by their distinguishing characteristics. For example,
based on the incidence of correlative duties, a right may be a right in rem
when it corresponds to a duty imposed upon persons in general or the right may
be a right in personam when it corresponds to a duty imposed upon determinate
individuals. It may here be mentioned that as will appear hereafter this
particular classification of legal rights into rights in rem and rights in
Personam is of no relevance for the purpose of ascertaining "legal
character", that is, "legal status."
Another
classification of legal rights is to divide them into proprietary and personal
rights. Salmond (pages 256 to 258) says :
"Another
important distinction is that between proprietary and personal rights. The
aggregate of a man's proprietary rights constitutes his estate, his assets, or
his property in one of the many senses of that most equivocal of legal terms.
The sum total
of a man's personal rights, on the other hand, constitutes his status or
personal condition, as opposed to his estate. If he owns land, or chattels, or
patent rights, or the goodwill of a business, or shares in a company, or if
debts are owing to him, all these rights pertain to his estate. But if he is a
free man and a citizen, a husband and a father, the rights which he has as such
pertain to his status or standing in the law .....
It makes no
difference in this respect whether a right is jus in rem or jus in Personam.
Rights of either sort are proprietary, and make up the estate of the possessor
if they are of economic value. Thus my right to the money in my pocket is proprietary;
but not less so is my right to the money which I have in bank. Stock in the
funds is part of a man's estate, just as much as land and houses; and a
valuable contract, just as much a valuable chattel. On the other hand, a man's
rights of personal liberty, and of reputation, and of freedom from bodily harm,
are personal, not proprietary. They concern his welfare, not his wealth; they
are judicial merely, not also economic. So, also, with the rights of a husband
and father with respect to his wife and children. Rights such as these
constitute his legal status, not his legal estate. If we go outside the sphere
of private into that of public law, we find the list of personal rights greatly
increased. Citizenship, honours, dignities, and official position in all its
innumerable forms, pertain to the law of status, not to that of property."
From the
above, it is clear that a legal right must be either proprietary, i.e., in the
nature of property, or personal and it is only the latter that creates a status.
For a better understanding of what is meant by "status", and to find
out what is the demarcating line between a right which is a proprietary right
and a right which is a personal right I will now turn to Holland.
A right, as
stated above, has four elements, two of which are "the person of
inherence" and "the person of incidence", i.e., the person in
whom the right resides and the person against whom the right is available.
Holland says (page 94) :
"Persons
are the subjects of duties as well as rights ... Persons, i.e., subjects of
rights or of duties, are in general individual human beings; but, in imitation
of the personality of human beings, the law recognises certain groups, of men
or property, which it is convenient to treat as subjects of rights and duties;
as persons in an artificial sense. A 'natural', as opposed to an 'artificial',
person is such a human being as is regarded by the law as capable of rights or
duties; in the language of Roman law as having a 'status'. As having any such
capacity recognised by the law, he is said to be a person, or, to approach more
nearly to the phraseology of the Roman lawyers, to be clothed with, or to wear
the mask (persona) of legal capacity."
Besides
possessing this general legal capacity, or status, a man may also possess
various special capacities, such as the 'tria capita' of liberty, citizenship,
and family rights. A slave having, as such, neither rights nor liabilities, had
in Roman law, strictly speaking, no 'status', 'caput', or 'persona'."
Holland (page
135) says that the status of persons concerned is a basis of the division of
rights :
"that is
to say, there are some rights in which the status of the persons concerned has
to be specially taken into consideration, while in others this is not the case.
This
distinction has led to a division of law into the 'law of persons' and the 'law
of things' ..."
Holland points
out that the said four elements of a right divide themselves into two classes,
the first consisting of the person of inherence and the person of incidence,
giving rise to the law classified as "the law of persons" and the
second consisting of the object and/or the acts or forbearances, giving rise to
the branch of law classified as "the law relating to things." About the
latter, it should be noted that although the word used is "things",
"the law relating to things" would include 'things' proper, meaning
thereby corporeal things which can be touched, such as a farm or slave, and
also incorporeal things which can not be touched, consisting of rights only,
such as a right of servitude, a right of action, or a right arising out a
contract.
A right varies
with a variation in any one of the series of its constituent elements. The law
of persons, as a source of variety in rights, is therefore distinct from and
much smaller than the residue of the law, which is generally called the law of
things. If a line is to be drawn between the law of things and that of persons,
where is the line to be drawn ? After discussing various tests of the
characteristics of the law that ought to be treated under the latter head,
Holland says (pages 143-144) :
"The true
test is a surely this. Does the peculiarity of the personality arise from
anything unconnected with the nature of the act itself which the person of inherence
can enforce against the person of incidence ?
In order to
determine, for instance, whether the right of landlords should be considered
under the law of persons, we must ask whether landlords as a class have any
juristic peculiarities unconnected with the acts which they are entitled to
demand from their tenants; such as the payment of rent, the observance of
covenants, etc. They clearly have not. A landlord merely means a person who is
entitled to these acts. On the other hand, suppose the landlord to be an
infant; here at once a whole set of characteristics are present, modifying the
right to rent, etc., and quite unconnected with it. Nor is it only because the
same person sustains the two characters of infant and landlord that this is the
case; a man may be a pawn-broker and landlord, but the rights as landlord will
not be affected by his occupation as pawn-broker. The personally recognised in
the law of persons is such as modifies indefinitely the legal relations into
which the individual clothed with the personality may enter.
Of such
affections of personality there are two classes :
(1) The person may be 'artificial', i.e., may
be not a human being.
(2) The person may be under
disability, or may enjoy exemption, on account of age, sex, mental incapacity,
crime, alienage, or public station.
All of these
are abnormal deviations from the ordinary case of both parties concerned in a
right being human beings, under no special and far-reaching disability or
exemption. When the disability or exemption is not of a far-reaching character,
it will not be treated in practice as founding a special status, although, upon
the principles above stated, otherwise capable of being so treated. Thus, as a
rule, soldiers, or blind, or illegitimate, persons are not held to occupy a
status, although in several respects, and in particular with reference to
testamentary powers and rights of succeeding ab intestato, they may
respectively exhibit peculiarities which are not involved in the statement that
they are in military service, blind, or illegitimate."
Therefore, to
repeat what Holland has said, a legal right can be classified to be a personal
right and would amount to one's status, and is distinct from a proprietary
right, when it involves a peculiarity of the personality arising from anything
unconnected with the nature of the act itself which the person of inherence can
enforce against the person if incidence. The personality recognised in the law
of persons is such as modifies indefinitely the legal relations into which the
individual clothed with the personality may enter. This then appears to be the
test of what is legal status of "legal character" as mentioned in
section 42 of the Specific Relief Act.
Now, the field
of law itself may be divided into private law, i.e., the law which regulates
rights between subject and subject, and public law, i.e., the law which
regulates rights between the State and its subjects omitting for the purposes of
the consideration of the meaning of status, the third branch which is
international law. As already seen, it is the law of persons as contrasted from
the law of things which creates "status". As stated by Holland, the
contrast between the law of persons and of things, or between the law of
"normal" and of "abnormal persons" is sharply defined only
in private law and not in public law. In private law, where all characteristics
of law and not in public law. In private law, where all characteristics of law are
fully present, the law of persons is a statement of the ways in which the
general law is modified by varieties of status; while the law of things is a
description of the various kinds of rights enjoyed in private capacities by
persons as being within the jurisdiction of a State, but not as being in any
way representative of the sovereign power in the State. In public law, however,
which possesses the characteristics of law in a lower degree of development,
the distinction is but faintly traceable. What is analogous to the law of
persons here consists in a description of the State as a whole, of its ruling
body, of bodies of persons enjoying delegated ruling power, and of its
constituent members as such; in short what is usually known as "constitutional
law." On the other hand, the residue of public law consisting of the
administrative law and the criminal law has its analogies to the law of things.
Legal status
of a subject may, therefore, arise in relation to private law or in relation to
public law. A person's franchise or right to vote or right to a public office
would constitute his status in relation to public law and it was such status
which was the subject-matter of the said case of Sat Narain v. Hanuman Parshad,
and was held to be "legal character" within the meaning of section 42
of the Specific Relief Act.
As seen
earlier, status arises by reason of some peculiarity of the person of inherence
or the person of incidence. The person may be a natural person, i.e., a human
being, or an artificial person, i.e., a juristic person, like a company or what
is known in English law as a corporation sole. The personality of an artificial
person is different from that of a normal natural person and it constitutes his
status in law. But amongst the natural persons themselves some have certain
peculiarities about their personality and to illustrate the same, Holland says
(at page 351) :
"The
chief varieties of status among natural persons may be refereed to the
following causes : 1. sex; 2. minority; 3. 'patria potestas' and 'manus'; 4.
coverture; 5. celibacy; 6. mental defect; 7. bodily defect; 8. rank, caste, and
official position; 9. race and colour; 10. slavery; 11. profession; 12. civil
death; 13. illegitimacy; 14. heresy; 15. foreign nationality; 16. hostile
nationality. All of the facts included in this list, which might be extended,
have been held, at one time or another, to differentiate the legal position of
persons affected by them from that of persons of the normal type."
It is this
passage from Holland which has been quoted by Banerjee in his Law of Specific
Relief in British India, and which has been reproduced in the said case of
Ramakrishna pattar v. Narayana Pattar.
As observed by
me earlier "legal character" as used in section 42 is equivalent to
legal status and legal status is legal right when it involves a peculiarity of
the personality arising from anything unconnected with the nature of the act
itself which the person of inherence can enforce against the person of
incidence. The plaintiff claims legal character or legal status by reason of
his managing directorship. Under section 2(26) of the Companies Act, 1956, a
director is a managing director when he is entrusted with powers of management
either by virtue of an agreement with the company, or of a resolution passed by
the company in general meeting, or by its board of directors, or by virtue of
memorandum or articles of association. On this definition of a managing
director as given by the Companies Act, it is necessary to ascertain first who
is the person of inherence, which is "the act" that is the right, and
who is the person of incidence. It is the plaintiff who is the person of
inherence. It is the plaintiff who as managing director claims certain rights.
The act, that is the right or rights are the powers entrusted to the managing
director as mentioned in the above definition. It is the company which is the
person of incidence, that is the person against whom the powers or rights as
managing director would be available. It may be that not only the company, that
is, the first defendant company, but even the plaintiff's co-directors may
perhaps fall within the category of persons of incidence. I do not think it
necessary to analyse and ascertain whether the plaintiff’s four directors would
or would not be persons of inherence. I will assume that they do fall within
that category of persons of incidence. But to my mind it is quite clear that
whatever powers or rights the managing director is entitled to are by reason of
the particular entrustment. It is the particular entrustment, that is, the
particular agreement or resolution or memorandum or articles of association
mentioned in the said section 2(26), which fully determines the nature and
extent of that power or right of the managing director. The personality of a
managing director has no peculiarity, and certainly no peculiarity unconnected
with or independent of his said right or power as a managing director, and,
therefore, there can possibly be no legal right which a managing director can
have which would involve such peculiarity of personality which is dependent of
the right or power itself and which the managing director can enforce against
his company and against his co-directors. The position of a managing director
is totally unlike that of a minor or a wife. A minor by the only reason of his
being a minor and the wife by the only reason of her being a wife has a
peculiarity of personality which is unconnected with any right which the minor
or the wife may claim. A landlord would have certain rights against his tenants
as such landlord, but if that landlord happens to be a minor, the peculiarity
of the status of the minor, which is totally independent of the rights as a
landlord, would affect and modify the otherwise normal rights as a landlord.
The personality of a minor as recognised by the law of persons is such that it
modifies indefinitely the legal relations into which the minor as having been
clothed with such personality may enter. Such is not the case of managing
director. Independently of the powers entrusted to him, he has no peculiarity
or legal status which affects or modifies his powers or rights. A managing
director cannot therefore be said to have any legal status. Now amongst the
said 16 varieties of legal status mentioned by Holland by way of illustration,
the 8th variety is "rank, caste, and official position" and Mr. Bhatt
contended that "official position" would include managing
directorship. Now, the said 16 varieties of status mentioned by Holland are to
be understood in the light of the general principles formulated by Holland,
otherwise some of the said varieties having been mentioned generally are liable
to create a misunderstanding. Fortunately, apart from the said general
principles, Holland himself gives (page 355) illustrations of
"office" as used in the said 8th variety as follows :
"(8)The
king, according to the maxim of English law, can do no wrong. No action can be
brought against him, nor indeed against a foreign sovereign, as such, or his
ambassador. Certain high officials are exempted from responsibility for the
acts of their subordinates, and various public functionaries are relieved from
liability by the Statutes of Limitation at an earlier date than other
people."
The king or
the high officials mentioned in this illustrations have a legal status, as they
have a peculiarity of personality as in the case of a minor which exists
independently of any particular right which they claim and which they can
enforce against the persons of incidence. It is in this sense that
"official position" or "office" has been used in the said
8th variety and as seen earlier, managing directorship cannot fall within it.
On the general test mentioned above, it is clear that when rights were claimed
under a contract the same would not amount to "legal character" under
section 42 as held in some of the cases I have referred to above. Nor is the
question whether the judgement in a particular case would amount to a judgement
in rem a test of "legal character" as argued by Mr. Munshi, because
the division of legal rights into rights in rem and rights in personam is of no
relevance in judging legal status or legal character. Indeed, section 43 of the
Specific Relief Act itself states that the declaration under Chapter VI of that
Act, i.e., under section 42, would be binding only the parties to the suit and
those claiming through them, which means that it is not a judgement in rem. Nor
is the ownership of any property or the absence of any criterion for judging
legal character. It is the peculiarity of the personality of the person of
inherence which is the determining factor of legal character and ownership of
property or the absence of it is of no relevance.
I, therefore,
hold that the plaintiff is not entitled to any legal character within the
meaning thereof in section 42 of the Specific Relief Act. The answer to issue
No. 10 will therefore be in the negative. The plaintiff is therefore not
entitled to the declaration prayed for under prayer (b) of the plaint as that
declaration is prayed for on the basis that the plaintiff is entitled to a
legal character, viz., that of the managing director of the first defendant
company and is to the effect that the plaintiff continues to hold such legal
character.
There is
however another declaration prayed for under prayer (a) of the plaint, the same
being that the resolutions dated 23rd September, 1957, are void, illegal,
inoperative and of no effect whatsoever. Mr. Bhatt had repeatedly stated that
the whole cause of action in the plaint in on the basis of the plaintiff being
entitled to a legal character and the suit being under section 42 of the
Specific Relief Act. As I have held that the plaintiff, as the managing
director of the first defendant company, was not entitled to any legal character
the relief claimed under prayer (a) must therefore also fail. The plaint is not
on the basis that the plaintiff was appointed as the managing director of the
first defendant company by or under any contract, express or even implied,
between the plaintiff and the first defendant company. As a matter of fact Mr.
Bhatt repeatedly stated that the plaintiff's claim was not under any contract
express or implied. But apart from the point raised in this case as to whether
the plaintiff is entitled to a legal character or not, Mr. Nathwani, the
learned counsel for defendants Nos. 2, 4, 5 and 6, had raised another point for
my decision, viz., that in order to obtain relief the plaintiff must, on the
plaint as it stands, place reliance on the articles of association of the first
defendant company, but that the plaintiff is not entitled to do so as the
plaintiff is not even a shareholder of the first defendant company. Now, it is
quite clear that the plaintiff must rely on the articles of association of the
first defendant company in order to challenge the validity of the resolutions
dated 23rd September, 1957. It is the plaintiff's case, as made out in the
plaint, that on a true construction of the articles of association of the first
defendant company and particularly article 100, the board of directors of the
first defendant company had no power to pass the said resolutions and that the
said resolutions are invalid because of that reason. Mr. Bhatt however argued
that reliance has to be placed on the articles of association of the defendant
company, not by the plaintiff to complete the cause of action, but by the
defendants to justify the plaintiff's removal from his managing directorship.
He pointed out that it has been stated in the plaint that the plaintiff was appointed
as a joint managing director and it is further stated in paragraph 17 that
"the plaintiff continues to be the joint managing director of the first
defendant having the powers and responsibilities assigned to him under the said
resolution dated 24th June 1957". He argued that once the plaintiff's
appointment is admitted, it is for the defendants, who allege termination, to
prove that there is a valid termination of that appointment.He argued that the
the plaintiff's cause of action is complete so far as the suit under section 42
is concerned and the plaintiff himself does not want to rely on any articles of
association of the first defendant company, but it is the defendants who would
have to rely on the articles to justify the termination of the plaintiff's
joint managing directorship. In my opinion, this contention of Mr. Bhatt is not
sustainable. The plaintiff's cause of action, according to the plaintiff
himself, is on the basis of a legal character under section 42. Under section
42 the plaintiff can file a suit for declaration against persons denying or
interested in denying that legal character. What the plaintiff has to prove is
that the plaintiff is entitled to legal character at the date of the suit.
Therefore the plaintiff must prove that the plaintiff was validly appointed as
a managing director (assuming for this purpose that managing directorship is a
legal character) and that the plaintiff continues to be such managing director
at the date of suit. The plaintiff may not have to prove his appointment
because such appointment is admitted. But merely establishing by such admission
that the plaintiff was so appointed is not sufficient. If such appointment
gives to the plaintiff a legal character the plaintiff must establish the
characteristics of such legal character by establishing the nature of such
appointment, which would, amongst the other factors, include how such
appointment was liable to be terminated. Once the plaintiff establishes his
legal character in all its aspects, including the modes of its termination, it
would then be for the defendants to prove that the plaintiff's appointment has
been validity terminated in that mode of termination as established by the
plaintiff. For example, if the plaintiff establishes that his legal character
as joint managing director was such that it could be terminated only by a
special resolution passed by the first defendant company at a general meeting
of its members, then and only then, would it be necessary for the defendants,
if they allege termination, to prove that there was a valid special resolution
passed by the first defendant company at a proper general meeting of its
members. In this case, in order to prove the plaintiff's alleged legal
character as managing director, it would be for the plaintiff to prove, amongst
the other things, whether such appointment of the plaintiff was capable of
being terminated, and if so, in what manner; and in order to prove the same the
plaintiff must rely on the articles of the first defendant company. Next, it is
common ground that the plaintiff at any material time was not shareholder of
the first defendant company. Now, even between a member and the company, the
articles of association constitute a contract only in respect of his rights and
liabilities as a shareholder, but not in respect of rights and liabilities
which he has in a capacity other than that of a member. But as between the
company and outsiders, i.e., persons who are not shareholders, the articles do
not in any circumstances constitute a contract of which that person can take
advantage. This position in law is too clear to require reference to any
authorities or even text books. The plaintiff not being a member of the first
defendant company is therefore not entitled to place any reliance on the articles
of the first defendant company. What is more, the plaintiff's cause of action
is not, as already observed by me earlier, on the basis even of an implied
contract between him and the first defendant company so that it cannot be said
that the articles of the first defendant company or any of them impliedly form
part of any contract between the plaintiff and the first defendant company. In
my opinion, therefore, the plaintiff is not entitled to place any reliance in
this suit as framed on any of the articles of association of the first
defendant company or to claim any relief placing any reliance on the said
articles. But in order to get the declaration under prayer (a) of the plaint,
the plaintiff has to rely on the articles of association of the first defendant
company and particularly article 100, or course, on the construction placed
thereon as hereinafter mentioned by the plaintiff, and without placing such
reliance the plaintiff cannot get the said declaration. The plaintiff is
therefore not entitled to the declaration prayed for under prayer (a) of the
plaint. In this connection Mr. Nathwani had cited the case of Mothey Krishna
Rao v. Grandhi Anjanyulu. In that case a secretary of the company who had been
removed by the board of directors from that post brought a suit for a
declaration that he still continued to be the secretary, on the ground that the
board of directors had no power to remove him under the articles of
association. It was held that the plaintiff's appointment as secretary must be
regarded as one de hors the articles and it was incumbent on him to make out a
contract outside and independently of the articles, and he had no cause of
action on the articles. Mr. Bhatt sought to distinguish that case on its facts.
In view of the decision I have already arrived at as above, I do not think it
necessary to analyse the judgement in that case or to consider the distinction
sought to be placed thereon by Mr. Bhatt. But I should state that as in that
case so also in this case it was argued on behalf of the plaintiff that there
is a 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. It was argued by Mr. Bhatt that this suit falls within the
said former category and that the plaintiff could rely upon the articles of
association to show that the plaintiff is sought to be removed by an authority
incompetent to do so and that therefore there is no competent removal at all of
the plaintiff from his managing directorship. In respect of this argument the
following passage from the judgement in the above case appearing at page 96 is
relevant :
"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."
In my opinion
this passage applies with equal force to the identical arguments advanced by
Mr. Bhatt. I may repeat that in my opinion the plaintiff is not entitled to
place any reliance on the articles of association of the first defendant
company in support of any cause of action in this suit.
Prayer (c) of
the plaint asks for an injunction. The injunction as prayed for therein really
divides itself into two parts. The first part is to restrain the defendants
from acting upon or in pursuance of the said resolutions dated September 23,
1957; and the second part is to restrain the defendants from interfering with
the plaintiff's rights and powers as joint managing director under the said
resolution dated June 24, 1957.
So far as the
said first part of the said injunction is concerned, the same is so related to
the declaration prayed for under prayer (a) of the plaint. To get such an
injunction the plaintiff must establish that the plaintiff is entitled to legal
character, which I have held that the plaintiff as managing director is not
entitled to, and moreover, the plaintiff must rely on the articles of
association of the first defendant company, which I have held the plaintiff is
not entitled to do. The plaintiff's prayer for that part of the injunction must
therefore fail.
So far as the
said second part of the said injunction is concerned, the same is co-related to
the declaration prayed for under prayer (b) of the plaint. On the basis that
the plaintiff was entitled to legal character as contended by him a declaration
is sought as in prayer (b) and an injunction under the said second part of
prayer (c). I have held that the plaintiff is, as the joint managing director
of the first defendant company, not entitled to any legal character, the result
of which would be that the plaintiff would not be entitled to either of the
said two reliefs. So far however as the said injunction is concerned, Mr. Bhatt
had further argued that even if I were to hold that the plaintiff is not
entitled to a legal character, the plaintiff was any event entitled to the said
injunction. In support of the said contention Mr. Bhatt advanced no further or
other arguments whatsoever save and except relying upon the case of Kunj Behari
v. Keshavlal. That case is not an authority for the proposition that when the
court refuses to grant the plaintiff a declaration under section 42 on the
ground that the plaintiff is not entitled to legal character, the plaintiff is still
entitled to an injunction based on the plaintiff's claim to legal character. On
the contrary that case envisages an injunction being granted to the plaintiff
on the basis that the plaintiff would succeed in establishing the grounds on
which the plaintiff claimed the declaration. It is definitely not a case which
says that when the plaintiff fails to establish the grounds on which he claims
the declaration, the plaintiff should be given an injunction but not the
declaration. To my mind at least, this proposition urged on behalf of the
plaintiff is such that it has merely to be stated to be rejected. The
declaration as well as the injunction are both of them reliefs and both are
based on the plaintiff's claim that he is entitled to legal character.
If that claim
to legal character itself is negatived, how can the plaintiff get either of the
two reliefs ? It must be remembered that the whole claim in suit is based on
the plaintiff's claim to legal character and that only. It is not the
plaintiff's case, nor has it been argued, that the plaintiff has any claim
otherwise than that on the basis of legal character under section 42. That
being so, once it is held that the plaintiff is not entitled to legal
character, the plaintiff would not be entitled not only to the declaration but
also to the injunction prayed for. It is quite likely that because of this
clear position Mr. Bhatt did not develop his argument in this behalf and rested
contact only by citing the said case. But even that case is not an authority in
any way supporting the present contention of Mr. Bhatt. I am inclined to infer
that this argument was not intended to be seriously pressed. But whether
intended to be seriously pressed or not, as I have held that the plaintiff as
the joint managing director is not entitled to any legal character, I hold that
the plaintiff is not entitled to either the declaration under prayer (b) or the
said second part of the injunction under prayer (c) of the plaint.
As I have held
that the plaintiff's is not entitled to any legal character, and I have
negatived the plaintiff's said contention that the plaintiff is in any event
entitled to an injunction even if it be held that the plaintiff is not entitled
to legal character, as a necessary corollary I must hold that the plaint does
not disclose any cause of action. Issue No. 9 will therefore have to be
answered in the negative.
The result of
my above findings is that the plaintiff is not entitled to any relief in this
suit and the suit would have to be dismissed. In view of the said findings it
is not necessary for me either to deal with issues Nos. 2 and 3 or to deal with
the issues Nos. 6, 7 and 8. As however, the contentions covered by these issues
have been argued before me, I will deal with the main arguments relating to
these issues.
I will first
deal with the contentions covered by the issues Nos. 2 and 3. It is the
resolutions dated September 23, 1957, passed by the board of directors of the
first defendant company which are challenged in this case as being ultra vires
the powers of the board. The question for consideration therefore, is did the
board of directors have power to revoke the appointment of the plaintiff as
joint managing director ? If the board had no such power the said resolutions
dated September 23, 1957, would be ultra vires the board.
Now, under the
articles of association of the first defendant company a person may be a
director by reason of his having been elected as such at the general meeting of
the company in the ordinary way, or if he is a nominated director having been
nominated under the provisions of article 93(a), of if he is a director having
been appointed in accordance with the provisions of article 93(b). Thereafter
article 99 provides that the directors may from time to time appoint anyone of
their own body, i.e., a person who is already a director, to be a managing
director and may vest in such managing director such powers as the board of
directors itself has under the articles of association of the first defendant
company and such appointment as managing director is to be for such period and
upon such terms as the directors think fit. Article 99 deals with the
appointment of a person who is already a director as managing director and with
vesting of powers in him. So far there is no controversy between the parties as
regards the interpretation of the relevant article. The controversy is as to
how a managing director is to be removed from his office as managing director
and how are the powers vested in him as the managing director to be removed. A
managing director is, as already seen, a director with certain additional
powers vested in him as the managing director and the controversy before me is
confined only to the question of the removal of such additional powers vested
in him as managing director. The question is to be judged on the basis - which
basis is common to both the sides - that upon the removal of the managing
director as managing director, that is, upon the removal of his additional
powers as managing director, he would be relegated to his original position as
a director and would continued to be such director with the same rights and
powers and obligations and liabilities which attached to his directorship
immediately before his appointment as a managing director. To be more specific,
the plaintiff was appointed a joint managing director by the resolution dated
June 24, 1957, but immediately before the passing of that resolution the
plaintiff was a special director appointed under article 93(b) and was entitled
to certain remuneration under the resolution dated June 15, 1956, and it is
common ground that the resolutions dated September 23, 1957, which are
cancelled in this suit do not and do not even purport to adversely affect in
any way the plaintiff's said appointment as special director or his rights to
remuneration under the said resolution dated June 15, 1956. Therefore, as I
said, the only question is which is the authority which is empowered by the
article to remove a managing director, i.e., the additional powers and
characteristics of a managing director, his original directorship with all the
original rights, powers, obligations and liabilities remaining untouched. The
plaintiff contends that the power of removal on a true construction of article
100 is in the general meeting of the members of the company to be exercised by
a special resolution, whereas the first defendant company contends that it is
in the board of directors themselves. It is therefore necessary to state very
briefly how each party arrives at its said conclusion.
According to
the plaintiff it is article 100 which contains such power of removal. According
to the plaintiff the relevant provision of that article is :
"A
managing director ... shall, subject to the provisions of any contract between
him and the company, be subject to the same provisions as to ... removal as the
other directors of the company."
There being no
contract about the managing directorship between the plaintiff and the company
the said condition "subject to the provisions of any contract between him
and the company" has no application in this case. Therefore, according to
the plaintiff, article 100 provides that a managing director can and must be
removed as the other directors of the company and the provision as regards the
other directors of the company is contained in article 114 of the articles of
association of the first defendant company to the extent that it provides :
"... the
company may by extraordinary resolution remove any ordinary director before the
expiration of his period of office."
According to
the plaintiff, the said provision of article 114 is to be read as if it was
bodily reproduced and incorporated in article 100. If so read, article 100 is
to be construed as providing that a managing director shall be subject to
removal by the company by an extraordinary resolution. The plaintiff further
contended that since April 1, 1956, when the Companies Act, 1956, came into
force the said words "extra ordinary resolution" have, by reason of
section 651 of that Act, to be read as "special resolution," such
special resolution being defined by section 189 of that Act. The plaintiff
therefore contended that article 100 so construed provides that it is the
company which has the power by a special resolution to remove a managing
director in the said sense of taking away his additional characteristics and
powers as a managing director leaving his original appointment as a director
unaffected and that therefore the said resolutions dated September 23, 1957,
which were passed by the board of directors are of no effect, the board having
no such power to remove a managing director.
On the other
hand, according to the first defendant company, the said construction placed by
the plaintiff on article 100 is incorrect and that on a correct construction of
the same, article 100 merely clarifies the position of the director as a
director when he happens to have been appointed also as a managing director.
According to the first defendant company it is article 99 which authorises the
board of delegate its powers, all or some, from time to time, to one of
themselves, and that upon such delegation, the director to whom such powers are
delegated becomes, that is, he is to be styled as, a managing director and that
it is implicit in the provision of article 99 that the body, namely the board
of directors, that is authorised to delegate such powers has the authority to
withdraw such powers, and if the withdrawal be of all such delegated powers, to
remove the director concerned from his managing directorship, leaving, of
course, his directorship untouched. According to the first defendant company
therefore the board of directors of the first defendant company had the power
to remove the plaintiff from his managing directorship and the said resolutions
dated September 23, 1957, were therefore within the powers of the board and
have been validly passed.
I will now
proceed to examine the contentions of each side and find out what is the true
position. Now, as pointed out by me earlier, on September 26, 1956, the company
amended its said articles 99 and 100, the only change thereby made being the
introduction of the words "and/or executive director" wherever
occurring in the said two articles. It was argued on behalf of the plaintiff
that this being only an amendment, it is not as if totally new articles 99 and
100 are introduced for the first time, but that it is the old articles 99 and
100, framed before the Companies Act, 1956, came into effect, which continued,
subject however to the said amendment. It was argued that the said articles 99
and 100 are framed on the basis of regulation 72 of Table A in the First
Schedule to the Indian Companies Act, 1913, and that the regulation 72 divides
itself into two parts, the first dealing with the appointment of a managing
director which is dealt with by article 99 and the second dealing with the
determination of managing directorship which is dealt with by article 100. It
was further argued that the last clause of regulation 72 provides that the
appointment of a joint managing director shall be subject to determination if
the company in general meeting resolves that his tenure of office of managing
directorship be determined but that there is no such specific provision
contained in article 100 and that is because the same has been provided for by
providing that a managing director shall be subject to removal as the other
directors of the company and thereby providing for the removal of a managing
director the same mode as is provided by article 114 for the removal of a
director. It was argued that on the parallel of a regulation 72 article 100
must be construed as containing a provision for the removal of a managing
director. This argument is intended to meet the argument on behalf of the first
defendant company that article 100 does not in any way provide for the
determination of managing directorship at all. In my opinion this argument
urged on behalf of the plaintiff is not well founded. Undoubtedly regulation 72
must have been used as a basis or as a precedent for drafting articles 99 and
100. To a certain extent the subject dealt with, the provisions, and even the
wording of regulation 72 and articles 99 and 100 are common. But the wording is
materially altered and what I have to construe is the actual provisions of
articles 99 and 100, on their own phraseology and in their context in the
articles of association of the first defendant company. It would be incorrect
to interpret article 100 on the assumed hypothesis that article 100 was
intended not only to provide for the same subject as is provided for by the
second part of regulation 72 but was also to contain the same or even a greatly
similar provision. I cannot proceed to interpret article 100 on an assumption
that because regulation 72 provides for the determination of the office of
managing directorship, therefore, article 100 must also be assumed to provide
for the determination of the office of managing directorship. I have to take
the language of article 99 and article 100 as used therein, if necessary in its
context with the other articles of the first defendant company, and then
interpret the same to ascertain whether article 100 does or does not contain
any provision in connection with the determination of the powers of a managing
director or for the removal of the managing director from the office of a
managing director. I will, therefore, proceed to consider the provisions of
articles 100 itself on that footing.
Article 100
was amended on September 26, 1956. As amended, that article in its opening part
mentions "A managing director or managing directors and/or executive
director," and at its end states "he shall ipso facto and immediately
cease to be a managing director." It is obvious that in making the said
amendment there has been an oversight, by reason whereof there has been an
omission to add the words "or executive director whichever he may
be," or other words to that effect, at the extreme end of that article.
Article 100 in its present form, if it had to be construed in its application
to an executive director, would create a difficulty, because the material part
of it would read "an executive director ... if he ceases to hold the
office of director he shall ipso facto and immediately cease to be a managing director."
The executive director cannot cease to be a "managing director". It
is, I believe, the lack of proper amendment as aforesaid that leads to this
difficulty. Fortunately for me this case does not require an interpretation of
article 100 in relation to an executive director and in construing article 100
I will proceed to deal with it, for the purpose of this case, as if the words
"and/or executive director" were absent.
Article 100
divides itself into three parts which, without any change or omission would
read as follows :
"A
managing director or managing directors shall not while he continues to hold
that office be subject to retirement by rotation and he shall not be taken into
account in determining the rotation of retirement of directors,
but he shall,
subject to the provisions of any contract between him and the company be
subject to the same provisions as to recognition and removal as the other
directors of the company,
and if he
ceases to hold the office of directors he shall ipso facto and immediately
cease to be a managing director."
The said first
and third parts clearly provide as to the directorship of a person who is a
director and also a managing director. Articles 107 and 108 provide for
retirement by rotation and, therefore, the first part of the article 100
provides that a managing director while he continued to hold the office as
managing director shall not be subject to retirement by rotation and shall not
be taken into account in determining the rotation of retirement of directors. A
managing director, as already seen, is first a director and then becomes a
managing director, and therefore the third part deals with what is to happen to
the appointment of a person as managing director if that person ceased to hold
his office of director and says that if he ceases to be a director he would
automatically cease to be a managing director. Whether the words "subject
to any contract between him and the company" preceding the second part
would, on a grammatical construction, be taken to be repeated in the third part
also or not appears to be arguable, but it is not necessary for the purposes of
this case to decide it. It is to be noted that both the first and the third
parts relate to the position of a person as director when that person is also a
managing director. Now turning to the second part, it says, "but he (i.e.,
managing director) shall, subject to the provisions of any contract between him
and the company, be subject to the same provisions as to recognition and
removal as the other directors of the company." The use of the word
"recognition" of a director in this part is intriguing. No
submissions were advanced as to its meaning and I confess that its meaning is
not easy for me to comprehend. This part contains the words "recognition
and removal." The use of both these words together in this way furnishes a
clue as to what was intended to be meant by "recognition." Removal of
a director means when the person or body, like the company in general meeting,
having authority to remove a director exercises such authority and removes the
directors. In such a case there is originally a power given for removal and
thereafter there is a voluntary exercise of that power. Such exercise of power
brings about the cessation of the directorship of that director. In the case of
the first defendant company such removal so far as ordinary director is
concerned has been provided for by article 114. But there can be other ways in
which a cessation of the directorship can result, these ways having been
provided for by article 98 of the articles of the first defendant company. All
the ways under article 98 are either the happening of a specified event like
insolvency or unsoundness of mind of the director or some voluntary act of the
director like his tendering his resignation. But what is common to all these
ways under article 98 is that on the happening of the contingency provided for,
the cessation of directorship automatically results without anything else being
required to be done thereafter. Therefore on the happening of such contingency
the director can be said to cease to be capable of being recognized as a
director of the company. It is in this meaning that the word
"recognition" has been used in the second part of article 100, and
recognition of a director would mean the person's continuation in office as a
director. It appears to refer to the stage when a person continues to be in his
office of a director and which stage terminates when he ceases to be a director
under article 98 of the articles of association of the first defendant company.
This appears to be the only possible meaning because both recognition and
removal deal with a common subject, viz., determination of the directorship,
and at the same time the two would not overlap, as "recognition" would
apply in cases where such termination is brought about automatically without
requiring a voluntary act of an outside agency to baring it about, whereas
"removal would require a voluntary act of an outside agency."
"Recognition" of a director refers to the stage when a person
continues to be a director and has not ceased to be a director under article
98; and what happens to his managing directorship when he ceases to be a
director has been provided in the third part. The third part does not contain
any new provision for a bringing about a cessation of his office as managing
director. The third part is really an explanation or clarification as to what
effect the cessation of his office as a director would have on his office as a
managing director, such explanation or clarification being that because he
ceases to be a director, he ipso facto, i.e., automatically without anything
more, will cease to be managing director also and such cessation of managing
directorship being automatic it shall take effect immediately, that is the
cessation of directorship will result in a simultaneous cessation of managing
directorship also.
Now, what is
the meaning of the words "other directors of the company" occurring
in this second part ? The articles of the first defendant company do contain a
reference to "ordinary director." e.g., in articles 107 and 114,
although that term "ordinary director" does not appear to have been
defined anywhere in the articles. The meaning however is obvious and it means a
director appointed in the ordinary way by election at a general meeting of the
members of the company. "Ordinary director" is in contradistinction
to a "nominated director" under article 93(a) and a "special
director "under article 93(b). Now, the removal of "the other directors
of the company" can be in the case of an ordinary director under article
114 where the removing authority is the company; whereas in the case of a
nominated director and a special director it would be under articles 93(a) and
93(b) respectively the removing authority being the persons mentioned in the
said respective articles, who are other than the company. Therefore, the
removing authorities in the case of each of the said three types of directors
are different and the method of removal would also be different. It is in the
light of this analysis that I must test the argument urged on behalf of the
plaintiff, viz., that it is this second part that provides for the removal of a
person from his managing directorship and for that purpose the relevant provision
of article 114 should be read as if it was reproduced, as it were, in this
second part of article 100. As already seen, "the other directors of the
company" would include at least the said three types of directors, and the
agency which can remove and the method of removal are different in the case of
each of them. If so, there is no justification for singling out any that which
is applicable to the removal of an ordinary director only and omit that which
is applicable to the removal of the other two types of directors. Why read the
relevant provisions of only article 114 into article 100 and not those of
article 93(a) or article 93(b) ? And that raises a further question as to why
this second part of article 100 contains such a vague provision when it mentions
"other directors" without specifying "ordinary director,"
if it was "ordinary director" which was intended to be referred to
here ? I think this vagueness or confusion results because the very foundation
of the argument of the plaintiff is incorrect. This second part is not, in my
opinion, at all intended to provide for the removal of a person from his
managing directorship. The whole article 100, that is all its three parts,
provides as to what is the position of a person as a director when that person
is a director and also a managing director. As article 100 divides itself into
three parts, it is reasonable to assume or infer that all the three parts
contain provisions relating to the same subject. Of course such an assumption
would not be justified if the language of the second part clearly indicated to
the contrary, but there is no such indication. On the contrary, if the
interpretation canvassed on behalf of the plaintiff were to be accepted the
second part would appear to be vague and confusing. Further, the second part
begins with the word "but" the use whereof indicates that what
follows it and what precedes it both deal with the same idea of topic, namely,
what would happen to a person's directorship when he is also a managing director,
but that the provision which follows that word "but" is the opposite
of the provision contained in that portion of the article which precedes that
word "but". The provision preceding the word "but" is that
when a director is appointed a managing director the provision about rotation,
i.e., retirement by rotation, will not apply to him so long as he continued to
be a managing director but what follows the word "but" provides the
opposite, viz., that when a director is appointed a managing director even
during the subsistence of his managing directorship his original directorship
shall, unlike the termination thereof by retirement by rotation, be liable to
termination on his ceasing to be "recognised" as a director or by his
removal as a director. Moreover the language of the second part is clearer and
more appropriate if the second part is taken as providing for what is to happen
to the person's directorship when he is appointed also as a managing director.
The relevant words are "he (i.e., the managing director) shall ... be
subject to the same provisions as to recognition and removal as the other
directors of the company", which would mean that a person shall, even if
he is appointed as a managing director be subject to the provisions as to
recognition or removal as a director as the other directors of the company. Mr.
Bhatt on behalf of the plaintiff argued that such interpretation requires the
underlined words "as a director" to be added in the second part. It
is true that normally words should be construed as used without adding any more
words therein. But this is not a case of addition of totally new words. In the
first part itself the words "as a director" are present, but by
implication. The first part says "a managing director shall not while he
continued to hold that office be subject to retirement by rotation". The
question arises "retirement by rotation" as what ? Certainly not as a
managing director. Neither the Companies Act, old or new, nor the articles of
the first defendant company provide for retirement by rotation of a managing
director. It must mean "retirement by rotation" as a director. A
retirement by rotation as a director is provided for both by the Companies Act
and even by articles 107 and 108 of the articles of association of the first
defendant company itself; and even Mr. Bhatt did not dispute that the
"retirement by rotation" in the first part must be as a director. But
what is more, the words, "as a director" are, as I said, present here
in the first part by implication because the subsequent words in the first part
itself are "and he shall not be taken into account in determining the
rotation of retirement of directors". The use of the last word
"directors" makes it clear that the retirement by rotation mentioned
in the first part is retirement by rotation "as a director." There is
also a still further reason why the second part must be taken as a mere
clarification as to what is the effect on a person's directorship when that
person is also a managing director. The possible modes of termination of a
person's directorship are of three categories, viz., by retirement by rotation
under article 107, by ceasing to hold office as mentioned under article 98, and
by removal under article 14 or 93(a) or article 93(b) in the case of an
ordinary or a nominated or special director respectively. Unless the second
part is construed as explaining what is to happen to a person's directorship
when he is appointed also a managing director, i.e., whether by reason of his
appointment as a managing director his original directorship would or would not
terminate by ceasing to be a director under article 98 or by being removed as a
director under articles 114, 93(a) and 93(b). Article 100 would have to be
taken to deal only with one kind of termination of directorship, namely, by
retirement by rotation and not by ceasing to her a director or removal as a
director. The first part clearly deals by way of clarification with one class
of termination of directorship, viz., by retirement by rotation and there is,
therefore, a greater justification to construe the second part as dealing by
way of clarification with the remaining classes of termination of directorship
viz., by ceasing to be a director or by removal as a director. I, therefore,
reject the argument urged on behalf of the plaintiff and hold that article 100
does not lay down any provision for removing a person from his managing
directorship.
As article 100
does not lay down any provision for removing a person from his managing
directorship, the next question to be considered is whether the board of
directors of the first defendant company did have the power to remove the
plaintiff from his managing directorship. Now, in article 99 the words used are
"from time to time" when it says that the directors may from time to
time appoint any one or more of their body to be managing director and may vest
in such managing director all or some of the powers vested in the directors by
the articles of association of the first defendant company. The words
"from time to time "as occurring in an Act of the British Parliament
which authorised the Lord Chancellor from time to time to make an order have
been construed in Lawrie v. Lees by Lord PENZANCE as : "the words 'from
time to time' are words which are constantly introduced where it is intended to
protect a person who is empowered to act from the risk of having completely
discharged his duty when he has once acted, and, therefore, not being able to
act again in the same direction. The meaning of the words "from time to time"
is that after he has made one order he may make a fresh order to add something
to it, or take something form it, or reverse it altogether." The Act did
not specifically authorises the Lord Chancellor to revoke the order but the
words were construed to include the power to "reverse it altogether".
On the same analogy and reasoning the use of the words "from time to
time" in article 99 indicates that the directors have been given the power
not only to appoint a managing director and to vest powers in him as mentioned
in that article, but also to reverse the same, i.e., revoke his appointment or
withdraw all or some of the powers vested in him. Article 99 is merely a
delegation by the company to the directors of its powers to appoint a managing
director. In Foster v. Foster, article 99 of the Company in that case
contained, so far as it is material for this purpose, a provision similar to
the article 99 of the first defendant company and read as follows :
"99. The
directors may, subject to the preceding clauses, from time to time appoint any
one or more of their body to be managing director or directors, for such
period, at such remuneration, and upon such terms as the directors think
fit."
In connection
with that PETERSON J. observed at page 543 as follows :
"In my
view, however, the appointment by the directors of one of their body as
chairman, or the appointment by the directors of one of their number as a
managing director, without more, is not a contract within article 93, but is
merely a deletion of their powers, and is very similar to the power which they
posses to appoint committees of themselves and delegate their powers to those
committees."
I will deal
with this case later on in greater detail, but what is material at present is
that the article in construed as a merely a delegation of powers by the company
to its board of directors to appoint a managing director. If there is such a
delegation it is merely a creation by the company of its board of directors as
its agent for doing what the article empowers the board of directors to do.
Delegation merely creates an agency as held by WILLS J. in Huth v. Clarke. If,
therefore, by this article 99 the first defendant company has created its board
of directors as its agents to appoint a managing director, the relationship
between the three parties is that the company is the principal, the board of
directors are the agents and the managing director is a sub-agent. In treating
this relationship as that of principal and agent, I am not oblivious to the
following remarks of LORD SANKEY occurring in his judgment in Regal (Hastings)
Ltd. v. Gulliver :
"Directors
of a limited company are the creatures of statute and occupy a position
peculiar to themselves. In some respects they resemble trustee, in others they
do not. In some respects they resemble agents, in others they do not. In some
respects they resemble managing partners, in others they do not."
For the
purpose of the point under consideration, inasmuch as there is a delegation of
powers by the company to its board of directors to the extent mentioned in
article 99, I think that it is safe to say that for the purpose of considering
the exercise of powers the relationship is that of principal and agent and
sub-agent as mentioned above. Looked at in that perspective, under section 193
of the Indian Contract Act, the agent, namely the board of directors, stands in
the position of a principal in relation to the sub-agent, namely, the managing
director; and under section 203 of that Act, subject to the exceptions and conditions
mentioned in that section, with which exceptions and conditions we are not
concerned in this case, a principal can revoke the authority given to the agent
and, therefore, the board of directors as the principal of the managing
director can always revoke the authority of its agent, the managing director. A
revocation of all powers is tantamount to removal and, therefore, even on this
position the board of directors of the first defendant company has, under
article 99, a power to remove the managing director, although such a power of
removal has not been expressly given by that article.
I will now
turn to the said case of Foster v. Foster which I have mentioned earlier. The
article of association of the company in that case contained an article No. 89
which was similar to article 101 of the first defendant company which empowered
the directors to exercise all the powers which the company itself had subject
to the limitations mentioned therein. The company in that case had also article
99 which I have already reproduced above and which was similar to the article
99 of the first defendant company. Article 102 of the company in that case
provided that the directors may elect a chairman of their meetings, and
determine the period for which he was to hold office. A general meeting of the
company held on January 25, 1911, appointed the plaintiff in that case as
director and later on the same day a meeting of the board of directors
appointed the plaintiff as the chairman of the board of directors. Later on August
14, 1911, the board of directors appointed the plaintiff as the managing
director of the company. In connection with the business of the company certain
disputes arose between the plaintiff Foster and the defendant Mrs. Foster. On
July 30, 1913, the board of directors passed two resolutions whereby Mrs.
Foster was appointed the chairman of the board of directors of the company and
was also appointed a joint managing director along with the plaintiff, the
plaintiff becoming a joint managing director in place of his original position
of the sole managing director. Thereafter, on January 19, 1915, the board of
directors passed a resolution terminating the plaintiff's appointment as
director and also as a joint managing director with Mrs. Foster. The plaintiff
thereupon filed a suit challenging inter alia the said resolutions of the board
of directors dated July 30, 1913, and 19th January 1915. One of the grounds of
challenge, as appearing from the arguments of Tomlin K. C., the learned counsel
for the plaintiff, at page 538 was "the plaintiff can only be removed by
an extraordinary resolution". This would mean that the point taken by the
plaintiff was that the person who had the power to remove the plaintiff from
his chairmanship and also his joint managing directorship was the company
itself in its general meeting and not the board of directors. The decision as
regards this contention of the plaintiff was that the board of directors did
have under the said article 99 the power to remove the plaintiff from his
managing directorship as appears from the following passage of the judgment at
pages 542-543 :
"In the
same way it is argued that the appointment of the plaintiff as sole managing
director was for such time as he should be a director. Here the question depends
on article 99, under which 'The directors may, subject to the preceding
clauses, from time to time to appoint any one or more of their body to be
managing director or directors, for such period, at such remuneration, and upon
such terms as the directors think fit.' In this case, also, it appears to me
that the directors have power from time to time appoint any one or more of
their body to be managing director or directors, and it does not involve as a
consequence that if they are dissatisfied with the person whom they have
appointed managing director, or think that another of their body would fill the
position more adequately, they are unable to substitute a new managing director
in place of the old one."
From this
passage it is clear that when the learned Judge used the words
"substituting a new managing director in place of the old one" it was
meant removing the old managing director and appointing a new one in his place.
It is not disputed even on behalf of the plaintiff before me that the provision
of that article 99, so far as it is material for the purpose of this case, were
similar to those of article 99 of the first defendant company and, therefore,
as held by PETERSON J. with which I respectfully agree - the board of directors
did have the power under article 99 to remove the plaintiff from his managing
directorship. In the arguments of the plaintiff's counsel, Tomlin K. C., as
appearing at page 538 it was specifically contended on behalf of the plaintiff
that the plaintiff could only be removed by the company by an extraordinary
resolution. This clearly indicates that it was in that case contended that the
power of removing a managing director was in the company and not in the board
of directors; and, therefore, the decision of PETERSON J. that the board had
the power to remove is unquestionably a decision of a point which directly
arose for his decision in that case. Mr. Bhatt however attempted to water down
the effect of that decision by saying that as appearing at pages 542-543 of the
said report, the learned Judge first considered the position of the plaintiff
in that case as chairman and held that the plaintiff was validly removed as
such chairman. Mr. Bhatt contended that that decision involved only a
construction of article 102 and a decision on the point as to the period of his
office as chairman, but not as to the point as to who had the power, whether
the company or the board of directors, to remove him. Mr. Bhatt argued that in
the very next paragraph of his judgment, the learned Judge proceeds to consider
the point about the determination of the plaintiff's managing directorship,
that the opening words are "in the same way" and that the first
sentence shows that the learned Judge was thinking only in terms of the period
or duration of the plaintiff's managing directorship and that, therefore, the
learned Judge's mind was at that time not focused on the point as to who,
whether the company or the board, had the power to remove the plaintiff from
his managing directorship. I am unable to accept this argument of Mr. Bhatt.
Undoubtedly, the first sentence of the last paragraph at page 542 supports Mr.
Bhatt's contention, but there is no justification to assume that when the
learned Judge says what he has in fact said in the above passage quoted by me
from his judgment the learned Judge was not in terms dealing specifically with
the said point actually argued before him by Tomlin K. C. that it was the
company and not the board who had the power to remove the plaintiff from his
managing directorship. This case is, therefore, a direct authority for the
proposition that on that article, the wording whereof was materially the same
as that of article 99 of the first defendant company, even though there is no
specific power granted to the directors for the removal of the managing
director, such a power has been impliedly granted to them by that article.
Mr. Bhatt
relied upon the case of Nelson v. James Nelson and Sons Ltd. The articles of
association of the company in that case contained article 84 which empowered
the board to exercise all the powers of the company subject to the limitation
mentioned in that article, and article 85 empowered the board to appoint from
time to time any one or more of their number to be managing director and with
such powers and authorities, and for such periods as they deem fit, and to
revoke such appointment. In construing those article LORD READING C.J. says in
his judgment at page 776 as follows :
"One of
those powers is to appoint a managing director - I draw particular attention to
these words - 'for such period as they deem fit.' The directors, therefore,
have under that part of the article power to appoint a managing director for a
term of years, and the words which immediately follow - 'and may revoke such
appointment' - only give the directors powers to take away that which they have
given provided that they have not bound themselves to give it for any period of
time. The directors have the power to appoint and the power to revoke the
appointment, but the article does not mean that they have the power to revoke
at will notwithstanding any agreement into which they may have entered for the
appointment of a managing director for a term of years. I am quite unable to
give the words the construction for which the defendants contend. If those last
words had not been inserted in the article, the result would have been that the
power to appoint a managing director would have been vested in the directors,
but the power to revoke the appointment would have remained with the
company."
It is the last
sentence in the above quotation which was strongly relied upon by Mr. Bhatt.
Mr. Bhatt conceded that that sentence contains a mere obiter of the learned
Judge and was not necessary for the decision of that case. He pointed out, and
with respect to the learned Judge of agree with Mr. Bhatt, that the obiter of s
eminent a judge as LORD READING is entitled to great respect. But looking at
the arguments of counsel as appearing in the above report and also going
through the judgment of the lower court reported in Nelson v. James Nelson and
Sons Ltd.,of find that this obiter though not necessary for the decision of
that case was not even the result of any arguments advanced on that point. It
does not appear to be the result of full consideration having been applied to
the decision contained in those obiter dicta. In my opinion, these obiter dicta
are not sufficient to outweigh the conclusion I have arrived at earlier as
mentioned above. When commenting on the said case of Foster v. Foster, Mr.
Bhatt had commened that these dicta of LORD READING were not even cited or
considered by PETERSON J. in his judgement and that that shows that the point
under consideration was not properly argued before PETERSON J. It is true that
the said obiter dicta of LORD READING do not appear to have been cited before
or to have been considered by PETERSON J. But to my mind it does not in any way
detract from the said judgment of PETERSON J. It is quite possible that the
above remarks of LORD READING being mere obiter dicta and not being the result
of a full argument in the case or a considered opinion of the learned Judge
were not cited in Foster v.Foster.
Therefore, if
it was necessary, I would have held that the board of directors of the first
defendant company did have the power to revoke the appointment of the plaintiff
as joint managing director and that, therefore, the said resolutions dated 23rd
September, 1957, were not ultra vires the powers of the board of directors.
I may mention
that there were certain other points argued both by Mr. Munshi and by Mr.
Bhatt. These were, however, in the nature of further alternative arguments and
in view of my above judgment, I do not think it necessary to complicate my
judgment further by dealing with such further alternative arguments. One of
such further alternative arguments, which was advanced by Mr. Munshi, was that
even if I were to hold that the plaintiff was entitled to a legal character
within the meaning of section 42 of the Specific Relief Act, I should not
exercise my discretion under that section in favour of granting to the
plaintiff the declaration as prayed for. The reason in support of that argument
was that the court will not in its discretion grant a decree by way of a
declaration when the same was capable of being negatived by the company in its
general meeting. It appears from the copy of the plaint exhibit 6 and indeed it
is common ground that the share capital of the first defendant company is
divided into 15,000 shares in all, out of which the Kamani group holds 10,450
shares and the seventh defendants holds 50 shares and that the plaintiff in
effect controls the voting rights in respect of the remaining 4,500 shares. It
was argued by Mr. Munshi that looking to the array of the parties before me even
if I hold that the board of directors did not have the power to revoke the
plaintiff's appointment as managing director and give a declaration to that
effect, the company could call a general meeting of its members at which the
Kamani group would be in a position by ordinary resolution to ratify the said
resolutions dated 23rd September, 1957, of its board of directors or pass a
fresh resolution to the same effect. Mr. Bhatt in his turn countered this
argument by contending that on his submission that article 114 should be read
as it were as having been reproduced in article 100 of the first defendant
company, the first defendant company would require a special resolution and not
merely an ordinary resolution to remove the plaintiff as the managing director
of the first defendant company but that the voting strength being as
aforestated the Kamani group would not be able to command the requisite
majority of vote for passing a special resolution. The consideration of even
this argument requires various alternatives to be decided first. I have already
held that the plaintiff is not entitled to a legal character. But if I had held
that he was entitled to a legal character I would have further held that I
ought not to have exercised my discretion in favour of granting the declaration
asked for because I have also held that the provisions of article 114 are not
to be deemed to have been incorporated in article 100, the result being that a
mere ordinary resolution would be sufficient, if passed by the first defendant
company to remove the plaintiff from the managing directorship as contended by
Mr. Munshi.
Under the
circumstances my answers to the issue are :
Issue No. 1 :
Not pressed by Mr. Munshi. I may repeat that some time after this issue was raised
Mr. Bhatt made it clear that the cause of action in the plaint was on the basis
of a claim to a legal character under section 42 of the Specific Relief Act and
thereupon Mr. Munshi did not press this issue. Moreover, to avoid any possible
misunderstanding, I may note that this issue was raised immediately after the
pleadings were read and does not cover and was not even intended to cover the
contention that the plaintiff is not entitled to rely upon the articles of
association of the first defendant company for the reliefs claimed in the suit.
This latter contention was urged by Mr. Nathwani at a much later stage in the
case and it was some time thereafter, that a further issue, being issue No. 11,
was raised to cover this contention.
Issue No. 2 :
Unnecessary to decide. See judgment. If necessary I would have answered this
issue in the affirmative.
Issue No. 3 :
Unnecessary to decide. See judgment. If necessary, I would have answered this
issue in the negative.
Issues Nos. 6,
7 and 8 : Unnecessary to decide. See judgement. If necessary, I would have
answered issues Nos. 6 and 7 in the affirmative and issue No. 8 in the
negative.
Issues No. 9 :
As I have held that the plaintiff is not entitled to any legal character, I
answer this issue in the negative.
Issue No. 10 :
In the negative.
Issue No. 11 :
In the negative.
The result is
that the suit is dismissed.
As the suit
has been dismissed by me normal rule as to costs, namely, that the costs must
follow the event must also be followed in this case. The defendants Nos. 7 and
8 however have all along supported the plaintiff and so far as their costs are
concerned the position is different. I need not however consider that position
any further because their respective counsel state that they do not press for
their costs. Under the circumstances so far as defendants No. 7 and 8 are
concerned there will be no order as to their costs.
So far as
defendants Nos. 1 to 6 are concerned, they have appeared in three different
sets and the question has been argued at very great length before me as to
whether one or two or three sets of costs should be allowed as between the
defendants Nos. 1 to 6. After such arguments were advanced however, the
defendants Nos. 1 to 6 between them, and also between them and the plaintiff,
are now agreed that in view of my above judgment the order for cost against the
plaintiff should be that the plaintiff should pay the costs of the first
defendant company in one set and also a half of one set of costs for the
remaining defendants Nos. 2 to 6. Under the circumstances, with such consent, I
order that the plaintiff do pay the costs of the suit, one set to the first
defendant company and half of one set to the defendants Nos. 2 to 6.
On behalf of
the defendants in whose favour I have made an order for costs as aforesaid an
application was made under rule 601 of the High Court rules on the Original
Side to the effect that I should either allow a fixed sum in excess of Rs.
2,000 as instructions for brief or that I should direct the Taxing Master to
allow such sum exceeding Rs. 2,000 as he may in his discretion think proper.
The hearing of this case has undoubtedly been a long one. I am told that the
hearing lasted for about 35 hours. But against that, it is also true that this
case did not involve numerous or complicated facts and, moreover, there was no
oral and very little documentary evidence. To enable me to exercise my said
discretion what is being placed before me today are merely general arguments
and rough estimates and, therefore, there is not before me at present
sufficient material to enable me to exercise the discretion vested in me under
the said rule 601. I will be in a much better position to judge this after the
successful defendants in whose favour I have made an order for costs have
prepared and lodged their respective bills of costs. Under the circumstances I
direct that this application under rule 601 should be renewed after such bills
of costs have been prepared and lodged with the Taxing Master.
[1941] 11
Comp Cas 301 (
v.
Punjab Zamindara Bank Ltd.
Young, C.J., and
July 11, 1941
M.C. Mahajan, for the appellant.
Basant Krishan, for the respondent.
These are cross appeals from the decision of Mr. Justice Bhide. The
plaintiff, Sardar Gulab Singh, brought an action against the Punjab Zamindara
Bank Limited,
Both parties have, therefore, filed appeals: the plaintiff against the
decision disallowing him an injunction and the defendants against the decision
granting the plaintiff a declaration.
The plaintiff was the promoter of the Company. Article 101 of the
Articles of Association provided as follows:—
"The remuneration of the Managing Director may
be by way of salary, commission, participation in profits or by any or all of
these modes at the discretion of the Board and they may enter into agreement
with such Managing Director as to term of office subject to such conditions as
they may deem necessary. But Sardar Gulab Singh, Honorary Magistrate, will be
the 1st Managing Director to the Company and his remuneration shall be 25 per
cent. of the net profits. He will remain Managing Director for the time he
holds shares at least of Rs. 20,000".
The Company was registered and in due course commenced operation as a
bank. The plaintiff, Sardar Gulab Singh, in accordance with Article 101 applied
for Rs. 20,000 worth shares which were allotted by the Board and he paid the
allotment money. He acted as Managing Director for 11 years, and for two years
before he was dismissed was paid, in accordance with Article 101, 25 per cent.
of the net profits. He received Rs. 8,000 a year for these two years. The
balance sheets of the Company were passed every year by the Company in general
meetings and they show the 25 per cent. paid to Sardar Gulab Singh as Managing
Director.
The shareholders of the Company, however, apparently did not approve of
the Managing Director receiving such a large proportion of the profits and in
the month of November 1931 (Ex. P. 19) some of the shareholders requisitioned a
meeting of the Company. On the agenda for the meeting two of the items were a
"vote of no confidence in the Managing Director" and "the
Managing Director was not entitled to 25 per cent. of the profits". No
notice was given to the shareholders that the Company intended to amend Article
101. At the meeting Article 101 was amended. This resolution amending Article
101 was duly confirmed at a subsequent meeting. This amendment has been held
because of the lack of notice, to be invalid.
On the 6th of July 1932, a suit was brought by those opposed to Sardar
Gulab Singh for a declaration that he had ceased to be Managing Director on the
ground of the amendment of the articles. If this suit had proceeded the
decision would have settled the point now in dispute between the parties. In
the month of October 1932, Sardar Gulab Singh was forcibleejected from the bank
and at the annual meeting of the Company in November of that year Sardar Gulab
Singh was compulsorily retired. In the month of August 1933 the suit was
allowed to be dismissed under Order IX, Rule 8, Civil Procedure Code. The
plaintiffs, therefore, from that time were barred from bringing another suit on
the same cause of action. In the same month, however, Sardar Gulab Singh filed
a suit for a declaration that the election of the Directors at the annual
meeting was invalid, and that they should be restrained from acting. He also
filed a petition for the liquidation of the Company. The petition was
subsequently settled and in the month of July 1936 Sardar Gulab Singh's suit
was dismissed, whereupon he filed an appeal. On the 12th day of August 1936,
pending the appeal, the present suit was filed by Sardar Gulab Singh and his
appeal was withdrawn as the directors had disappeared by rotation. It is
necessary to give these particulars as it has been held by the lower Court that
Sardar Gulab Singh was guilty of laches in not bringing his present suit
earlier. It is to be noted that in all these proceedings by the Company it was
never denied that Sardar Gulab Singh was the Managing Director, and even in the
present suit it was never raised that there was no contract between the Company
and Sardar Gulab Singh until the appeal. In fact in all the actions it was
taken for granted that Sardar Gulab Singh had been acting as the Managing
Director of the Company.
The first point argued by Mr. Basant Krishan on behalf of the Company was
that the Memorandum and Articles of Association of the Company did not
constitute a contract between the Company and Sardar Gulab Singh and in support
of his argument he drew our attention to several English authorities based on a
provision similar to Section 21 of the Indian Companies Act in the English
Companies Act. Section 21 enacts as follows:—
"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".
If the matter had been res integra it is possible that we might have held
that the terms of Section 21 did provide that Article 101 of the Articles of
Association of the Punjab Zamindara Bank Limited constituted a contract between
Sardar Gulab Singh and Company when registered. In view, however, of the long
series of decisions of eminent Judges of the English Courts, which have clearly
laid down that the Articles of Association did not constitute any contract and
in particular the decision in Eley's Case, and in
Pritchard's Case, we would
hesitate to disagree with the distinguished Judges who have decided to the
contrary. It is moreover unnecessary in this case to decide this appeal upon
this point. Mr. Mehar Chand on behalf of Sardar Gulab Singh contends that even if
Section 21 of the Indian Companies Act does not constitute a legal and binding
contract between the parties there is in this case an implied contract between
the Company and Sardar Gulab Singh in the terms of Article 101.
A contract may be either express or implied. An express contract can be
proved by written or spoken words which constitute an agreement between the
parties and an implied contract, on the other hand, may be proved by
circumstantial evidence of an agreement. A contract may also be of a mixed
character, that is, partly expressed in words and partly implied from acts of
the parties and circumstances. Mr. Mehar Chand contends that by the acts of the
parties a contract was clearly implied in the terms of Article 101. Sardar
Gulab Singh applied for and obtained Rs. 20,000 worth of shares, which were
allotted by the Board. He was the Managing Director and acted as Managing
Director for 11 years and he was remunerated in accordance with the terms set
out in Article 101. As we have already pointed it was never contended until the
appellate stage that Sardar Gulab Singh had not acted and been remunerated as
Managing Director. In the suit itself no issue was struck on this point, the
only issue was whether Sardar Gulab Singh had been improperly removed from the
office of Managing Director. It seems to us, therefore, that an implied
contract on the terms of Article 101 has been clearly proved.
There is ample authority for the proposition that under the
circumstances, such as in this case it is possible to prove an implied contract
even though the Memorandum and Articles of Association are held not to
constitute a contract in themselves. Isaacs' case appears to us to be an
authority on all fours with the present ease. In Isaacs' case the
Articles of Association provided that the qualification of a director should be
the holding of shares of the nominal amount of £ 1,000 and that a director
should acquire his qualification shares within one month of his appointment. If
he did not do so, he should be deemed to have agreed to take the said shares
and that the shares should be forthwith allotted to him. Sir Henry Isaacs
signed the memorandum and articles of association for one share. He acted as a
director for more than a year but never applied for any shares, nor were any
allotted to him, nor was he registered as a member of the company. The company
went into liquidation and the Court of Appeal held that Sir Henry Isaacs had
agreed with the company to take, and the company had agreed to allot to him,
the shares which constituted his qualification as a director and that
accordingly he was liable to be settled on the list of contributories in
respect of that number of shares. The learned Lord Justices held that the
action of Sir Henry Isaacs in acting as a director in addition to the terms of
the articles amounted to an implied contract between him and the company.
In Beckwith's case, it was
held that although the provisions in the articles were only part of the
contract between the shareholders inter se, the provisions in the articles
were, on the directors being employed and accepting office on the footing of
them, embodied in the contract between the company and the Directors and on the
winding up of the company the directors were, therefore, entitled to rank as
ordinary creditors in respect of the remuneration due to them at the
commencement of the winding up.
In In re R. Bolton and Company, Isaacs'
case
was followed by the Court of Appeal and the decision of Wright, J., in the
lower Court that by accepting office and acting as directors, the directors had
agreed to take the qualification shares in accordance with the terms set-out in
the articles of association of the company was upheld.
It is clear, therefore, that both on principle and on authority an
implied contract may be proved by the acts of the parties on the terms set out
in the articles of association of the company.
The plaintiff, Sardar Gulab Singh, therefore, having proved the contract
between himself and the company is, in our opinion, entitled to the declaration
prayed for and in this view we are in agreement with the learned single Judge
of this Court.
With regard to the second point, whether Sardar Gulab Singh is entitled
to an injunction, the learned single Judge decided that be was barred, inter
alia, on the ground that he was guilty of laches in having delayed bringing the
present suit. While we are in agreement with the learned single Judge that in
this case an injunction should not issue we would not have refused to grant it
on this ground. The suit brought by the opponents of Sardar Gulab Singh in July
1932 if proceeded with would have settled the whole case, but, for their own
reasons, they did not proceed with that suit. Sardar Gulab Singh immediately
brought other legal proceedings against the company. He may have been wrongly
advised or mistaken in not bringing his present suit, or in not impleading the
bank in the former suit, but we do not think that this can be held to be
negligence or laches disentitling him to an injunction. He has been busily
engaged in litigation in one form or another ever since his dismissal.
On other grounds, however, we do not consider that in this case it would be
proper to issue an injunction. The learned Judge held that the position of the
company and that of Sardar Gulab Singh as Managing Director was that of master
and servant. With great respect we do not think that this is correct. A
director or a Managing Director is in no way a servant of the company: he is
the agent of the company for carrying on its business. But we agree that the
same principles which have been held to apply to the issue of an injunction at
the instance of a dismissed servant ought also to apply in the case of a
dismissed agent. It would be contrary to public policy to impose upon an
unwilling principal an agent whom he does not wish to employ, especially as
there is nothing to prevent an agent whose contract of agency has been wrongfully
broken from bringing an action for damages. Section 21 of the Specific Relief
Act enacts that certain contracts cannot be specifically enforced: e.g., if a
contract depends 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; or a contract which is in its nature
revocable or a contract the performance of which involves the performance of a
continuous duty extending over a longer period than three years from its date,
such contracts cannot be specifically enforced. It appears to us that the
contract in this case contains terms to which some of these provisions are
applicable. The company could, if a majority of the shareholders in a general meeting
properly convened, so wish, amend the articles of association though this
action might give cause for an action for damages for breach of contract. The
contract clearly extends over a longer period than three years from its date
and it also depends on the volition of the parties. It has been invariably held
that an injunction will not issue in the case of contracts which cannot be
specifically enforced, and the Courts have always held that where breach of the
contract can be adequately compensated in damages an injunction will not issue
[See also Section 54 (c) of the Specific Relief Act].
We, therefore, for the reasons given, dismiss both the plaintiff's and the defendants' appeal. Under the circumstances we make no order as to costs.
[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.
[2004] 50 SCL 254 (Ker.)
Skypark
Builders & Distributors
v.
Kerala Police Housing & Construction Corpn. Ltd.
JAWAHAR
LAL GUPTA, CJ.
AND
CYRIAC JOSEPH, J.
NOVEMBER
18, 2002
Section 36 of the Companies Act, 1956, read
with section 7 of the Arbitration and Conciliation Act, 1996 - Articles of
Association - Effect of - Appellant sought that dispute with respondent, a
Government company, regarding payment and completion of work, be referred to
arbitration as objects of respondent-company, its articles of association, and
notice inviting tenders provided for arbitration - Whether provisions under
section 36 could not be interpreted to mean that company, or its director,
shall be bound to incorporate a provision for arbitration in every agreement
that company executes - Held, yes - Whether since relevant clauses in above
documents did not mean that respondent-company was bound to refer every dispute
to an arbitrator and provisions therein were merely enabling and there was no
agreement between parties containing arbitration clause, no party could claim a
reference to an arbitrator - Held, yes
The appellant had
executed certain work for the respondent, a Government company. There was a
dispute regarding payment and completion of the work. The appellant filed a
petition before the Chief Justice praying that the matter be referred to an
arbitrator. The said application was dismissed. It was held that there was
nothing on record to show that there was an arbitration agreement between the
parties. The petition under article 226 of the Constitution was dismissed by
the Single Judge.
On appeal, the
appellant contended, inter alia, that by reading the statement of objects for
which the respondent-company was established and the articles of association
with section 36, it would be found that the dispute had to be referred to an
arbitrator. Secondly, it was submitted that in the notice inviting tenders, a
provision had been made in clause 29A for reference to arbitration.
On appeal :
Held
The respondent,
a Government company, was established primarily with the object of providing
housing and office accommodation to the personnel of the police department. For
that purpose, it had reserved to itself the right to acquire land, construct
and maintain buildings, to let them out on rent or lease, for housing employees
or for using such buildings as offices. The board had also reserved in clause
(18) the right to refer all questions, disputes or differences to arbitration.
Similarly, in the articles of association, in clause 17(viii), the board of
directors was empowered to refer any claim or demand to arbitration. However,
neither of the two clauses could be read to mean that the corporation was bound
to refer every dispute to an arbitrator. The provisions were merely enabling.
They imposed no duty. Equally, the provisions conferred no right on a
contracting party to claim a reference to an arbitrator. It was also not
provided that an arbitration clause shall be incorporated in every agreement
that the company may execute. Both the provisions were meant to enable the
corporation to enter upon arbitration if so advised and nothing more. Reliance
was also placed on section 36 which in a nutshell, provides that the articles
of association shall bind the company and its directors and nothing more. The
provisions could not be interpreted to mean that the company or its directors
shall be bound to incorporate a provision for arbitration in every agreement
that the company execute. In case an arbitration clause is incorporated in an
agreement, then the company and the board should be governed thereby. In view
of the above, the respondent-company was not bound to refer the dispute to
arbitration. [Paras 4 to 6]
As regards the
question whether there was any arbitration agreement, it was contended that in
the notice by which the tenders were invited, a provision for settlement of
disputes had been made in clauses 25 and 29A, and, therefore, a provision for
arbitration agreement should be read into the contract. In clause 25 it was
provided that in case of a dispute arising out of the contract in respect of
any matter, no court should have jurisdiction except the courts at
A perusal of
clause 29A showed that in the first part the power to withhold or retain the
amount of money due and payable to the contractor ‘arising out of or under any
other contract’ had been reserved. Thereafter, it had been provided that the
money so withheld or retained should be payable only when the dispute was
‘either mutually settled or determined by the arbitration clause or by the
competent court, as the case may be’. The only thing which emerged was that a
provision for arbitration could be made. If so made, the dispute could be
settled by reference to arbitration. However, it was clearly implicit in the
provision that unless the contract contained a clause for arbitration, no
reference shall be required to be made. Both the provisions did not imply that
an arbitration clause shall exist in every agreement or contract. A specific
provision had to be made. In the instant case, no agreement had been produced
which might have an arbitration clause. [Paras 11 and 12]
Moreover,
reliance was placed upon clause 8.1 of the notice inviting tender. It was
contended in that regard that the provisions of the Madras Detailed Standard
Specifications were applicable. The said clause was only for the purpose of
laying down specifications that a reference had been made to the Madras
Detailed Standard Specifications, etc. The obvious purpose was to ensure that
the standard specifications in respect of quantities, etc., as laid down by
different Governments, were followed. The above provision did not mean that all
provisions as contained in the Madras Detailed Standard Specifications for use
in the Public Works Department or the
As regards the
reliance placed on section 7 of the Arbitration and Conciliation Act, 1996,
even the instant contention could not be accepted. That section shows that an
arbitration agreement has to be in writing. In a case where such an agreement
is contained in the document signed by the parties, it can be inferred that
there is a written arbitration agreement. It had not been shown that the
objects of the company, the articles of association, the tender notice or the
Madras Detailed Standard Specifications had been signed by both the parties.
Thus, it could not be said that there was a written agreement for reference to
arbitration between the parties. [
In the result,
the appellant had not been able to refer to any provision in the agreement
which might have even remotely suggested that there was a provision for
reference to the arbitrator and, therefore, the appeal was to be dismissed. [
K. Babu
Thomas for the Applicant. G.S. Reghunath, Smt. Beena John and C.K.
Abdul Rahim for the Respondent.
Jawahar Lal Gupta, CJ. - The appellant executed certain work for
the Kerala Police Housing and Construction Corporation Ltd. There was a dispute
regarding payment and the completion of the work. On August 31, 2000, the
appellant filed a petition before the Chief Justice with the prayer that the
matter be referred to an arbitrator. A copy of this petition has been produced
as exhibit P-1 with the original petition. The matter was referred to the
designated judge. Vide order dated August 16, 2001, the application was
dismissed. A copy of the order passed by the hon’ble designated judge has been
produced as exhibit P-14. It was held that there is nothing on record to show
that there was an arbitration agreement between the parties. Aggrieved by the
order, the appellant filed a petition under article 226 of the Constitution. It
was dismissed by the learned Single Judge vide order dated May 31, 2002. Hence,
this appeal.
2.
Learned Counsel for the appellant has raised a twofold plea. Firstly, it has
been contended that in the statement of objects for which the
respondent-company was established, it was inter alia provided that, it shall
be competent to “refer all questions, disputes or differences (whether present
or future) arising between the company and any other person whosoever in
connection with or in respect of any matter either relating to the business or
affairs of the company or otherwise to arbitration, either in India or
abroad...”. Similarly, in the articles of association, in clause 17(viii), it
was provided that the company was competent to “refer any claim or demand by or
against the company to arbitration, and observe and perform the awards”. By
reading these two provisions along with section 36 of the Companies Act, 1956,
counsel contends that the dispute has to be referred to an arbitrator.
Secondly, counsel has submitted that in the notice inviting tenders, a
provision had been made in clause 29A for reference to arbitration. Still
further, he submits when the terms of the notice inviting tenders are read with
the document at exhibit P-5, reference to dispute to arbitration is imperative.
3. The two questions
that arise for consideration are :
(1) Whether the respondent-company was bound
to refer the dispute to arbitration?
(2) Whether there is any arbitration
agreement between the parties?
Regarding (1) :
The precise contention of Mr. Babu Thomas, learned Counsel for the
appellant is that the provisions for reference to arbitration having been made
in the objects with which the company was formed and in the articles of
association, the respondent has no choice but to refer every dispute to
arbitration. Is it so?
4.
In the present case, the respondent is a Government company. It was established
primarily with the object of providing housing and office accommodation to the
personnel of the Police Department. For this purpose, it had reserved to itself
the right to acquire land, construct and maintain buildings, to let them out on
rent or lease, for housing employees or for using such buildings as offices.
The board has also reserved in clause (18) the right to refer all questions,
disputes or differences to arbitration. Similarly, in the articles of association,
the powers of the Board of Directors were delineated in clause 17. In
sub-clause (viii), the board was empowered to refer any claim or demand to
arbitration. However, neither of the two clauses can be read to mean that the
Corporation was bound to refer every dispute to an arbitrator. The provisions
are merely enabling. Those impose no duty. Equally, the provisions confer no
right on a contracting party to claim a reference to an arbitrator. Still more,
it was also not provided that an arbitration clause shall be incorporated in
every agreement that the company may execute. Both the provisions were meant to
enable the corporations to enter upon arbitration if so advised. Nothing more.
5. Mr. Thomas
contends that in view of the provisions of section 36 of the Companies Act, the
Board of Directors has no choice but to refer every dispute to arbitration. We
are unable to accept this contention. Section 36, in a nutshell, is meant to
provide that the articles of association shall bind the company and its
directors. Nothing more. The provisions cannot be interpreted to mean that the
company or its directors shall be bound to incorporate a provision for
arbitration in every agreement that the company executes. As already observed,
the two clauses are in the nature of enabling provisions. In case an
arbitration clause is incorporated in an agreement, then the company and the
board shall be governed thereby. Nothing more.
6. Thus, the First question is
answered against the appellant.
Regarding (2) :
Mr. Thomas
submitted that in the notice by which the tenders were invited, a provision for
settlement of disputes had been made in clause 25. A further provision
regarding arbitration was made in clause 29A. Thus, a provision for arbitration
agreement should be read into the contract, a copy of which has been produced
at exhibit P-4.
7. The two provisions as contained in
clauses 25 and 29A read as under:
Clause 25 :
“Except where otherwise provided in the
contract all questions and disputes relating to the meaning of the
specifications, design, drawing and instructions hereinbefore mentioned and as
to the quality of workmanship or materials used on the work or as to any other
question, claim, right, matter of thing whatsoever in any way arising out of or
relating to the contract, designs, drawings, specifications, estimates,
instructions, orders or these conditions or otherwise concerning the works or
the execution or failure to execute the same whether arising during the
progress of the work or after the cancellation, termination, completion or
abandonment thereof shall be dealt in the legal jurisdiction of courts at
Trivandrum”.
Clause 29A :
“Any sum of money due and payable to the
contractor (including the security deposit returnable to him) under the
contract may be withheld or retained by way of lien by the
engineer-in-charge/architect against any claim of the
engineer-in-charge/architect or corporation or such other person or persons in
respect of payment of a sum of money arising out of or under any other contract
made by the contractor with the engineer-in-charge/architect or the corporation
or with such other person or persons. It is an agreed term of the contract that
the sum of money so withheld or retained under this clause by the
engineer-in-charge/architect or the corporation will be kept withheld or
retained as such by the engineer-in-charge/architect or the corporation or till
his claim arising out of the same contract or any other contract is either
mutually settled or determined by the arbitration clause or by the competent
court, as the case may be and that the contractor shall have no claim for
interest or damages whatsoever on this account or on any other ground in
respect of any sum of money withheld or retained under this clause and duly
notified as such to the contractor.”
8. A perusal of
clause 25 shows that for the purpose of settlement of disputes an omnibus
provision was made by which the jurisdiction of all courts except those at
Trivandrum was excluded. In other words, it was provided that in the case of a
dispute arising out of the contract in respect of any matter, no court shall
have jurisdiction except the courts at Trivandrum. Thus, the appellant can
derive no benefit from the provision contained in clause 25.
9. Mr. Thomas
submits that the only implication of clause 25 was that the jurisdiction of all
civil courts was ousted. In other words, the matter can be decided only by an
arbitrator. This contention is wholly misconceived. The exclusion was only of
courts outside Trivandrum. Nothing more. The contention raised by the appellant
goes against the plain language of the provision. Thus, it is rejected.
10. Mr. Thomas contends that clause 29A
specifically provided for an arbitration. Is it so?
11. A perusal of the document
shows that in clause 29 a provision for with- holding and also to have a lien
to retain any sum from a contractor has been made. In this clause, it has been,
inter alia, provided that, “a sum of money or moneys so withheld or retained
under the lien... by the engineer-in-charge/architect or corporation will be
kept withheld or retained...till the claim arising out of or under the contract
is determined by the arbitrator (if the contract is governed by the arbitration
clause) by the competent court as the case may be....”. Thus, on a perusal of
clause 29, it is clear that the corporation is competent to withhold the money
due to a contractor till the claim is finally settled by the arbitrator or by
the court. However, the clause clearly postulates that the decision of the
arbitrator shall be relevant only in a case where the contract is governed by
an arbitration clause. It is in this background that the provisions of section
29A have to be examined. The provision has already been quoted above. A perusal
thereof shows that in the first part the power to withhold or retain the amount
of money due and payable to the contractor “arising out of or under any other
contract” has been reserved. Thereafter, it has been provided that the money so
withheld or retained shall be payable only when the dispute is “either mutually
settled or determined by the arbitration clause or by the competent court, as
the case may be”.
12. On a consideration
of this clause, the only thing which emerges is that a provision for arbitration
can be made. If so made, the dispute can be settled by reference to
arbitration. However, it is clearly implicit in the provision that unless the
contract contains a clause for arbitration, no reference shall be required to
be made. Both the provisions as noticed above do not imply that an arbitration
clause shall exist in every agreement or contract. A specific provision has to
be made. In the present case, no agreement has been produced which may have an
arbitration clause.
13. Mr. Thomas contends
that clause 29A by itself incorporates an arbitration clause. We are unable to
accept this contention. A perusal of the clause does not support the
appellant’s contention.
14. Faced with this
situation, learned Counsel raised another submission. Relying upon clause 8.1
of the notice inviting tender, counsel has contended that the provisions of the
Madras Detailed Standard Specifications are applicable. A copy of the Madras
Detailed Standard Specifications has been produced as exhibit P-5. Clause 73 of
the Standard Specifications provides for arbitration. Thus, an arbitration
clause should be read into the agreement. Clause 8.1 reads as under :
“In the case of discrepancy between schedule
of quantities, the specifications and/or the drawings, the following order of
preference shall be observed :
(i) Description of schedule of quantities,
(ii) Particular specification and special
condition, if any,
(iii) Drawings,
(iv) Madras Detailed Standard Specifications,
(v) C.P.W.D. specifications,
(vi) Indian specification of B.I.S.”
A perusal of
the above shows that it is only for the purpose of laying down specifications
that a reference has been made to the Madras Detailed Standard Specifications
etc. The obvious purpose is to ensure that the Standard Specifications in
respect of quantities etc., as laid down by different Governments are followed.
We cannot read the above provision to mean that all provisions as contained in
the Madras Detailed Standard Specifications for use in the Public Works Department
or the Madras State have ipso facto been incorporated in the agreement between
the appellant and the respondent-corporation. Such a contention is wholly
untenable. The provision only lays down an order of preference about the
specifications. Nothing more.
15. Lastly, counsel
has submitted that on a cumulative reading of the above noticed provisions, it
should be inferred that there is an arbitration agreement between the parties
as contemplated under section 7 of the Arbitration and Conciliation Act, 1996.
Even this contention cannot be accepted. The plain language of section 7 shows
that an arbitration agreement has to be in writing. In a case where such an
agreement is contained in the document signed by the parties, it can be
inferred that there is a written arbitration agreement. It has not been shown
that the objects of the company, the articles of association, the tender notice
or the Madras Detailed Standard Specifications has been signed by both the
parties. Thus, it cannot be said that there is a written agreement for
reference to arbitration between the parties.
16. There is another
aspect of the matter. Mr. Raghunath, learned Counsel for the
respondent-corporation has pointed out that the State and its instrumentalities
had a bitter experience of reference of disputes to arbitrators. Even though
the dispute was referred to a Government officer, the awards were normally
against the State or its agencies. Thus, the State agencies had been instructed
not to incorporate an arbitration clause in any agreement. Thus, even the
respondent-corporation had not included an arbitration clause in the agreement
with the appellant.
17. Counsel appears to
be right. Learned Counsel for the appellant has not been able to refer to any
provision in the agreement which may even remotely suggest that there was a
provision for reference to the arbitrator.
18. No other point has been raised.
In view of the
above, we find no merit in the appeal. It is consequently dismissed. The
parties are left to bear their costs.
[1939] 9 COMP. CAS. 324
(ALL.)
HIGH
COURT OF
v.
Holyland Cinetone Ltd.
ALLSOP, J.
AUGUST 23, 1939
B. Malik, for the Applicants.
A. Sanyal, for the Opposite Party.
Allsop, J.—This is an
application by Vishwanath Prasad Jallan and Piare Lal Srivastava containing
three prayers, namely (1) that the register of the members of the Holyland
Cinetone Co., Ltd., should be rectified and that the names of the applicants
should be included in the said register, (2) that it be declared that the
applicants are still directors and members of the company and (3) that it be
declared that the action taken after January 26, 1936, is void and illegal and
does not bind the company and its shareholders. It is admitted that the first
prayer only can be granted under the provisions of Section 38 of the Indian
Companies Act. This Court cannot give the other declarations asked for and I
may say at once that the application in so far as it asks for those declarations
is hereby rejected.
There remains the question whether the names of the
applicants should be entered in the register of the members of the company. In
order to understand the dispute between the parties it is necessary to set
forth certain facts in the history of the company.
The memorandum and articles of association were subscribed
by 17 persons on November 18, 1935. The capital authorised was 25 lacs, of
which 10 lacs were to be issued. There were to be 20,000 ordinary shares of Rs.
100 each and 5,000 preferential shares of the same value. It was set forth that
the qualification of a director was that he must have subscribed for 100 shares
and that he must have paid all calls or any other moneys due to the company.
Twelve of the signatories of the memorandum and articles of association
undertook to purchase 100 shares each and they were to be the first directors
of the company. Their names
were Madhoramsand, Gurucharan Prasad Khattri, Harnarain Moolchand, Gopal Lal
Khanna, Durga Prasad, Bindbasni Prasad, Madangopal Kedia, Vishwanath Prasad
Jalan, Vishnushankar, Kedarnath Singh, Thakur Chhedi Singh and Piare Lal
Srivastava. It is to be noticed that the applicants are included in the list.
Each of the directors undertook in the memorandum to subscribe for 100 shares
and no more. Of the other five signatories three undertook to purchase 5 shares
each and the other two to purchase one share each. A meeting of the directors
was held on December 14, 1935 and four managing directors were elected, namely,
Madhoramsand, Gurucharan Prasad Khattri, Bindbasni Prasad and Madangopal Kedia
Doubtless the directors purported to act under Art. 115 of the articles of
association, but this article sets forth that the directors shall elect from
amongst themselves five directors constituting the board of managing directors
of the company. It is to be noticed that only four were elected. The managing
directors under the articles of association have been given very large powers.
A meeting of this board of managing directors was held on December 26, 1935,
and it was decided at the meeting that the subscribers to the memorandum who
were directors should be asked to pay Rs. 2,000 to the company. This resolution
was based on Article 7 of the articles of association which says that the amount
payable on application for each share offered to the public for subscription
shall be 20 per cent. of the nominal amount of the share and another 20 per
cent. shall be payable on the allotment of the share. The managing directors
were asking the directors to pay on their shares the percentage corresponding
with that which any member of the public would have to pay on application for
shares. Rs. 2,000 being 20 per cent. of Rs. 10,000, the price of the shares
which each of the directors had contracted to purchase. On January 17,1936, the
secretary of the company who happened at that time to be the applicant, Piare
Lal Srivastava, wrote a letter to all the directors drawing their attention to
the provisions of Section 85 of the Indian Companies Act and indicating that
they would cease to be directors if they did not pay the sum of Rs. 2,000 each
on or before January 26, 1936. Section 85 of the Indian Companies Act lays down
that it shall be the duty of every director, who is by the articles required to
hold a specified share qualification and who is not already qualified, to
obtain his qualification within 2 months after
his appointment, or such shorter time as may be fixed by the articles. The 26th
of January, 1936 was the end of the period of 2 months next after November 25,
1935, the date of registration. Madhoramsand, Gurucharan Prasad Khattri, Durga
Prasad and Madangopal Kedia, each paid a sum of Rs. 2,000 on January 25, 1936.
On January 26, 1936 there was a meeting at which the resignation of Moolchand
was accepted and Thakur Chhedi Singh was elected to the board of managing
directors, although he had not paid his sum of Rs. 2,000. Moti Chand was
elected to the board either under Article 89 of the articles of association
which gives the directors power to co-opt a qualified share-holder as a
director or under Article 90 which empowers the directors to elect any
shareholder as an honorary director to the board it not being necessary for
such director to hold a qualification share. Moti Chand had not paid anything
at that time to the company and he was not one of the signatories of the
memorandum and articles of association. Then on March 4, 1936, there was
another meeting of the directors at which those present were Madhoramsand,
Durga Prasad and Madangopal Kedia. No notice of this meeting was sent to those
directors who had not paid the sum of Rs. 2.000. Presumably those who had paid
had decided that the other directors could no longer act. It was originally set
forth in the articles of association that the number of directors should not be
less than 11 nor more than 21, but at this meeting the directors resolved that
the minimum number should be reduced from 11 to 5 and that an extraordinary
general meeting of shareholders should be held as soon as possible. The
articles required that there should be a quorum of five directors until it was
otherwise determined, but that article gave the directors power to regulate
their meetings and proceedings as they thought fit and to determine the quorum
necessary for the transaction of business. A meeting of the directors was held
again on March 5, 1936, but nobody appeared and the meeting was therefore
adjourned by the general manager to the next day, March 6. On that date the
directors present were Madhoramsand, Durga Prasad and Madangopal Kedia and they
decided that the quorum should be reduced to three. A meeting of shareholders
was called for March 23, 1936, but it was adjourned for want of a quorum, the
article requiring that it was necessary for 15 members personally to be present
to form a quorum at a general meeting. The meeting was adjourned to March 30, 1936, when it was
attended by Madhoramsand, Durga Prasad and S.N. Mitra. This meeting proceeded
to transact business under the provisions of Article 68 of the articles of
association which allows an adjourned meeting to transact business even if a
quorum has not been formed. This meeting reduced the minimum number of
directors to four. On April 11, 1936, there was again a meeting of directors at
which Madhoramsand, Durga Prased, Madangopal Kedia and Gurucharan Prasad were
present. They confirmed the resolution of March 6, 1936. They accepted the
resignation of Moti Chand who had been elected on January 26, and decided that
legal action should be taken against those directors who had not paid the sum
of Rs. 2,000 which they had been required to pay. On April 14, 1936, a meeting
of the shareholders took place, but it was adjourned to April 21, 1936 for want
of a quorum and on April 21 the resolution of March 23, 1936 was confirmed. The
next meeting of the directors was held on November 17, 1936. Those present were
Gurucharan Prasad, Madhoramsand, Madangopal Kedia and Durga Prasad. They
elected Shyam Sunder Lal, Jagannath Prasad and S.N. Mitra to be honorary
directors. Article 90 of the articles of association states that the number of
honorary directors shall in no case exceed three. At the same meeting
Madangopal Kedia's resignation was accepted and it was decided that the
directors should pay another sum of Rs. 2,000, this being the equivalent of the
sum which would be payable by members of the public on 100 shares at the time
of allotment. On the same date Durga Prasad resigned his position as managing
director and Jagannath Prasad and S.N. Mitra were appointed to the board of
managing directors. The next date with which we are concerned is December 13,
1936. By that time apparently an application had been made to the Registrar,
Joint Stock Companies that the company should be allowed to commence business
and a certificate of commencement had been received from the Registrar. On that
date the directors present were Gurucharan Prasad, S. N. Mitra, Jagannath
Prasad, Shyam Sunder Lal and Durga Prasad. They saw the commencement
certificate and decided that they would approach the defaulting directors
individually in order to obtain payment. On December 28 at another meeting it
was decided that further attempts should be made to obtain payment of this
money. These efforts succeeded to some extent because Harnarain Mulchand paid
Rs. 2,000 on January 18, 1937. Madhoramsand and Gurucharan Prasad had paid a further sum of Rs. 2,000 each on April 18, 1936 and Durga
Prasad paid a sum of Rs. 2,000 on November 17, 1936. On December 29 there was a
meeting at which Gurucharan Prasad, Shyam Sunder Lal and S.N. Mitra were
present. They passed a resolution that a notice should issue formally to all
the defaulting directors to make payment of the sums due from them. They warned
the directors that their shares would be forfeited if they did not pay the sums
due on or before January 15, 1937. Then there was a meeting on January 19, 1937
at which Jagannath Prasad, Gurucharan Prasad, Shyam Sunder Lal and Durga Prasad
were present and this meeting passed a resolution forfeiting the shares. The applicants
did nothing about this matter at the time but the company then sued them for a
sum of Rs. 4,000 each and it appears that a decree has been passed against one
of them while the suit of the other is pending. The decree which has been
passed is now in appeal.
It is explained on behalf of the applicants that they did
not really wish to have anything to do with the company and that they would be
quite content to give up their shares if they were not required to pay Rs.
4,000; but now they are in a position that they may be required, if the decree
is upheld to pay a sum of Rs. 4,000 each and at the same time to lose their
shares in the company and they feel therefore that they are entitled to stand
upon their strict rights to demand, if the resolution of forfeiture is invalid,
that their names should be restored to the register of the members of the
company.
The argument put forward in the first instance on behalf of
the company was that the signatories to the memorandum became members of the
company and were allotted shares automatically on the date when the company was
registered and consequently on that date they were bound to pay a sum of 20 per
cent. of the value of their shares as they would have had to do if they had
applied for shares on that date and a further 20 per cent. as they would have
to do if shares had been allotted to them on that date as members of the
public. At a later stage in the arguments the company had to abandon this
position because if it was the proper position, then a sum of Rs. 4,000 was due
from each of the original directors on November 25, 1935, and no director was
qualified to act under the articles of association unless he had paid the sum
of Rs. 4,000 on or before January 26, 1936. If this is the true position, then
none of the directors who continued to act on behalf of the company was entitled to do so
because none of them had paid Rs. 4,000 on or before January 26, 1936 and those
who had acted would render themselves liable to a penalty of Rs. 50 a day under
Section 85, Sub-section (2) of the Indian Companies Act provided that the
argument of the company was correct that sub-section (1) of Section 85 applied
not only to the purchase of shares but also to the payment for those shares as
part of the qualification for directorship under the articles of association.
The directors who now purport to represent the company were on the horns of a
dilemma. If this original argument of theirs was correct, they were liable at
least to a severe penalty and if it was not correct, then they were certainly
not entitled to forfeit the shares of the other directors merely because
payments were not made on or before January 26, 1936.
The company therefore fell back
upon the argument that these sums of 20 per cent. corresponding with application
money and 20 per cent, corresponding with allotment money were payable from the
dates on which they were respectively demanded by the company. Learned counsel
for the company relied on Section 21(2) of the Indian Companies Act which says
that any money payable by any member to the company under the memorandum or
articles of association shall be a debt due from him to the company. He
maintains that this money which he considers to be due from the directors was a
debt payable on demand. On the other side, it is argued on behalf of the
applicants that there is nothing in the memorandum or articles of association
which requires them to pay any sums corresponding with those which would be
payable by members of the public subscribing for shares at the time of
application or at the time of allotment. It is undoubtedly true that there is
no such specific provision either in the articles of association or in the
memorandum. It seems to me that Section 21 (2) of the Indian Companies Act does
not help the company in this case. It is no doubt true that money becomes a
debt when it is due under the articles of association and memorandum, but I
think that money does not become due merely because signatories of the articles
of association or the memorandum have undertaken to purchase shares and pay for
them. Subscribers who are members of the public also promise to take up and pay
for shares, but the amounts due from them at any time are only such part of the
price of the shares as they are required to pay at a particular time, that is, the part they are required to pay to application, the
part they are required to pay on allotment and the part that they may be
required to pay if the calls are made upon them in accordance with the
provisions of the articles of association. From the model articles set forth in
table A of the 1st Schedule of the Companies Act it will appear that a
distinction is made between money which is due and money which is presently due
and in my judgment it is only money which is presently due which can be
described as a debt. A question of this nature arose in the case of Alexander
v. The Automatic Telephone Co., where some directors of a company sought to
compel others to pay on their shares in the same proportion as had been paid by
shareholders who were members of the public. The case was decided under an
English Act in which there were provisions similar to those in Section 21 of
the Indian Companies Act and it was held that the directors were not legally
bound to make the payments, but that the Court of Chancery would compel them to
pay upon the ground that they had been acting in contravention of the trust
which had been reposed in them as directors of the company. The Indian
Companies Act seeks to deal with a situation of this kind by the provisions of
Section 103 which do not allow a company to commence business until every
director has paid to the company on each of the shares taken or contracted to
be taken by him and for which he is liable to pay in cash a proportion equal to
the proportion payable on application and allotment on the shares offered for
public subscription. In the case before me the directors who had signed the
memorandum of association were bound to pay a sum of Rs. 4,000 each before the
company was entitled to commence business. From this it does not necessarily
follow that they were liable to forfeiture of their shares if they did not make
the payment. As I have already said, there is no term in the articles of
association or memorandum by which the signatories contract to pay any sum on
any particular date or any particular time or on demand or otherwise except in
so far as the articles allow the company to make calls on its members. The
provision for calls was originally that the directors might from time to time
make such calls as they thought fit upon the members in respect of all moneys
unpaid on the shares held by them respectively and not by the condition of
allotment thereof made payable at fixed times, and each member should pay the
amount of every call so made on him to the persons and at the times and places
appointed by the directors. There is no resolution of the board of directors
requiring any members to make payments. There is only a resolution of the
so-called board of managing directors, but as I have already pointed out the
articles of association required that the board of managing directors should
consist of five directors and four directors only were appointed. It seems to
me, therefore, that these four directors were not entitled to exercise the
functions of the board of managing directors and the resolution passed by them
requiring the other directors to pay these sums of Rs. 2,000 was not valid. The
directors might have treated the so-called managing directors as a committee
which could make a recommendation to them and, if the board of directors as
such had passed a resolution that the recommendation of the managing directors
that money should be demanded should be accepted, then possibly the directors
would have had to pay these sums and if they had not paid them, they would have
been sums presently due. In the circumstances of this case, however, I hold
that these sums of Rs. 2,000 were never presently due and consequently that the
directors were not bound to make payments.
It has been urged on behalf of the company that the result
is unfortunate because some directors have prevented the company from
functioning properly. I do not think that any unfortunate result need have
arisen if the proper procedure had been adopted. If the majority of the
directors were unwilling to pay the sums which they should have paid under
Section 103 of the Indian Companies Act, then the company would not have been
able to commence business and if it did not commence business within a certain
period, then it could have been wound up on the application of any member. Once
it was wound up, all the sums due on the shares would have been available to
the company and any necessary expenses incurred for promoting and registering
the company could have been paid out and the whole matter would have come to an
end. The company may say that it should not have been at the mercy of some of
its directors, but on the other hand, those directors are equally entitled to
say that they should not have been at the mercy of the minority of their body.
If the majority were unwilling to proceed with the matter and by their conduct
automatically caused the winding up of the company, they were perfectly
entitled to do so.
I hold that these sums of Rs. 2,000 were never presently
due from the applicants and, therefore, that their shares were not liable to
forfeiture. I may add that there are provisions for forfeiture in the articles
of association and it is at least doubtful whether all the provisions were
observed so as to lead to forfeiture even if it could be said that there was a
call upon the applicants, but I do not think that it is necessary to go into
the details of that matter because I have already held that there was no proper
call and for that reason no money was due to be paid at any particular time by
the applicants.
On the other hand, it seems to me that it is discretionary
in the court to pass an order for the rectification of the register of members
and the fact remains that the Registrar of Joint Stock Companies has issued a
certificate enabling the company to commence business which he would not have
done if he had known that the present applicants as directors should have paid
a sum of Rs. 4,000 each before the date when he issued his certificate. In
these circumstances I do not think that I should exercise my discretion in
favour of the applicants unless they make the payment which they should have
made to enable the company to commence business. Learned counsel on behalf of
the applicants has suggested that his clients, if they pay Rs. 4,000, may find
themselves in a very difficult position. He contends that all the proceedings
of the company through the remaining directors after January 26, 1936, were
absolutely void and there may be many complications. I do not think that any
possible complications should prevent me from passing a conditional order in
favour of the applicants because what I propose to do is to impose the
condition that the applicants shall pay these sums of money within a certain
time and that their application shall be rejected if they do not pay the money.
The money will be deposited in court and what eventually happens to it may be
left to subsequent decision. It may be that it will be utilised towards the
payment of any decrees which may be ultimately passed in favour of the company
or it may be that it will be paid to the company when all disputes are set at
rest or finally it may eventually be returned to the applicants.
I direct that the register of members of the company shall
be rectified by the entry of the names of the applicants or either of them on
condition that each of the applicants or either of them deposits a sum of Rs.
4,000 in this Court on or before November 24, 1939. If either applicant fails
to make the deposit within that time, his application shall be rejected. I do
not pass any order for the payment of costs because both parties seem to be in
some measure to blame for the state of affairs which has arisen.
Section 41
DEFINITION
OF ‘MEMBER’
[1989] 66 COMP. CAS. 654
(KAR.)
HIGH COURT OF KARNATAKA
Shri Balaji Textile Mills Pvt.
Ltd.
v.
Ashok Kavle
P.P. BOPANNA AND M. RAMAKRISHNA JJ.
MARCH 2, 3, 1988
K.G. Raghavan and
R.D. Kolekar for the Appellant.
Jayaram and Jayaram, S.B.
Chandrasekhar, Uday Holla and R.D. Kolekar for the Respondent.
Bopanna J—This appeal arises against the order of the learned
company judge in Company Petition No. 8 of 1982, on a preliminary objection
raised by the appellants based on the provisions of section 41 of the Companies
Act, 1956 (for short "the Act"). The parties are referred to in this
appeal by the position assigned to them in the company petition.
The petitioners who are
shareholders of respondent No. 1-company had filed a petition under the provisions
of sections 397 and 398 of the Act against respondent No. 1, the company and
respondent No. 2, the ex-director of the first respondent-company. The
Registrar of Companies and also the chartered accountants, Messrs M.R. Narayan
and Company, were arrayed as respondents Nos. 3 and 4 in view of certain
allegations made against them by the petitioners. It is not necessary to go
into the various acts of oppression and mismanagement alleged by the
petitioners in the company petition since they are not the subject-matter for
consideration in this appeal.
In the statement of
objections filed by the respondents, a plea was taken that the petition is not
maintainable in view of the fact that the membership of the petitioners in the
first respondent-company is not in accordance with the requirements of section
41 of the Act. It should be noticed at this stage that, in the statement of
objections filed by respondents Nos. 1 and 2, they have stated amongst other
things :
"The respondents
herein dispute and deny that the petitioners or any of them is/are
members/shareholders of respondent No. 1 and therefore, the answering
respondents are advised that all valid and available defences open to them in
regard to the challenge to the petitioners as members/shareholders of
respondent No. 1 need not be placed in extenso in these proceedings but they
reserve their right to plead by way of defence in any other appropriate
proceedings that may be initiated for rectification in the register of
registered members under the Companies Act or by way of suit in an appropriate
court of law"
But, no specific defence
was taken in the statement of objections repudiating the rights of the
petitioners who claim to be shareholders of the first respondent-company on the
ground that their membership was violative of the requirement of section 41(2)
of the Act. However, on the preliminary objections raised by respondents Nos. 1
to 3, the learned company judge framed the following two issues for
consideration:
"(1) Whether
the petitioners in Company Petition No. 8 of 1982 are members of the first
respondent-company ? If they are members, whether they constitute minority
shareholders ?
(2) Alternatively,
whether respondents Nos. 2 and 3 and their associates hold shares in excess of
two shares and if so to what extent ?"
The
learned judge answered the first part of the first issue in favour of the
petitioners and hence this appeal by the contesting respondents, namely,
respondents Nos. 1 and 2. The learned judge recorded the evidence of the petitioners
on the first issue. Petitioner No. 1 examined himself and through him as many
as 24 documents were marked. In addition to this witness, some other witnesses
were examined including respondent No. 4, the chartered accountant. Respondents
Nos. 1 to 3 did not examine any witnesses but entirely relied on the
interpretation of section 41 of the Act.
Section
41 of the Act, though not specifically pleaded as a defence to the case of the
petitioners, was brought into play by respondents Nos. 1 to 3 in the light of
certain answers given by PW-1 in the course of his cross-examination. In answer
to one of the questions put in the cross-examination of PW-1, he has stated as
follows:
"I
did not make an application for allotment of shares. There was no agreement in
writing for allotment of shares. M/s. Joth Textiles and Ashok Textiles..."
Further,
in his re-examination (at page 20 of the paper book), he has stated thus:
"I
have stated earlier that I did not make an application for allotment of shares.
By that I only meant that I did not file any printed application form. With the
permission of the court, the following question was put:
Question.—On
what basis were the shares allotted to the members of your family in Balaji
Textiles and in regard to which proportion ?
Answer.—It
had been allotted in proportion to the profit and loss account of Ashok
Textiles."
On
this evidence of P.W.-1 in the company petition, an argument was constructed by
learned counsel for the contesting respondents that the petition was not maintainable
on the ground that the requirement of section 41(2) of the Act was not complied
with by the petitioners before they obtained shares in their names and,
therefore, the company petition was not maintainable. This plea was rejected by
the learned company judge and hence this appeal.
The
learned company judge observed in the course of his order that this point is
not covered by any precedent, in that no decision of the Supreme Court or any
other High Court on this point is found.
But, after consideration of
the language of section 41(2) of the Act, he came to the conclusion that:
"Public interest would
greatly suffer and share transfers particularly in public companies become very
difficult if the first part of sub-section (1) of section 41 of the Act should
be held to be a condition precedent. In any event, nothing in the language of
sub-section (2) is suggestive that consent in writing cannot be given after the
allotment of shares. In the instant case, apart from the pleadings, there are
the balance-sheets for the relevant years and the returns filed under the
signatures of the 1st petitioner which do constitute consent in writing."
He further observed:
"Equally commendable
is the view that any form of writing from which it is possible to infer that a
member has consented to be a member should be sufficient compliance with the
requirement of the said sub-section."
This finding of the learned
judge was based on some of the documents produced by the petitioners whose
authenticity was not impeached by the learned judge. They are the
balance-sheets for the periods commencing from August 31, 1979 and August 31,
1980—exhibits P-5 and P-6, exhibit P-70—the minutes of the annual general
meeting, exhibits P-23 and P-26 which are the share scrips signed by one of the
petitioners and the annual returns filed by respondent No. 2, exhibits P-13 to
P-16. So, on the basis of these documents, the learned judge came to the
conclusion that the petitioners had given their consent to become members
though the consent which is a condition precedent under section 41(2) came into
existence only after the allotment of shares.
On these findings of the
learned judge, the short point for consideration in this appeal is :
"Whether compliance
with section 41(2) of the Act is necessary to establish that a person is a
shareholder of a company ?
Whether a person who has
been admittedly treated as a member of the company could be precluded from
invoking the jurisdiction of the company court under sections 397 and 398 of
the Act ?"
It should be noticed at
this stage that though on the application made by the petitioners, the learned
judge has made an order directing respondent No. 1 to produce the register of
members, that book was not produced by respondent No. 1. Whether an adverse
inference should be drawn against respondents Nos. 1 to 3 for the
non-production of the register of members is also another matter for
consideration in this appeal.
Mr. Raghavan, learned
counsel for respondents Nos. 1 and 2, submitted that on the plain language of
section 41(2) of the Act, the construction put by the learned judge on that
sub-section is not correct and, therefore, the finding of the learned judge
that the company petition was maintainable requires to be considered in this
appeal. He read certain passages from the English law on the Companies Act to
drive home the point that unless the condition precedent as stipulated under
sub-section (2) of section 41 of the Act is satisfied, there could not be any
valid membership of the company. But, in this case, P.W. 1 having admitted that
he had not made any application in writing before he became a member of the
company, has not satisfied the condition precedent and, therefore, his petition
under sections 397 and 398 is not maintainable. Whatever may be said about P.W.
1 in the light of his deposition in cross-examination, the same cannot be
stated with regard to the 2nd petitioner and petitioners Nos. 3 and 4.
Petitioner No. 2 holds 1,500 shares, the 3rd petitioner holds 750 shares and
the 4th petitioner holds 750 shares. Nothing is suggested either in the
statement of objections or in the cross-examination of P.W. 1 that petitioners
Nos. 2 to 4 had obtained shares allotted to them without complying with the
first requirement of sub-section (2) of section 41 of the Act. Therefore, the
petition, in so far as it relates to petitioners Nos. 2 to 4 is maintainable
without going into the question whether they have complied with the requirement
of section 41(2) of the Act. However, the learned judge having given a finding
against the contesting respondents on the requirement of section 41(2) of the
Act, that finding may operate against respondents Nos. 1 to 3 if the matter
were to go for trial on the merits on the case. Therefore, we have to deal with
this appeal on merits.
We will first consider the
provisions of section 41 of the Act which read as follows:
"41.
(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."
The setting of this section
should be noticed. This section comes under Part II and Part II deals with the
incorporation of a company and matters incidental thereto though the marginal
note to section 41 reads:
"Definition of
'member'."
In our view, that by itself
does not throw any light on the scope of section 41 of the Act. The word
"member" is also defined under sub-section (27) of section 2 of the
Act. Sub-section (27) of section 2 of the Act reads 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."
The difference in the
language of section 2(27) of the Act which comes under the definition clause in
the Act and section 41 dealing with the membership of the company should be
noticed. In section 2(27), the word "member" is defined in a very
comprehensive manner and in relation to a company includes every type of member
but excludes a bearer of a share-warrant of a company issued under section 114
of the Act. But, in section 41 of the Act, under the heading "membership
of company", what is provided is that, in the case of subscribers to the
company, they should be deemed to have been members of the company and their
names shall be entered in the register of members. Under section 41(2) of the
Act, every other person who agrees in writing to become a member of the company
and whose name is entered in the register of members shall be a member of the
company. So, the first part of section 41 deals with deemed membership and the
second part of it deals with persons other than subscribers to the memorandum
of the company.
Now, the point for
consideration is whether this definition of "member" in section 41(2)
of the Act would, in any manner, control the meaning of the word
"member" in the other provisions of the Act which confer on these
members certain substantive rights as shareholders of the company, e.g.,
sections 397 and 398 of the Act under which this petition is filed. Chapter VI
of the Act provides for prevention of oppression and mismanagement of the
minority shareholders of a company. Under section 397 of the Act, the minority
shareholders can approach this court for relief against acts of oppression.
Under section 398 of the Act, they can approach this court for reliefs against
acts of mismanagement. The right to apply under sections 397 and 398 is
controlled by section 399 of the Act. So, for the purpose of considering
whether an application under sections 397 and 398 of the Act is maintainable, the line of enquiry
should be as to whether the persons who claim relief under sections 397 and 398
of the Act come within the scope of the provisions of section 399 of the Act.
Section 399 of the Act reads a3 under:
"(1) The following members of a company shall
have the right to apply under section 397 or 398:
(a) in the case of a company having a share
capital, not less than one hundred members of the company or not less than one-
tenth of the total number of its members, whichever is less, or any member or
members holding not less than one-tenth of the issued share capital of the
company, provided that the applicant or applicants have paid all calls and
other sums due on their shares;
(b) in the case of a company not having a
share capital, not less than one-fifth of the total number of its members.
(2) For the purposes 6f sub-section (1),
where any share or shares are held by two or more persons jointly, they shall
be counted only as one member.
(3) Where any members of a company are
entitled to make an application in virtue of sub-section (1), any one or more
of them having obtained the consent in writing of the rest, may make the
application on behalf and for the benefit of all of them."
A
combined reading of sections 397, 398 and 399 of the Act makes it clear that
the meaning of the word "member" of a company should be understood in
the context in which it is used and that meaning cannot be tagged on to the
membership clause in section 41(2) of the Act. The clause which is applicable
to test whether a member satisfies the requirement of sections 397 and 398 of
the Act would be section 2(27) of the Act and not the provisions of section
41(2) of the Act. The language of section 41(2) of the Act as it existed prior
to the amendment would throw some light on the scope of this provision. Before
section 41(2) was amended, the language of that sub-section was "every
other person who agrees to become a member of the company..." But, after
the amendment, the words "in writing" were incorporated. Why these
words were introduced in the Amendment Act of 1960 is found in the report of
the Companies Act Amendment Committee which reads thus:
"It
has been brought to our notice that in some cases, on the verge of liquidation,
entries are made in the register of members of the names of persons who never
applied for shares, in order to fasten liability on these persons as
contributories. To avoid this contingency, we
suggest the addition of the words 'in writing' after the word 'agrees' in
section 41(2)."(para 38 of the report)
So, this amendment was
designed to protect the interests of persons who would have been otherwise
fastened with liabilities as contributories, even in the absence of any request
for allotment of shares to them. Perhaps there had been innumerable cases where
such liabilities have been passed on even in the absence of a request for
allotment. To avoid such a contingency, the committee made a recommendation
that in case of any dispute about allotment, that dispute could be
satisfactorily resolved by insisting on an application in writing for allotment
of shares. So, this amendment has a limited scope and has to be interpreted by
applying the rule of mischief as understood in the law relating to the
interpretation of statutes.
What is the effect of
section 41(2) of the Act on shareholders whose names are found in the register
of members, who have been allotted shares, who have participated in the annual
general meeting of shareholders and who have also been issued share scrips by
the company pursuant to a valid resolution ? Whether such allotments made to
the shareholders are void or voidable, all because they have not applied in
writing for allotment of shares as provided under section 41(2) of the Act?
Mr. Raghavan, for the
contesting respondents, submits that the language of section 41(2) is plain and
does not admit of any doubt and, therefore, the condition precedent for
becoming a member of a company is that he should make an application, in
writing, and if that condition precedent is not satisfied, subsequent
ratification or issue of share scrips in his favour or the entering of his name
in the register of members would not validate bis membership and if that view
is taken, petitioner No. 1 would not be a member of the company who would be
entitled to make an application under sections 397 and 398 of the Act. The
scheme of the Act does not support his contention and that is clear from the
other sections in the Act in so far as they are necessary for the purpose of
this appeal, namely, sections ISO and 164 of the Act. Section ISO of the Act
enjoins every company to keep in one or more books a register of members
entering therein the particulars regarding the name and address of each member,
the shares held by each member distinguishing each share by its number and the
amount paid or agreed to be considered as paid on those shares, the date at
which each person was entered in the register as a member and the date at which
any person ceased to be a member. The proviso to the section is not necessary
for the purpose of this case. If default is made in complying with sub-section
(1) of section 150 of the Act, under sub-section (2), the company and every
officer of the company who is in default shall be punishable with fine which
may extend to fifty rupees for every day during which the default continues.
Section 150 of the Act is a statutory requirement which enjoins every company
to maintain a register of members and in default the company and every officer
of the company who is in default would be punishable under section 150(2) of
the Act. In this case, admittedly, the register of members was maintained by
the company but the same was not produced by the company before the court in
spite of the order of the court. It is not the case of the contesting
respondents that in the register of members, the names of the petitioners are
not found. So, by their own conduct, they have treated the petitioners as
shareholders of the company. Under section 164 of the Act, the register of
members, the register of debenture-holders, and the annual returns,
certificates and statements referred to in sections 159, 160 and 161 shall be
prima facie evidence of any matters directed or authorised to be inserted
therein by the Act. As noticed earlier, exhibits P-13 to P-16, P-23, P-26, P-17
and P-5 were all documents maintained by the company under the various
provisions of the Act. They contain the names of the petitioners in one way or
the other as members of the company and, therefore, the entry of their names as
shareholders shall be prima facie evidence of their membership of the company.
One more document which requires to be noticed is the report of the Registrar
of Companies, exhibit P-71. This report of the Assistant Registrar of Companies
indicates that petitioners Nos. 1 and 2 were directors of respondent No. 1
company at the relevant time and this report was made under section 209A of the
Act. In the face of these provisions and the other provisions of the Act in
regard to the membership of petitioner No. 1 in respondent No. 1 company, could
it be said that merely because petitioner No. 1 had not complied with the
requirement of section 41(2) of the Act, his membership should be treated as
null and void and, therefore, the petition is not maintainable ?
In our view, the line of enquiry
in a matter like this is to find out as to what extent section 41(2) of the Act
controls the other provisions of the Act in respect of rights of members under
the Act, and is there any indication in section 41(2) of the Act to take the
view that unless the first part of section 41(2) is complied with, a member
does not get any right at all under any of the provisions of the Act to enforce
his rights as a member of the company.
We have already excerpted
section 41(2) of the Act. The head-note to sections 41 and 42 reads
"membership of the company". But the marginal note to section 41(2)
reads "definition of member". Mr. Raghavan has placed reliance on
this marginal note to drive home the point that unless petitioner No. 1 satisfied
the requirement of section 41(2) of the Act, he cannot be treated as a member
of the company and consequently he cannot file a petition under sections 397
and 398 of the Act. Now, the scope of a marginal note to a section for the
purpose of interpreting the section is well-settled. In Maxwell on the Interpretation of Statutes,
12th Edition, by P. St. J. Langan at page 9:
"The notes often found
printed at the side of sections in an Act, which purport to summarise the
effect of the sections, have sometimes been used as an aid to construction. But
the weight of the authorities is to the effect that they are not part of the
statute and so should not be considered, for they are inserted not by
Parliament nor under the authority of Parliament, but by irresponsible
persons"
Lord Reid, while commenting
on similar marginal notes in Chandler v. Director of Public Prosecutions [1964] AC 763, where
the side note ("penalties for
spying") to section 1 of the Official Secrets Act, 1911, which came up for
consideration, observed at p. 789:
"In my view, side
notes cannot be used as an aid to construction. They are mere catchwords and I
have never heard of it being supposed in recent times that an amendment to
alter a side note could be proposed in either House of Parliament. Side notes
in the original Bill are inserted by the draftsman. During the passage of the
Bill through its various stages, amendments to it or other reasons may make it
desirable to alter a side-note. In that event, I have reason to believe that
alteration is made by the appropriate officer of the House—no doubt in
consultation with the draftsman. So, side notes cannot be said to be enacted in
the same sense as the long title or any part of the body of the Act."
Sometimes, a marginal note
will in any case be inaccurate, and it will then be "on its own merits and
of no assistance whatever"
Likewise, the headings
prefixed to sections or sets of sections in some modern statutes are regarded
as preambles to those sections. They cannot control the plain words of the
statute, but they may explain ambiguous words, a rule which, whatever the
assistance which it may render in construction, cannot stand logically with the
exclusion of marginal notes, for headings like marginal notes are, as Avory J.,
pointed out in R v. Hare [1934] 1 KB 354, "not voted on or passed by
Parliament, but are inserted after the Bill has become law"
If this canon of
interpretation is kept in view, in our opinion, the maginal note to section
41(1), viz., definition of "member", does not bring out the true
scope of section 41(2) of the Act. It appears to us that the marginal note does
not in any way control the true scope and effect of section 41(2). The
Legislature obviously would not have created a conflict in the meaning of the
word "member" by denning it in one way under section 41(2) and in
another way under section 2(27). Therefore, neither the marginal note to
section 41 nor the head note to section 41 has any implication or bearing on
the interpretation of the word "member". Viewed from this angle, it
is clear that the word "member" under sections 397 and 398 of the Act
will have to be construed in the light of section 2(27) of the Act and the
other various provisions of the Act which deal with the rights of members and
not with reference to section 41(2) of the Act, and, therefore, it is
unnecessary to consider whether petitioner No. 1 has complied with the
condition precedent for becoming a member. We have noticed earlier the rule of
mischief which was in the mind of the Legislature when section 41(2) was amended.
To quote Maxwell again—
"(1st) What was the
common law before the making of the Act. (2nd) What was the mischief or defect
for which the common law did not provide. (3rd) What remedy Parliament hath
resolved and appointed to cure the disease of the commonwealth. And (4th) The
true reason of the remedy; and then the office of all the judges is always to
make such construction as shall suppress the mischief, and advance the remedy,
and to suppress subtle inventions and evasions for continuance of the mischief,
and pro privato commodo, and to add force and life to the cure and remedy,
according to the true intent of the makers of the Act, pro bono publico".
So, the limited purpose of
amending section 41(2) of the Act by the incorporation of the words "in writing"
was to protect innocent persons from the demands of companies on the verge of
going into liquidation. Beside, none of the commentaries which were read out by
learned counsel for the contesting respondents excepting the Commentary on the
Companies Act by M.S. Ramaiah support the contention of learned counsel. In
Palmer's Company Law, Volume I, 23rd Edition, at page 683, the learned author
has observed as follows:
"In the case of
members other than the subscribers to the memorandum, two essential conditions
have to be satisfied to constitute a person a member :
(1) an agreement to become a member; and
(2) entry on the register.
These two conditions are
cumulative: unless they are both satisfied, the person in question has not
acquired the status of member.
Thus, an agreement to
become a member alone does not create the status of membership; it is a
condition precedent to the acquisition of such status that the shareholder's
name should be entered on the register. Conversely, the company is not entitled
to place a person's name on the register without his having agreed to become a
member; a person improperly registered without his assent is not bound thereby
and may have his name removed from the register.
The agreement to take
shares in the case of allotment and of transfer.
A
person desirous of acquiring shares may express his agreement to do so in one
of two forms. He may apply to the company for shares and may have them allotted
to him, or he may have the shares transferred to him in pursuance of a contract
of sale or other transaction. There is no difference, as Chilly /. said in
Nicol's case [1885] 29 Ch.D. 421, between a contract to take shares and any
other contract. A formal contract is not necessary. If, in substance, an
agreement is made, the form is not material."
(underlined
by us)
If this commentary is read
as a whole, the emphasis is that there should be consent of the member before
he is registered as a member. The underlying purpose of section 41(2) is that a
person must give his consent in unequivocal terms by applying in writing for
allotment of shares. But it does not mean that the company cannot allot the
shares even when a person has not complied with the requirement of section
41(2) of the Act. That apart, what is the effect of an allotment made in
violation of section 41(2) is considered in the other commentaries on the
English Companies Act. In Gore-Browne on Companies, 43rd Edition, it is said :
"But it is not absolutely necessary to have a printed form, as a letter
applying for shares, or even a verbal application, is sufficient. In para. 9-2
in the same book, it is said: "The usual practice in the case of
allotments of shares by private companies is to dispense with the letter of
allotment and, on allotment, to proceed at once to the issue of a share
certificate and entry of the allottee's name in the register of members".
This observation goes to show that even compliance with section 41(2) of the Act
would not be a mandatory requirement but only directory. It could be further
seen in para. 9.3 of that book "If shares are allotted in contravention of
the provisions of section 47, the allotment is not void, but only voidable, and
then only if the applicant applies within one month after the holding of the
statutory meeting, or if the allotment was made after the statutory meeting
within one month after the date of the allotment."
In Pennington's Company
Law, Fourth Edition, it is observed at page 289 under the heading
"Membership":
"Although a company
will not be compelled to register a transfer which has not been executed by the
transferee, except where the simplified form of transfer now authorised by
statute has been used, execution of the transfer is not the only way by which
the transferee may signify his agreement to become a member, and he will become
one if the company registers the transfer and he either recognises the validity
of the registration or acts in the capacity of a member, for example, by attending
shareholders' meetings or receiving and retaining dividends."
In
Charlesworth and Cain on Company Law, 12th Edition, at page 167, it is observed :
"The ordinary law of
contract, which usually requires an offer and an acceptance if there is to be
an agreement, applies to agreements to take shares in a company. Where a
prospectus is issued by the company, otherwise than on a rights issue, the
prospectus is not an offer—it is merely an invitation to the public to make
offers. An offer is made by the applicant in sending a form of application for
shares to the company and it is accepted by the allotment of shares to the
applicant. Under normal articles, the power to allot shares is vested in the
board of directors."
In all these commentaries,
the uniform view taken that the allotment of shares is a matter of contract
between the parties and that contract could either be express or implied and if
a person is treated as a shareholder of the company either by entering his name
in the register of members or treating him as a member by any subsequent
conduct, his right of membership cannot be questioned by the company on the
ground that he has not complied with section 41(2) of the Act.
The view that we have taken
on the interpretation of section 41(2) finds support from the observations made
by Cross on Statutory Interpretation at page 50. The learned author has quoted
the following observations of Lord Denning in Engineering Industry Training Board v. Samuel Talbot
(Engineers) Ltd. [1969] 2 QB 270, at page 274 :
"...we no longer
construe Acts of Parliament according to their literal meaning. We construe
them according to their object and intent."
So, having taken the view
that section 41(2) was amended primarily for the benefit of the shareholders
against the claim of unscrupulous companies, the procedure for becoming a
member of a company as provided under section 41(2) cannot be extended to the
other provisions of the Act so as to defeat the rights of the shareholders who
have been recognised as shareholders by the company in the register of members,
in the return of allotment, in the share scrips and in the balance-sheets.
In
Sri Gopal Jalan and Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Comp Cas 862 (SC), the question that came up
before the Supreme Court was whether the re-issue of forfeited shares is not an
allotment of shares within the meaning of section 75 of the Act. The Supreme
Court has observed as follows (p. 864 of 33 Comp Cas):
"The word 'allotment'
has not been defined in the Companies Act either in our country or in
"What is termed
'allotment' is generally neither more nor less than the acceptance by the
company of the offer to take shares. To take the common case, the offer is to
take a certain number of shares or such a lesser number of shares as may be
allotted. That offer is accepted by the allotment either of the total number
mentioned in the offer or a less number, to be taken by the person who made the
offer. This constitutes a binding contract to take that number according to the
offer and acceptance. To my mind there is no magic whatever in the term
'allotment' as used in these circumstances. It is said that the allotment is an
appropriation of a specific number of shares. It is an appropriation, not of
specific shares, but of a certain number of shares.
The process described by
Chitty J. is very familiar in company law. Under the Act, a company having
share capital is required to state in its memorandum the amount of that capital
and the division thereof into shares of a fixed amount : see section 13(4).
This is what is called the authorised capital of the company. Then the company
proceeds to issue the shares depending on the condition of the market. That
only means inviting applications for these shares. When the applications are
received, it accepts them and this is what is generally called allotment. No
doubt there may be an allottment of shares without an application but no
instance exists where that word is used to describe a transaction whereby one
becomes a shareholder otherwise than by appropriation to him of a share out of
the previously unappropriated share capital."
These observations will go
to show that if a shareholder who claims relief under sections 397 and 398 of
the Act satisfies the company court that he is a shareholder of a company by
virtue of allotment of shares in his favour which is evidenced not only by the
register of members maintained by the company but also by the statutory returns
and documents maintained and filed by the company, it is not open to the
contesting respondents to contend that for the purpose of sections 397 and 398
of the Act, a shareholder must comply with the condition precedent stipulated
in section 41(2) of the Act.
For these reasons, this
appeal has to fail and is dismissed.
As the matter is pending
before the learned company judge since 1982 and serious allegations of
mismanagement against the company are made in the petition, it is desirable
that the company petition is disposed of as expeditiously as possible as also
the other preliminary issues.
In the circumstances of the
case, parties to bear their own costs.
[1988]
63 COMP. CAS. 662 (KER)
HIGH COURT OF KERALA
v.
Harrisons Malayalam Ltd.
VARGHESE
KALLIATH, J.
JANUARY
7, 1988
M.
Ramanatha Pillai for the Petitioner.
K.A.
Nayar, Sebastian Davis and Philip Mathew for the Respondent.
Varghese
Kalliath, J.—This
is an application filed under section 155 of the Companies Act, 1956. Section
155 of the Companies Act gives power to this court to rectify the register of
members. Section 150 mandates that every company shall maintain a register of
its members. Section 150 provides that,
"(1) Every
company shall keep in one or more books a register of its members, and enter
therein the following particulars :
(a) the
name and address, and the occupation, if any, of each member;
(b) in
the case of a company having a share capital, the shares held by each member,
distinguishing each share by its number, and the amount paid or agreed to be
considered as paid on those shares ;
(c) the
date at which each person was entered in the register as a member; and
(d) the
date at which any person ceased to be a member :
Provided
that where the company has converted any of its shares into stock and given
notice of the conversion to the Registrar, the register shall show the amount of stock held by each of the members
concerned instead of the shares so converted which were previously held by him.
(2) If default is made in complying with
sub-section (1), the company, and every officer of the company who is in
default, shall be punishable with fine which may extend to fifty rupees for every
day during which the default continues."
Section 109 of the
Companies Act provides that:
"A transfer of the
share or other interest in a company of a deceased member thereof made by his
legal representative shall, although the legal representative is not himself a
member, be as valid as if he had been a member at the time of the execution of
the instrument of transfer."
In this case, the
petitioner and the second respondent claim that they are the legal heirs of
Ramavarma Valiakoil Thampuran. Thampuran has left a will, which is an annexure
to the petition, marked exhibit A-5, and by virtue of this will, the shares
held by Thampuran in Malayalam Plantations (Holdings) Limited (UK) have been
bequeathed to the petitioner and the second respondent. It is also provided in
the will that they are entitled to the shares in the ratio of 2 : 1.
Thampuran had 3,750 shares
in Malayalam Plantations (Holdings) Limited (UK). We are now concerned only
with regard to these shares held by the said Thampuran. Thampuran died on
December 29, 1975. There is no dispute that the said shares have to devolve as
a bequest by virtue of the will to the petitioner and the second respondent.
The case of the petitioner
is that she is entitled to an order from this court under section 155 of the
Companies Act to rectify the share register of the first respondent, Messrs.
Harrisons Malayalam Ltd.
Now, I shall advert to the
case of the petitioner as to how Messrs. Harrisons Malayalam Ltd. came into
existence and how the petitioner is entitled to claim the right to become a
shareholder of the said company when Thampuran had shares only in the Malayalam
Plantations (Holdings) Ltd. (UK). Messrs. Harrisons and Crosfield (UK)Ltd. were
acting as agents and secretaries of Malayalam Plantations (Holdings) Ltd. (UK).
By annexure A-3, it is seen that exercising the power under section 209(1) of
the Companies Act (English Act), 1948, Messrs. Harrisons and Crosfield (UK)
Ltd. had acquired the shares held by Thampuran in Malayalam Plantations
(Holdings) Limited (UK), and that the said company, Malayalam Plantations
(Holdings) Limited (UK), have received on behalf of the shareholder, Thampuran,
as purchase consideration, shares of Harrisons & Crosfield (UK) Limited.
Further, it is seen stated that Thampuran had 340 ordinary shares of £1 each in
In the petition it is not
stated that pursuant to this letter they have received the shares of Messrs.
Harrisons & Crosfield (UK) Ltd. From the records available in this case, it
is difficult for this court to proceed on the basis that the petitioner and the
second respondent have obtained the share certificates of Messrs. Harrisons
& Crosfield (UK) Ltd. and thus the petitioners have become members or
shareholders of Messrs. Harrisons & Crosfield (UK) Ltd. In this respect, I
have to refer to annexure A-2 which is exhibit A-3. In this annexure, Messrs.
Harrisons & Crosfield (UK) Ltd. have indicated that they have received
Malayalam Plantations (Holdings) Ltd. (UK) share certificates for 3,750 shares,
but they said that they wanted the completed indemnity (bond) and a letter of
request also. The letter of request referred to in exhibit A-3 should be a
letter of request from Malayalam Plantations (Holdings) Ltd. (UK) for the
transfer of shares, since at that time those shares were held in trust by
Malayalam Plantations (Holdings) Ltd. (UK). I am not in a position to say with
certainty from the. records available in the case that there was a transmission
of the shares held by Valiakoil Thamburan in Malayalam Plantations (Holdings)
Ltd. (UK) in favour of the petitioner and the second respondent. Of course, the
possibility is that those shares have been converted into shares of Messrs.
Harrisons & Crosfield (UK) Ltd. and so, those shares might have been
transmitted to the legatees under the will of Thamburan, namely, the petitioner
and the second respondent. Anyhow, from the records available in the case, I
feel that the petitioner and the second respondent have got entitlement for 340
ordinary shares of £1 each in Messrs. Harrisons & Crosfield (UK) Ltd. Of
course, the petitioner and the second respondent have to comply with the
formalities required for the actual transmission/transfer of shares. Whether
the petitioner and the second respondent have complied with the formalities
required for actual transmission/transfer of shares cannot be said with
certainty. I am bound to consider what it is that constitutes membership in a
company. This is a point of first importance in the law of companies and it can
be answered only with reference to the relevant provisions of the Companies
Act.
Section 41 of the Companies
Act gives the definition of a member. It includes the subscribers to the
memorandum of a company and every other person who agrees in writing to become
a member of the company and whose name is entered in its register of members.
In the case of members other than subscribers to the memorandum, two essential
conditions have to be satisfied to constitute a person as a member : (1) An
agreement in writing to become a member, and (2) an entry on the register.
These two conditions are cumulative. Both these conditions have to be satisfied
and if both these conditions are not satisfied, the person in question cannot
claim the status of a member. The position in the English Act is also almost
identical.
Messrs. Harrisons and
Crosfield (UK) Ltd. had large assets and liabilities in
"Within six months
after the operative date, the Indian company will issue shares for cash to Indian
residents at par to ensure that 60% of the issued capital is held by Indian
residents. In issuing and allotting shares to the transferor company, the
Indian company will see that the equity participation of the transferor company
in the Indian company shall not exceed 40% of the issued capital and the
balance 60% will be issued and allotted to persons resident in
Subsequent to the
incorporation of Messrs. Harrisons and Crosfield (India) Ltd., by an order of
this court in C.P. No. 13 of 1983, a scheme of arrangement and amalgamation was
passed whereby Messrs. Harrisons and Crosfield (India) Ltd. was amalgamated
with Malayalam Plantations (India) Ltd. and by that amalgamation, Messrs.
Harrisons and Crosfield (India) Ltd. ceased to exist and the name
"Malayalam Plantations (India) Ltd." has been changed to Messrs.
Harrisons Malayalam Ltd., the first respondent in this petition.
The question that has to be
considered in this case is, whether, from the aforesaid facts and
circumstances, the petitioner's claim for rectification of the share register
of Messrs. Harrisons Malayalam Ltd. can be allowed or not. Counsel for the
petitioner submitted that all assets and liabilities of Messrs. Harrisons and
Crosfield (UK) Ltd. in India are now virtually vested with Messrs. Harrisons
Malayalam Ltd. and so, he submits that since the petitioner and the second respondent
had some shares in Messrs. Harrisons and Crosfield (UK) Ltd., by virtue of
transmission in their favour of the shares of their father in Malayalam
Plantations (Holdings)'Ltd. (UK), the share register of the first respondent
has to be rectified declaring that the petitioner and the second respondent are
holding shares in the first respondent-company. Of course, it is true that all
the business liabilities in India of Messrs. Harrisons and Crosfield (UK) Ltd.
have been, as I said earlier, now taken over by Messrs. Harrisons Malayalam
Ltd.
The main question that I
have to answer is whether, if the petitioner and the second respondent have got
the shares of Malayalam Plantations (Holdings) Ltd. (UK) transferred to them as
shares of Messrs. Harrisons and Crosfield (UK) Ltd., those shares can be
treated as the shares of the first respondent-company. Counsel for the
petitioner submitted that it can be done since all the liabilities of Messrs.
Harrisons and Crosfield (UK) Ltd. have been taken over by Messrs. Harrisons
Malayalam Ltd. in respect of its Indian business. The question is whether that
provision is comprehensive enough to say that the shares held by Indian
residents in Messrs. Harrisons and Crosfield (UK) Ltd. also have been taken as
liabilities of Messrs. Harrisons and Crosfield (India) Ltd. in the first
instance and then by Messrs. Harrisons Malayalam Ltd. I find it difficult to
accept the contention of counsel for the petitioner. Assuming that the
petitioner succeeds in establishing that the shares held by her father in
Malayalam Plantations (Holdings) Ltd. (UK) have been converted into shares of
Messrs. Harrisons and Crosfield (UK) Ltd. and those shares have been
transmitted to the petitioner and the second respondent, even in that case, it
is difficult to say that the shares held by the petitioner in Messrs. Harrisons
and Crosfield (UK) Ltd. have to be treated as shares of Messrs. Harrisons
Malayalam Ltd. as one of the business liabilities of Messrs. Harrisons and
Crosfield (UK) Ltd. in India. The shares held by Indian citizens in Messrs.
Harrisons and Crosfield (UK) Ltd. may perhaps constitute a liability of that
company. But, it can never be said that it is a business liability. What is the
true position of a shareholder in a company? If the company earns profits and
declares dividend, certainly, the shareholder is entitled to participate in it
and get his share of dividend. In the event of winding up, his right is to
participate in the distribution of company's assets in accordance with the rights
given to him under the articles. He acquires no other interest in the assets of
the company : See Mrs. Bacha F. Guzdar v. CIT [1955] 27 ITR 1 ; [1955] 25 Comp
Cas 1 ; AIR 1955 SC 74. "A share in a company cannot properly be likened
to a sum of money settled upon and subject to executory limitations to arise in
the future ; it is to be regarded rather as the interest of the shareholder in
the company, ensured, for the purposes of liability and dividend, by a sum of
money but consisting of a series of mutual covenants entered into by all the
shareholders inter se in accordance with section 16 of the Companies Act, 1862,
and made up of various rights and liabilities contained in the contract,
including the right to a certain sum of money. (Vide Borland's Trustee v. Steel
Brothers and Co. Limited ([1901] 1 Ch. 279)).
What is taken over by the
Indian company are the assets and business liabilities of M/s. Harrisons and
Crosfield (UK) Ltd. in India and so in any event it cannot be said that the
Indian company has taken over all the shares held by Indian citizens in Messrs.
Harrisons and Crosfield (UK) Ltd. Counsel for the first respondent submitted
that there is no bar for Indian citizens to hold shares in a U.K. company and
in fact, so many Indian citizens are having shares in Messrs. Harrisons and
Crosfield (UK) Ltd. In this view, the contention of the petitioner is not
sustainable. I hold that even if the petitioner has got the shares of her
father transferred to the petitioner and the second respondent and those were
shares of Messrs. Harrisons and Crosfield (UK) Ltd., the petitioner and the
second respondent cannot claim shares in Messrs. Harrisons Malayalam Ltd. and
so, this court is not in a position to rectify the share register of the first
respondent.
Counsel for the first
respondent also submitted before me that there is no clear evidence in this
case that the petitioner has obtained shares of Messrs. Harrisons and Crosfield
(UK) Ltd, and if they have not obtained shares of Messrs. Harrisons and
Crosfield (UK) Ltd., they cannot have any claim at all. To meet this argument,
counsel for the petitioner submitted that section 155 of the Companies Act has
got a wider scope and width and that this court can make an investigation as
regards the question whether the petitioner and the second respondent have
obtained shares of Messrs. Harrisons and Crosfield (UK) Ltd. I feel that from
the papers produced, though it is not conclusive, the possibility to a near
certainty is that they have got an entitlement to hold shares in Messrs.
Harrisons and Crosfield (UK) Ltd. As I said earlier, that alone is not
sufficient for me to act under section 155 of the Companies Act and rectify the
share register. I do not want to say anything more on this aspect of the case.
The petition deserves to be
dismissed and I do so. No costs.
[1985] 58 COMP. CAS. 563
(SC)
SUPREME COURT OF
v.
Swadeshi Polytex Ltd.
E.S. VENKATARAMIAH AND SABYASACHI MUKHARJI, JJ.
FEBRUARY 12, 1985
K.K. Venugopal, R.N. Karanjawala and Manik
Karanjawala for the Appellant.
K.
Parasaran, K.S. Cooper, Cyril S. Shroff, S.S. Shroff, Ashok Desai, Anil Diwan,
Pinaki Mishra, Parveen Kumar, Dr. Y.S. Chitale, V.D. Mehta, C.A. Babde, S. Swarup,
K.J. John and J. Sorabjee for the Respondent.
Anil Diwan, R.
Karanjawala, Mrs. Manik Karanjawala, Arun Jetley, Miss Bina Gupta, T.S.
Krishnamurthi Iyer and Vineet Kumar for the Intervener.
Venkataramiah,
J —This appeal
by special leave is filed against the order dated August 7, 1984, passed by the
High Court of Allahabad in Civil Misc. Application No. 10968 of 1984 in Special
Appeal No. 2 of 1982 en its file. The dispute involved in this case relates to
the validity of an extraordinary general meeting of the Swadeshi Polytex Ltd.
(hereinafter referred to as "the Polytex Company"), a company
governed by the Companies Act, 1956 (hereinafter referred to as "the
Act"), held pursuant to a notice dated February 11, 1984, issued under s.
169 of the Act by some of its members.
The
controlling interest in the Swadeshi Cotton Mills Co. Ltd. (hereinafter
referred to as "the Cotton Mills Company") which is also governed by
the Act was acquired by Mangturam Jaipuria and his family in 1946. Sitaram
Jaipuria is the adopted son of Mangturam Jaipuria. After his adoption,
Mangturam Jaipuria got a natural son, Rajaram. In or about the year 1964,
Sitaram Jaipuria became the chairman and managing director of the Cotton Mills
Company. In 1970, the Jaipuria family decided to promote another company and
accordingly the Polytex Company was established. In 1970, Rajaram became the
managing director of the Cotton Mills Company and Sitaram continued as its
chairman. Sitaram became the chairman and managing director of the newly
established Polytex Company in which the Cotton Mills Company had acquired 10
lakhs shares of Rs. 10 each. From about 1975-76 on account of a very serious
setback in its financial position, the Cotton Mills Company could not meet the
wage bill, the dues of the U.P. Electricity Board and several other monetary
claims against it. There were serious labour troubles in its factory and its
work virtually became paralysed. The total liability of the Cotton Mills
Company was of the order of Rs. 234 crores in the year 1977. On October 27,
1977, the Collector of Kanpur passed an order under s. 182A of the U.P. Land
Revenue Act, 1901 (hereinafter referred to as "the Land Revenue
Act"), read with s. 5 of the Uttar Pradesh Government Electrical Undertakings
(Dues Recovery) Act, 1958, appointing a receiver in respect of the Cotton Mills
Company for a period of six months with various powers specified therein and in
particular to seize 1 lakh of shares of the Polytex Company of the face value
of Rs. 10 lakhs held by the Cotton Mills Company and to pledge them in favour
of the State Government of Uttar Pradesh against a loan for the purpose of
meeting the dues payable to the employees of the Cotton Mills Company and he
made a further order under s. 149 of the Land Revenue Act read with s. 5 of the
U.P. Government Electrical Undertakings (Dues Recovery) Act, 1958, attaching
the remaining 9 lakhs shares of the Polytex Company held by the Cotton Mills
Company and empowering the receiver to seize them. Both the orders appointing
the receiver and the order attaching 9 lakhs shares were incorporated in the
same document, the relevant part of which read thus:
"ORDER
Whereas electricity dues are payable by M/s
Swadeshi Cotton Mills Co. Ltd., Kanpur, to the U.P. State Electricity Board and
recovery certificates for the amount enumerated below have been received for
realisation of the dues above mentioned from the said consumer:
|
|
Rs. |
|
Recovery
certificates dated 29.9.76, 31.12.76, 16.12.76, 29.12.76, 16.7.76, 17.9.76 and
3.10.77 |
1,06,22,423.17 |
|
Less
: amount paid |
19,00,000-00 |
|
Balance |
87,22,423-17 |
|
Add:
Collection charges |
10,62,242-31 |
|
TOTAL RECOVERABLE |
97,84,665-48 |
And whereas, for the expeditious recovery of the
dues outstanding as above, without affecting adversely the running of the
mills, it is just and proper that a receiver be appointed for the mills at
Kanpur, belonging to M/s Swadeshi Cotton Mills Co. Ltd.
Now,
therefore, I, K.K. Bakshi, Collector, Kanpur, in exercise of the power under
sub-section (1) of section 182A of the U.P. Land Revenue Act of 1901 read with
section 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act,
1958, do hereby appoint Shri L.N. Batra, A.D.M., Kanpur, as receiver of the
said mills belonging to M/s Swadeshi Cotton Mills Co. Ltd., for a period of six
months with immediate effect and direct that the receiver shall exercise the
following powers :
1. The receiver shall exercise supervision
over the sales of products of the said mills and the disbursemeut of receipts
from day to day.
2. That the receiver shall ensure that the
receipts of the said mills are, after the payment of labour dues and other essentials
for the running of the mill, appropriated towards recoverable arrears against
M/s Swadeshi Cotton Mills Co. Ltd. as land revenue.
3. That the receiver shall, if necessary, for the running of
the said mills borrow money from State Government or other financial
institutions and make other appropriate arrangements in this behalf for the
repayment of the amount and the recovery thereof as arrears of land revenue.
4. That the receiver shall seize the shares held by M/s
Swadeshi Cotton Mills Co. Ltd. in M/s Swadeshi Polytex Ltd. of the face value
of Rs. 10 lakhs (ten lakhs) and shall be competent to pledge the same by way of
security for the borrowings referred to above.
5. That the receiver shall be competent also to make payment to
the Punjab National Bank against the guarantee dated 16.12.1976 and relieve the
State Government of its liabilities there under correspondingly.
6. That in the event of guarantee furnished by the State
Government in favour of the Punjab National Bank dt. 16.12.76 being invoked,
the receiver shall be competent to make the payment to the State Government
against the liability accruing there from.
7. That the receiver shall have access to all books of account,
ledger, cash books, stock books and all other documents kept or maintained by
M/s Swadeshi Cotton Mills Co. Ltd. in the course of business.
8. That the reciver shall be competent for the reasons to be
recorded also to put a restraint against any transaction being entered into by
M/s. Swadeshi Cotton Mills Co. Ltd. involving the business and assets of the
mills and which are not in the interest thereof or may be detrimental to the
same in his opinion.
9. That the receiver shall have all powers incidental or
ancillary for carrying out of the functions and the powers referred to above.
10. That subject to the above and to any directions that I may
hereafter issue from time to time, the present management of the said mills
shall continue to run the mill and business.
In view of the urgency, the
order is being made exparte with the direction, however, that a notice to show
cause shall issue to M/s. Swadeshi Cotton Mills Company Ltd. for November 15,
1977.
And further, in exercise of
the power under section 149 of the U.P. Land Revenue Act, 1901, read with
section 5 of the U.P. Government Electrical Undertakings (Dues Recovery) Act of
1958,1 hereby direct attachment and sale of shares held by M/s. Swadeshi Cotton
Mills Co. Ltd. in M/s. Swadeshi Polytex of the face value of Rs. 90 lakhs
(ninety lakhs) and hereby empower the receiver to seize the same.
|
|
Sd/-
. |
|
Dated: |
(K.
K. Baksi) |
|
October 27, 1977." |
Collector,
|
On the same date, i.e., on
October 27, 1977, the receiver pledged 1 lakh of shares as per the order of the
Collector in favour of the Government of Uttar Pradesh against a loan of Rs.
135 lakhs. The receiver also took possession of 9 lakhs shares as per the order
made under s. 149 of the Land Revenue Act. Subsequently, the receiver pledged
on November 9, 1977, 1 lakh shares out of the above 9 lakhs shares in favour of
the Government of Uttar Pradesh against a loan of Rs. 15 lakhs and on January
4, 1977, 15 lakhs shares against a further loan. Thus, out of the 10 lakhs
shares of the Polytex Company of the face value of Rs. 1 crore held by the
Cotton Mills Company, 35 lakhs shares stood pledged in favour of the Government
of Uttar Pradesh and the remaining 65 lakhs shares of the face value of Rs. 65
lakhs remained with the receiver.
The events which have led
to this appeal are, however, these : In the year 1976, the Cotton Mills Company
filed a petition under sections 397 and 398 of the Act against the Polytex
Company alleging oppression and mismanagement of the Polytex Company by Sitaram
Jaipuria and other directors of the Polytex Company in Company Petition No. 20
of 1976 on the file of the Allahabad High Court. That petition was dismissed by
the company judge of the High Court on April 19, 1982. Against his decision, an
appeal was filed by the Cotton Mills Company in August, 1982, in Special Appeal
No. 2 of 1982 before the Division Bench of the High Court. That appeal is still
pending. On February 11, 1984, the Cotton Mills Company and four others,
namely, Rajaram Jaipuria, Mahabir Prasad Dalmia, Siyaram Sharma and K. B.
Agarwal, who together held 10,01,950 shares of the value of Rs. 10 each sent a
notice to the Polytex Company which was received by it on February 15, 1984,
under section 169 of the Act requiring the board of directors of the Polytex
Company to call an extraordinary general meeting of the Polytex Company to
consider and, if thought fit, to pass with or without modification the
following as ordinary resolutions :
"1. RESOLVED that the appointment of Shri
Sitaram Jaipuria as managing director of Swadeshi Polytex Ltd. be and is hereby
terminated prior to the expiry of his term, in exercise of the powers conferred
by article 110 of the articles of association of the company.
2. Resolved
further that Shri Sitaram Jaipuria be and is hereby removed from the office of
director and consequently from the office of the managing director of the
Swadeshi Polytex Ltd.
3. RESOLVED further that resolution passed at the 13th annual
general meeting of Swadeshi Polytex Ltd. in respect of item 7 ' Special
Business ' of the notice dated 31st January, 1983, of the said 13th annual general meeting for the
remuneration of Shri Sitaram Jaipuria as managing director be and is hereby
rescinded.
4. Resolved
that Shri Ashok Jaipuria be and is hereby removed from the office of director
of Swadeshi Polytex Ltd.
5. Resolved
that in the vacancy caused by the removal of Shri Ashok jaipuria, Shri Sitaram
Singhania, be and is hereby appointed as a director of Swadeshi Polytex Ltd.,
and in respect of whose appointment special notices have been received from
some members indicating their intention to appoint Shri Sitaram Singhania as a
director of the company.
6. Resolved
that Shri B.M. Kaul be and is hereby removed from the office of director of
Swadeshi Polytex Limited.
7. Resolved
that in the vacancy caused by the removal of Shri B.M. Kaul, Dr. Rajaram
Jaipuria be and is hereby appointed as a direc tor of Swadeshi Polytex Ltd. and
in respect of whose appointment, special notices have been received from some
members indicating their intention to appoint Dr. Rajaram Jaipuria as a
director of the company.
8. Resolved
that Shri P.B. Menon be and is hereby removed from the office of director of
Swadeshi Polytex Ltd.
9. Resolved
that in the vacancy caused by the removal of Shri P.B. Menon, Shri R.D. Thapar,
be and is hereby appointed as a director of Swadeshi Polytex Ltd. and in
respect of whose appointment, special notices have been received from some
members indicating their intention to appoint Shri R.D. Thapar as a director of
the company."
The
requisitionists of the meeting also asked the Polytex Company to treat the said
notice as a special notice under s. 284(2) and (5) read with s. 190 of the Act
for appointment of Sitaram Singhania, Rajaram Jaipuria and R.D. Thapar in place
of Ashok Jaipuria, B.M. Kaul (who was also the chairman of the Cotton Mills
Company) and P.B. Menon respectively as directors of the Polytex Company. They
enclosed an explanatory statement as required by s. 173 of the Act to the
notice containing reasons for moving the aforesaid resolutions. On receipt of
the notice, an emergent meeting of the directors of the Polytex Company was
held on February 23, 1984, to consider the above-said notice issued under s.
169 of the Act. The following is the material part of the minutes of the said
meeting:
"Requisition
notice
The
Board was informed that a notice had been received at the registered office of
the company on 15th February, 1984, from Swadeshi Cotton Mills Co. Ltd. (SCM)
and four other shareholders requistioning an extraordinary general meeting of the company under section 169
of the Companies Act, 1956.
The requisition notice
received from SCM was read before the board. The board considered the motives
behind the requisition and took serious note of the false and baseless
allegations made in the explanatory note enclosed to the notice of requisition.
The secretary pointed out a few technical defects in the requisition notice.
The draft notice and the explanatory statement were placed before the meeting.
The same was perused and discussed and the following resolutions were passed :
Resolved
that an extraordinary general meeting of the
company, pursuant to the requisition received by the company on 15th February,
1984, under section 169 of the Companies Act, 1956, from Swadeshi Cotton Mills
Co. Ltd. and others be held at the registered office of the company on
Wednesday, the 28th March, 1984, at 10-30 a.m.
Resolved
further that the secretary be and is hereby
authorised to issue notice for convening the aforesaid meeting as per draft
placed before the board and initialled by the chairman for the purposes of
identification and to take such other steps as may be required in this regard.
The board was of the view that
the financial institutions should be informed of this development and the
directors who wish to make their representation to the shareholders may be
requested to do so. The secretary was directed to take necessary steps in this
regard."
The board of directors also
prepared and circulated an explanatory statement pursuant to s. 173 of the Act
along with the notice issued to the shareholders calling the extraordinary
general meeting to be held on March 28, 1984. The requisitionists of the
meeting filed an application before the Division Bench in Special Appeal No. 2
of 1982 for appointing a chairman of the meeting. S. Jagannathan, who was a
member of the board of directors as the nominee of I.F.C.I, was appointed as
the chairman of the meeting by the Division Bench on March 23, 1984. The
meeting was, however, adjourned as a shareholder had obtained on order of
temporary injunction restraining the holding of the meeting in a suit filed by
him at the Court of the Munsif, Alipore (
"Special
leave granted.
The
High Court of Allahabad shall make a fresh order directing the holding of the
meeting of the company and that meeting shall be held in accordance with the
order of the High Court notwithstanding any order of injunction, etc., issued
by any other court or authority in
Again
on July 4, 1984, a further order was passed by this court as follows:
"Mr.
Sorabjee and Mr. Mridul state that the extraordinary general meeting may be
called on any day to be fixed by the High Court in the second week of August,
1984, They also state that the venue of the meeting shall be determined by the
chairman, Shri Jagannathan, appointed by the High Court. No further orders are
necessary on prayers (b) and (c) in the application dated June 25, 1984, made
before the Allahabad High Court by the petitioner."
Accordingly
the meeting was fixed to be held on August 14, 1984. Since there was a motion
for the adjournment of the meeting, this court was again approached by the
parties by an application for a further direction which was disposed of on
September 4, 1984. In the meanwhile appellant No. 1, Balkrishan Gupta, had
filed an application before the High Court of Allahabad in Special Appeal No. 2
of 1982 questioning the right of the requisitionists to issue notice under s.
169 of the Act to call the extraordinary general meeting. His contention was
that since a receiver had been appointed by the Collector in respect of the
shares held by the Cotton Mills Company and they had also been attached, the
shares held by the Cotton Mills Company could not be taken into consideration
for determining the required qualification to issue the notice under s. 169 of
the Act requisitioning the extraordinary general meeting and that if those
shares were omitted from consideration, then the shares held by the other
requisitionists would not be sufficient to issue the said notice. That
application was dismissed by the High Court by its order dated August 7, 1984.
This appeal by special leave is filed against the said order of the High Court.
In this appeal, this court passed the following order on September 14, 1984:
"All the learned
counsel for the parties in this petition agree that the meeting which is now
adjourned to September 24, 1984, should be held on that day and the agenda of
the meeting should be discussed and voted upon. We make an order accordingly.
The result of the voting shall be reported to this court by the chairman within
one week after it is ascertained. The resolutions passed at the meeting shall
not come into effect until further orders by this court. The matter may be
listed in the third week of Ocotber, 1984."
After the report submitted
by the chairman of the meeting was received by this court, this court passed a
further order on October 12, 1984, which reads as follows :
"The report of the
chairman of the extraordinary general meeting which has been submitted to this
court in a sealed cover is opened and perused by the court. The report states
that all the resolutions other than the resolution for adjournment have been
lost. The photostat copies of the report along with the enclosures may be made
available to the parties at their expense. List the matter on 29-10-1984 before
this Bench."
After the above order was
passed, the Industrial Development Bank of
"1. The board of directors of Swadeshi
Polytex Ltd. (hereinafter referred to as 'SPL') shall be reconstituted pending
the holding of the next annual general meeting of SPL as under :
(a) Four nominees of the financial institutions (including one to
be selected and communicated by IDBI/IFCI to SPL) including the representative
of the U. P. State Industrial Development Corporation.
(b) Four nominees of Shri Sitaram Jaipuria
(hereinafter referred to as ' SRJ) including SRJ.
(c) Four nominees of Dr. Rajaram Jaipuria
(hereinafter referred to as 'RRJ') including RRJ.
All nominations under
sub-clauses (b) and (c) above shall be made by February 9, 1985. Nominations
under sub-clause (a) (except the nominee of the U. P. State Industrial
Corporation) shall be made within ten days of the date of this order. The
reconstituted board shall start functioning from February 11, 1985. The
secretary of SPL is directed to convene the reconstituted board meeting within
15 days of the order.
2. (a) SRJ
and RRJ shall designate one nominee each out of their respective
nominee-directors as executive directors. The said executive directors shall
jointly carry on the management of SPL and will have all the powers of the
managing director and control of finance, If any difference of opinion arises,
it shall be referred to the board of directors.
(b) All
committees of the board shall stand dissolved.
3. SRJ shall continue as the managing
director of the company and he voluntarily undertakes not to exercise any
powers or functions of the managing director till his re-election at the next
annual general meeting of SPL.
4. SRI will continue to be the chairman of
the company and as such will preside over the board meetings of SPL. He
voluntarily undertakes not to have any second or casting vote.
5. All minutes of the board meetings shall
be prepared by a nominee of the financial institutions and shall be signed by
the chairman.
6. The next annual general meeting of SPL
shall be called and held on May 15, 1985. The chairman of the said annual
general meeting shall be appointed by this court.'
7. All the members of the reconstituted
board appointed pursuant to clause 1 above (excluding nominees mentioned in clause
1(a) (including non-rotational directors, i.e., SRJ and/or Shri F. R. Beshania,
shall resign and a new board shall be elected at the said annual general
meeting. All shareholders of SPL (including SRJ and RRJ) shall be entitled to
propose names of any persons for appointment as directors of SPL at the said
annual general meeting. Members of the reconstituted board may, if they so
desire, seek re-election at the said annual general meeting.
8. All pending matters before this court
including the Transfer Case No. 1 of 1985 and all Civil Misc. Petitions in
Civil Appeal No. 4803 of 1984 save and except Civil Appeal No. 4803 of 1984
(Balkrishan Gupta v. Swadeshi Polytex Ltd.) shall stand withdrawn and all
questions raised in all such withdrawn proceedings are expressly left open. All
allegations against the financial institutions, the chairman of the IDBI and
the Government in Transfer Case No. 1 of 1985 and Civil Misc. Petitions Nos.
39900 of 1984 and 340 of 1985 shall stand withdrawn.
9. Votes cast by the financial
institutions at the next annual gene. ralmeeting of SPL to be held on May 1 5,
1985, shall not be questioned by the parties hereto on any ground.
10. The Civil Appeal No. 4803 of 1984
(Balkyishan Gupta v. Swadeshi Polytex Ltd.) shall be disposed of on merits.
11. Notice of board meeting to all members of
the reconstituted board shall be sent by registered post acknowledgment due.
12. It shall be open to the board of
directors if it so chooses to re view any delegation of powers.
13. There shall be no disciplinary action by
way of victimisation of any employee.
14. SRJ shall obtain the resignation of the
present members of the board of directors (excluding the nominees of financial
institutions).
15.
The
undertakings that have to be filed in accordance 'with the above order shall be
filed in this court within one week from today. The next annual generasl
meeting which is ordered to be held on May 15, 1985, shall be held
notwithstanding any order, direction or injunction of any other court in
Judgment
in Civil Appeal No. 4803 of 1984 is reserved.
All
the other cases referred to above stand disposed of in terms of this
order."
The
parties, however, requested the. court to decide the question relating to the
right of the Cotton Mills Company to join as a requisitionist of a meeting
under s. 169 of the Act or to vote at a meeting of the company since it was
likely that one or the other member might raise it as an issue at the next
meeting. We shall, therefore, proceed to decide the said question by this
judgment.
The
principal ground urged on behalf of the appellants is that the extraordinary
general meeting had not been validly called since the Cotton Mills Company had
ceased to enjoy the privileges of a member of the Polytex Company by reason of
the appointment of a receiver by the Collector of Kanpur in respect of the ten
lakhs shares in the Polytex Company held by the Cotton Mills Company, the
attachment of the nine lakhs shares out of the said 10 lakhs shares and also
the pledge of 3,50,000 shares out of the said 10 lakhs shares with the
Government of Uttar Pradesh as security for the loans advanced by it. The total
paid-up equity share capital of the Polytex Company is Rs. 3,90,00,000
(39,00,000 shares of Rs. 10 each) and it is not disputed that if the 10 lakhs
shares held by the Cotton Mills Company are omitted from consideration, the
remaining requisitionists would not have sufficient voting strength to issue a
notice under s. 169 of the Act. The appellants contend that the Cotton Mills
Company could not, therefore, join the other requisitionists in issuing the
notice under s. 169 of the Act calling upon the Polytex Company to call the
extraordinary general meeting and without the support of the shares held by the
Cotton Mills Company, the remaining requisitionists would not have been
eligible to requisition the meeting. The material part of s. 169 of the Act
reads:
"169. Calling of
extraordinary general meeting on requisition.—(1) The board of directors of a company
shall, on the requisition of such number of members of the company as is
specified in sub-s. (4), forthwith proceed duly to call an extraordinary
general meeting of the company.
(2) The requisition shall set out the
matters for the consideration of which the meeting is to be called, shall be
signed by the requisitionists, and shall be deposited at the registered office
of the company.
(3) The requisition may consist of several
documents in like form, each signed by one or more requisitionists.
(4) The number of members entitled to
requisition a meeting in regard to any matter shall be:
(a) in the case of a company having a share
capital, such number of them as hold at the date of the deposit of the
requisition, not less than one-tenth of such of the paid-up capital of the
company as at that date carries the right of voting in regard to that
matter;............"
We
have already referred to the order of the Collector appointing the receiver in
respect of the shares in question, attaching them and ordering that 3,50,000
shares be pledged in favour of the Government of Uttar Pradesh.
Section
150 of the Act requires every company to keep a register of members containing
the" name, address and the occupation, if any, of each member and other
particulars mentioned therein. Section 153 of the Act provides that no notice
of any trust, express, implied or constructive, shall be entered on the
register of members. Section 153B of the Act, however, provides that
notwithstanding anything contained in s. 153, where any shares in a company are
held in trust by any person, he (the trustee) shall within such time and in such form as may be prescribed make
a declaration to the public trustee appointed under s. 153A of the Act in
accordance with and subject to the rest of the provisions of s. 153B of the
Act.
It is clear from the
relevant provisions of the Act which are referred to hereafter that a member
can participate and exercise his vote at a meeting of a company in accordance
with the Act and the articles of association of the company. Section 41 of the
Act defines the expression "member" of a company. The subscribers to
the memorandum of association 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. A subscriber to the memorandum is liable as
the holder of shares which he has undertaken to subscribe for. Any other person
who agrees to become a member of a company and whose name is entered in its
register of members shall be a member of the company. In his case, the two
conditions, namely, that there is an agreement to become a member and that his
name is entered in the register of members of the company are cumulative. Both
the conditions have to be satisfied to enable him to exercise the rights of a
member. Subject to s. 42 of the Act, a company or a body corporate may also
become a member. When once a person becomes a member, he is entitled to
exercise all the rights of a member until he ceases to be a member in
accordance with the provisions of the Act. The voting rights of a member of a
company are governed by s. 87 of the Act. Section 87 of the Act says that
subject to the provisions of s. 89 and sub-s. (2) of s. 92 of the Act, every
member of a company limited by shares and holding any equity share capital
therein shall have a right to vote, in respect of such capital, on every resolution
placed before the company and his voting right on a poll shall be in proportion
to his share of the paid-up equity capital of the company. Regulations 8 and
86(a) of the articles of association of the Polytex Company read :
"8. Save as herein
otherwise provided, the company shall be entitled to treat the registered
holder of any share as the absolute owner thereof and accordingly shall not,
except as ordered by a court of competent jurisdiction or as by law required,
be bound to recognise any trust, benami or equitable or other claim to or
interest in any such share or any fractional part of such share on the part of
any other person whether or not it shall have express or other notice thereof.
86(a). On a show of hands every holder of equity shares
entitled to vote and present in person or by proxy shall have one vote and upon
a poll, every holder of equity shares entitled to vote and present in person or
by proxy shall have one vote for every equity share held by him."
A
person ceases to be a member by transferring his share to another person, by
transmission of his share by operation of law, by forfeiture of share, by
death, or by any other reason known to law. In the case before us, therefore,
three points arise for consideration at this stage.
They are :
(i) Whether by reason of the appointment of
the receiver under the Land Revenue Act in respect of the shares of the Polytex
Company held by the Cotton Mills Company, the Cotton Mills Company had ceased
to have the rights of a member under section 169 of the Act ?
(ii) Whether by the attachment of the shares
under section 149 of the Land Revenue Act, the Cotton Mills Company suffered
any diminution or curtailment in its rights as a shareholder in respect of the
shares so attached ?
(iii) Whether by the pledge of certain shares,
the Cotton Mills Company suffered any such diminution or curtailment ?
In
the Act, the expressions "a member", "a shareholder" or
"holder of a share" are used as synonyms to indicate the person who is
recognised by a company as its owner for its purposes. What does ownership of a
share connote? "Ownership in its most comprehensive signification",
says Salmond, "denotes the relation between a person and any right that is
vested in him. That which a man owns in this sense is a right." The right
of ownership comprises benefits like claims, liberties powers, immunities and
privileges and burdens like duties, liabilities, disabilities, etc. Whatever
advantages a man may have as a result of the ownership of a right may be
curtailed by the disadvantages in the form of burdens attached to it. As
observed by Dias, an owner may be divested of his claims, etc., arising from
the right owned to such an extent that he may be left with no immediate
practical benefit. He remains the owner none the less because his interest will
outlast that of other persons in the thing owned. The owner possesses that
right which ultimately enables him to enjoy all rights in the thing owned by
attracting towards himself those rights in the thing owned which for the time
being belong to others, by getting rid of the corresponding burdens. An owner
of a land may get rid of the interest of a mortgagee in it by redeeming the
mortgage, may get physical possession of land by terminating a lease and may
get rid of an attachment by discharging the debt for which it is attached. A
receiver appointed by a court or authority in respect of a property holds it
for the benefit of the true owner subject to the orders that may be made by
such court or authority. The different kinds of rights of ownership flowing
from the ownership of a right depend upon the nature of the right owned. A
person who is a shareholder of a company has many rights under the Act. Some of
them, with which we are concerned in this appeal principally, are : (i) the
right to vote at all meetings (s. 87), (ii) the right to requisition an
extraordinary general meeting of the company or to be a joint requisitionist
(s. 169), (iii) the right to receive notice of a general meeting (s. 172), (iv)
the right to appoint proxy and inspect proxy registers (s. 176), (v) in the
case of a body corporate which is a member, the right to appoint a
representative to attend a general meeting on its behalf (s. 187), and (vi) the
right to require the company to circulate his resolutions (s. 188). The
question for consideration is : when does a shareholder cease to be entitled to
exercise any of these rights ?
Section
182A of the Land Revenue Act which provides for the appointment of a receiver
in respect of the assets of a defaulter who is liable to pay an arrear of
revenue or any other sum recoverable as an arrear of revenue reads thus :
"182A.Appointment
of receiver.—(1) Notwithstanding anything in this Act, when an arrear of
revenue or any other sum recoverable as an arrear of revenue is due, the
Collector may, in addition to or instead of any of the processes hereinbefore
specified, by order,—
(a) appoint, for such period as he may deem
fit, a receiver of any movable or immovable property of the defaulter ;
(b) remove any person from the possession or
custody of the property ;
(c) commit the same to the possession,
custody or management of the receiver ;
(d) confer upon the receiver all such
powers, as to bringing and defending suits and for the realisation, management,
protection, preservation and improvement of the property, the collection of the
rents and pro fits thereof, the application and disposal of such rents and
profits, and the execution of documents, as the defaulter himself has or such
of those powers as the Collector thinks fit.
(2) Nothing in this
section shall authorise the Collector to remove from the possession or custody
of property any person whom the defaulter has not a present right to remove.
(3) The Collector may from time to time extend
the duration of appointment of the receiver.
(3A) No order under sub-section (1) or
sub-section (3) shall be made except after giving notice to the defaulter to
show cause, and after considering any representations that may be received by the
Collector in response to such notice :
Provided
that an interim order under sub-section (1) or sub-section (3) may be made at
any time before or after the issue of such notice :
Provided
further that where an interim order is made before the issue of such notice,
the order shall stand vacated if no notice is issued within two weeks from the
date of the interim order.
(4) The provisions of rules 2 to 4 of Order
XL, contained in the First Schedule to the Code of Civil Procedure, 1908, shall
apply in relation to a receiver appointed under this section as they apply in
relation to a receiver appointed under the Code with the substitution of
references to the Collector for references to the court."
Section
149 of the Land Revenue Act, which provides for the attachment and sale of
movable property belonging to a defaulter, reads thus :
"149.
Attachment and sale of movable property.—The Collector may, whether the
defaulter has been arrested or not, attach and sell his movable property.
Every
attachment and sale ordered under this section shall be made, according to the
law in force for the time being for the attachment and sale of movable property
under the decree of a civil court. In addition to the particulars mentioned in
clauses (a) to (o) of the proviso to section 60 of the Code of Civil Procedure,
1908 (Act V of 1908), articles set aside exclusively for the use of religious
endowments shall be exempted from attachment and sale under this section. The
costs of the attachment and sale shall be added to the arrear of revenue, and
shall be recoverable by the same procedure."
We
shall first consider the effect of appointment of a receiver in respect of the
shares in question. A perusal of the provisions of s. 182A of the Land Revenue
Act shows that there is no provision in it, which states that on the
appointment of a person as a receiver, the property in respect of which he is
so appointed vests in him, similar to the provision in s. 17 of the Presidency
Towns Insolvency Act, 1909, where on the making of an order of adjudication,
the property of the insolvent wherever situate would vest in the official
assignee, or in s. 28(2) of the Provincial Insolvency Act, 1920, which states
that on the making of an order of adjudication, the whole of the property of
the insolvent would vest in the court or in the official receiver. Sub-section
(4) of s. 182A of the Land Revenue Act provides that rules 2 to 4 of Order XL
of the Code of Civil Procedure, 1908, shall apply in relation to a receiver
appointed under that section. A receiver appointed under O. XL of the CPC only
holds the property committed to his control under the order of the court but
the property does not vest in him. The privileges of a member can be exercised
by only that person whose name is entered in the register of members. A
receiver whose name is not entered in the register of members cannot exercise
any of those rights unless in a proceeding to which the company concerned is a
party and an order is made therein. In R. Mathalone v. Bombay Life Assurance Co.
Ltd. [1954] 24 Comp Cas 2 ; AIR 1953 SC 385 ; [1954] SCR 117, it has been laid
down clearly that a receiver appointed by a court in respect of certain shares
which had not been duly entered in the register of members of the company
concerned as belonging to him could not acquire certain newly issued shares
which could be obtained by the members of the company. This court observed at
page 21 of 24 Comp Cas thus :
"Mr.
Pathak argued that the plaintiff was entitled to reliefs (a) and (b) both in
his suit as well as in the receiver's suit and that the receiver's suit was
wrongly dismissed by the High Court. We are unable to agree. In our opinion,
the High Court rightly held that the receiver appointed in the suit of Sir
Padampat could not acquire the newly issued shares in his name. That privilege
was conferred by section 105C only on a person whose name was on the register
of members. The receiver's name admittedly was not in the register and the
company was not bound to entertain that application. Mr. Pathak argued that
that may be so but the receiver was not making an application in his individual
right but he had been armed by the court with power to apply in the right of
the defendant, Reddy. The fact, however, is that the receiver made the
application in his own name. Even if Mr. Pathak's contention is right, the
company was no party to the suit filed by Sir Padampat against Reddy and that
being so, no order could be issued to the company in that suit to recognize the
receiver as a shareholder in place of Reddy."
Even
where the holder of a share whose name is entered in the register of members
hands over his shares with blank transfer forms duly signed, the transferee
would not be able to claim the rights of a member as against the company
concerned until his name is entered in the register of members. This court in
Howrah Trading Co. Ltd. v. CIT [1959] 29 Comp Cas 282 ; 36 ITR 215 ; AIR 1959
SC 775 ; [1959] Supp. 2 SCR 448, has observed at pp. 286 and 287 of 29 Comp Cas
thus:
"The
position of a shareholder who gets dividend when his name stands in the
register of members of the company causes no difficulty whatever. But transfers
of shares are common, and they take place either by a fully executed document
such as was contemplated by regulation 18 of Table A of the Indian Companies
Act, 1913, or by what are known as ' blank transfers '. In such blank
transfers, the name of the transferor is entered, and the transfer deed signed
by the transferor is handed over with the share scrip to the transferee, who,
if he so chooses, completes the transfar by entering his name and then applying
to the company to register his name in place of the previous holder of the
share. The company recognises no person except one whose name is on the.
register of members, upon whom alone calls for unpaid capital can be made and
to whom only the dividend declared by the company is legally payable. Of
course, between the transferor and the transferee, certain equities arise even
on the execution and handing over of ' a blank transfer', and among these
equities is the right of the transferee to claim the dividend declared and paid
to the transferor who is treated as a trustee on behalf of the transferee.
These equities, however, do not touch the company, and no claim by the
transferee whose name is not in the register of members can be made against the
company, if the transferor retains the money in his own hands and fails to pay
it to him.
A
glance at the scheme of the Indian Companies Act, 1913, shows that the words
'member', 'shareholder', and 'holder of a share' have been used interchangeably
in that Act. Indeed, the opinion of most of the writers on the subject is also
the same. Buckley on the Companies Acts, 12th edition, page 803, has pointed
out that the right of a transferee is only to call upon the company to register
his name and no more. No rights arise till such registration takes place."
In
this case, this court followed the dictum of Chitty J. in Wala Wynaad Indian
Gold Mining Co., In re [1882] 21 Ch 849 (Ch D) which emphasised that the entry
of the name of person in the register of members was an essential condition for
exercising voting rights at the meeting of the company concerned.
In
Buckley on the Companies Acts (14th edn.), vol. I, p. 972, it is stated thus :
"Company
cannot enquire into beneficial ownership.—As between the shareholder and the
company, the person entitled to exercise the right of voting is the person
legally entitled to the shares, the member whose name is on the register."
In
Kurapati Venkata Mallayya v. Thondepu Ramaswami and Co. [1963] Supp. 2 SCR 995
; AIR 1964 SC 818, this court had occasion to consider the validity of a suit
instituted by a receiver to collect debts due to a party to a suit in his own
name. The court upheld the right of the receiver to maintain the suit observing
that a receiver invested with full powers to administer the property which is
custodia legis or who is expressly authorised by the court to institute a suit
for collection of debts was entitled to institute a suit in his own name
provided he did so in his capacity as a receiver. But in the course of the said
decision, this court approved the decision of the Calcutta High Court in Jagat
Tarini Dasi v. Naba Copal Chaki [1907] ILR 34 Cal 305 in which it had been
stated : "On the whole, we are disposed to take the view that, although a
receiver is not the assignee or beneficial owner of the property entrusted to
his care, it is an incomplete and inaccurate statement of his relation to the
property to say that he is merely its custodian" (Underlining by us).
Thus, whatever may be the other powers of a receiver dealing with the property
which is in custodia legis while in his custody, he is not to be construed as either
an assignee or beneficial owner of such property.
In
Wiser. Lansdell [1921] 1 Ch 420 (Ch D), it was held that in the case of a
bankrupt whose name was still on the register of members of a company, as
between himself and the company, the bankrupt, so long as his name remained on
the register, was entitled to vote in respect of the shares, though as between
himself and the mortgagees, he could vote only as they dictated. But the right
to vote was held to be unimpaired as long as his name appeared on the register.
In
a later case, Morgan v. Gray [1953] 1 Ch 83 (Ch D), after referring to the
decision in Wise v. Lansdell [1921] 1 Ch 420 (Ch D), Danckwerts J. observed (at
p. 87 of [1953] 1 Ch) :
"It
seems to me that, unless there is some provision in the company's articles or
in the Companies Act which empowers me to say that the bankrupt is no longer a
member of the company, and is, therefore, unable to vote, expressly, I must
come to the conclusion that the bankrupt still remains a member as long as he is
on the register, notwithstanding that by taking appropriate steps under the
appropriate provisions the trustee in bankruptcy may be able to secure
registration of himself as the proprietor of the shares. Unless and until that
is done, and as long as the bankrupt remains on the register of the company, he
remains a member in respect of those shares and is entitled, as it seems to me,
to exercise the votes which are attributable to that status, notwithstanding
that he has no longer any beneficial interest in the shares and that the
company is entitled to pay any dividends to his trustee in bankruptcy."
The
following statement in Kerr on Receivers (13th Edn.) at page 310 : "the
power of the company and its directors to deal with the property comprised in
the appointment (both property subject to a floating charge and property
subject to a fixed charge), except subject to the charge, are paralysed",
which was relied on by the appellants, is not of much use to them. It only
means that the authority competent to appoint a receiver may give directions
regarding the property. It does not imply that the right of the company to
exercise the right to vote on the basis of the shares of another company held
by it at the meeting of such other company becomes automatically suspended.
Under s. 51 of the Code of
Civil Procedure, 1908, a receiver may be appointed by a civil court on the
application of a decree-holder in execution of a decree for purposes of
realising the decree-debt. This is only a mode of equitable relief granted
ordinarily when other modes of realisation of the decretal amount are
impracticable. A receiver appointed under that section will be able to realise
the amounts due from a garnishee and his powers are akin to the powers of a
receiver appointed under 0. 40, r. 1 of the CPC, 1908. But he would not have
any beneficial interest in the assets of the judgment-debtor. He collects the
debts not as his own but as an officer of the court.
We do not also find any substance
in the contention of the appellant based on s. 137 of the Act. Section 137 of
the Act provides that if any person obtains an order for the appointment of a
receiver of, or of a person to manage, the property of a company, or if any
person appoints such receiver under any powers contained in any instrument, he
shall, within thirty days from the date of the passing of the order or of the
making of the appointment under the said powers, give notice of the fact to the
Registrar; and the Registrar shall, on payment of the prescribed fee, enter the
fact in the register of charges maintained under s. 130 of the Act. It is not
clear in this case whether any entry had been made in the register of charges
of the order of appointment of receiver in this case. Even granting that such
an entry had been made, it would not have the effect of taking away the right
of the Cotton Mills Company to exercise the right to vote in respect of the
shares in question. We do not also find any substance in the argument based on
ss. 153B, 187B and 187C of the Act. Section 153 of the Act states that no
notice of any trust, express, implied or constructive, shall be entered in the
register of members or of debenture holders. Section 153B of the Act requires
that notwithstanding anything contained in s. 153, where any shares in, or
debentures of, a company are held in trust by any person, the trustee shall
make a declaration to the public trustee. Section 187B of the Act provides that
save as otherwise provided in s. 153B but notwithstanding anything contained in
any other provisions of the Act or any other law or any contract, memorandum or
articles, where any shares in a company are held in trust by a person as
trustee, the rights and powers (including the right to vote by proxy) exer-cisable
at any meeting of the company or at any meeting of any class of members of the
company by the trustee as a member of the company cease to be exercisable by
the trustee as such member and become exercisable by the public trustee.
Section 187C of the Act makes it incumbent upon a person whose name is entered
in the register of members of a company but who does not hold the beneficial
interest in the share in question in such form as may be prescribed make a
declaration to the company specifying the name and other particulars of the
person who holds the beneficial interest in such share. The Companies
(Declaration of Beneficial Interest in Shares) Rules, 1975, are made in this
connection. It is obvious from the foregoing that none of the provisions referred
to above has any bearing on the question before us.
Mere appointment of a
receiver in respect of certain shares of a company without more cannot,
therefore, deprive the holder of the.shares whose name is entered in the
register of members of the company the right to vote at the meetings of the
company or to issue a notice under s. 169 of the Act.
The consequence of
attachment of certain shares of a company held by a shareholder for purposes of
sale in a proceeding under s. 149 of the Land Revenue Act is more or less the
same. The effect of an order of attachment is what s. 149 of the Land Revenue
Act itself says. Such attachment is made according to the law in force for the
time being for the attachment and sale of movable property under the decree of
a civil court. Section 60 of the CPC, 1908, says that except those items of
property mentioned in its proviso, lands, houses, or other buildings, goods,
money, banknotes, cheques, bills of exchange, hundis, promissory notes,
Government securities, bonds or other securities of money, debts, shares in a
corporation and all other saleable property, movable or immovable, belonging to
a judgment-debtor, or over which, or the profits of which, he has a disposing
power which he may exercise for his own benefit, whether the same be held in
the name of the judgment-debtor, or by another person in trust for him or on
his behalf, are liable for attachment and sale in execution of a decree against
him. Section 64 of the CPC, 1908, states that where an attachment of a property
is made, any private transfer or delivery of the property attached or of any
interest therein and any payment to the judgment-debtor of any debt, dividend
or other monies contrary to such attachment, shall be void as against all
claims enforceable under the attachment. What is forbidden under section 64 of
the CPC is a private transfer by the judgment-debtor of the property attached
contrary to the attachment, that is, contrary to the claims of the decree
holder under the decree for realisation of which the attachment is effected. A
private transfer under s. 64 of the CPC is not absolutely void, that is, void
as against all the world but void only as against the claims enforceable under
the attachment. Until the property is actually sold, the judgment-debtor
retains title in the property attached. Under r. 76 of 0. 21 of the CPC, 1908,
the shares in a corporation which are attached may be sold through a broker. In
the alternative, such shares may be sold in public auction under r. 77 thereof.
On such sale, either under rule 76 or under r. 77, the purchaser acquires
title. Until such sale is effected, all other rights of the judgment-debtor
remain unaffected even if the shares may have been seized by on officer of the
court under r. 43 of
O. 21 of the CPC, 1908, for the purpose of effecting the attachment, or through
a receiver or through an order in terms of r. 46 of O. 21 of the CPC which may
have been served on the judgment-debtor or on the company concerned.
On
behalf of the appellants, relying upon the decision in Hawks v. Me Arthur
[1951] 1 All ER 22, it is contended that the order of the Collector attaching
the shares was in the nature of a charging order which deprived the Cotton
Mills Company of its rights in them. Having carefully gone through the said
decision, we find that it has not much relevance to the case. In that case, the
chairman and the manager of a company had purchased certain shares of the
company held by one of its members in two separate lots after paying
consideration there for contrary to art. 13 of the company's articles of
association which granted a right of pre-emption to all the other members in
respect of the shares in question. 'Immediately after the said purchases were
made, another member of the company obtained a money decree against the
transferor of the shares and also a charging order over the shares standing in
the name of the transferor but which had been sold earlier either to the
chairman or the manager. He claimed that since the transfer of the shares was
contrary to art. 1 3 of the company's articles of association, the transfer was
void and, hence, he was entitled to enforce the charging order against those
shares for realising his decretal amount. The court negatived his claim holding
that notwithstanding the complete failure to comply with the company's articles
in regard to the procedure to be followed before the shares could be
transferred, the transferees having paid to the transferor the full
consideration for the shares had obtained equitable rights therein and as their
rights accrued earlier than the equitable right of the plaintiff under the
charging order, their rights must prevail over his claim. It was argued before
us that the order of the Collector being an order in the nature of a charging
order, the receiver had obtained an equitable right in the shares in question
and there being no other legal or equitable right which would prevail over it,
the Cotton Mills Company had lost its right to the shares. The statement of
facts of the above decision itself shows that it has no bearing on the case
before us. It is to be noted that a charging order under the English Law is not
the same as an attachment of property or appointment of a receiver under the
Land Revenue Act. We may state here that charging orders under the English Law
are made under O. 50 of the English Supreme Court Practice under which the
English court may for the purpose of enforcing a judgment or order of that
court under which a debtor is required to pay um of money to a creditor, make an
order imposing on any such property of the debtor as may be specifed in the
order, a charge for securing the payment of any money flue or to become due
under the judgment or order. Such an order is referred to as the "charging
order". A charging order on the property or assets of the debtor is one of
the modes of enforcement of a judgment or order for the payment of money to the
creditor. It is, however, not a direct mode of enforcement in the sense that
the creditor can immediately roceed to recover the fruits of his judgment, but
it is rather an indirect mode of enforcement in the sense that it provides the
creditor with security, in whole or in part, over the property of the debtor.
It makes the creditor a secured creditor who having obtained his charging order
must proceed, as may be necessary according to the nature of the property
charged, to enforce his charge in order to obtain the actual proceeds of his
charge to satisfy his judgment, in whole or in part. Subject to the other
provisions of law, a charge imposed by a charging order will have effect and
will be enforceable in the same court and in the same manner as an equitable
mortgage created by the debtor by writing under his hand. A short passage in
Mula's Code of Civil Procedure (14th Edn), Vol. II at page 151s instructive and
reads thus :
"There
is no provision in the Code for charging orders, but on the Original Side of
the High Courts, which have inherited the older jurisdiction of the Court of
Chancery, it is the practice in cases where it is considered undesirable to
grant immediate execution to make a charging order in the form made in the case
of Kewy v. Attil [18] 34 Ch D 345. When the assets require nursing, the
advantage of a charging order is that it enables the court on the one hand to gain
time and on the other hand to protect the decree-holder. It also avoids the
confusion that might ensue if the court were to allow a direct attachment while
it is administering the assets of the partnership. The effect of a charging
order is to constitute the decree-holder a secured creditor although he
undertakes to deal with the charge subject to the further orders of the
court."
An
order of attachment cannot, therefore, have the effect of depriving the holder
of the shares of his title to the shares. We are of the view that the
attachment of the shares in the Polytex Company held by the Cotton Mills
Company had not deprived the Cotton Mills Company of its right to vote at the
meeting or to issue the notice under s. 16of the Act.
The
fact that 3,50,000 shares have been pledged in favour of the Government of
Uttar Pradesh also would not make any difference. Sections 172 to 178A of the
Indian Contract Act, 1872, deal with the contract of pledge. A pawn is not
exactly a mortgage. As observed by this court in Lallan Prasad v. Rahmat All,
AIR 1967 SC 1322; [1967] 2 SCR 233, the two ingredients of a pawn are (at p.
1325 of AIR 1967 SC):
"(1) that
it is essential to the contract of pawn that the property pledged should be
actually or constructively delivered to the pawnee, and
(2) a pawnee has only a special property in the pledge but the
general property therein remains in the pawner and wholly reverts to him on
discharge of the debt. A pawn, therefore, is a security, where, by contract, a
deposit of goods is made as security for a debt. The right to property vests in
the pledge only so far as is necessary to secure the debt... The pawner,
however, has a right to redeem the property pledged until the sale."
In Bank of Bihar v. State
of Bihar [1971] 41 Comp Cas 591 ; AIR 1971 SC 1210; [1971] Supp 2 SCR 299, also
this court has reiterated the above legal position and held that the pawnee had
a special property which was not of ordinary nature on the goods pledged and so
long as his claim was not satisfied, no other creditor of the pawner had any
right to take away the goods or its price. Beyond this, no other right was
recognised in a pawnee in the above decision. Under s. 176 of the Indian
Contract Act, 1872, if the pawner makes default in payment of the debt, or performance,
at the stipulated time, of the promise, in respect of which the goods were
pledged, the pawnee may bring a suit against the pawner upon the debt or
promise, and retain the goods pledged as a collateral security, or he may sell
the thing pledged, on giving the pawner reasonable notice of the sale. In the
case of a pledge, however, the legal title to the goods pledged would not vest
in the pawnee. The pawnee has only a special property. A pawnee has no right of
foreclosure since he never had the absolute ownership at law and his equitable
title cannot exceed what is specifically granted by law. In this sense, a
pledge differs from a mortgage. In view of the foregoing, the pawnee in the
instant case, i.e., the Government of Uttar Pradesh, could not be treated as
the holder of the shares pledged in its favour. The Cotton Mills Company
continued to be the member of the Polytex Company in respect of the said shares
and could exercise its rights under s. 169 of the Act.
It may be stated here that
the Government of Uttar Pradesh and the Collector who are the parties to this
appeal have not questioned the correctness of the judgment of the High Court.
One other subsidiary
contention urged on behalf of the appellants relates to the effect of an order
made by the Central Government on April 13, 1978, under s. 18AA(1)(a) of the
Industries (Development and Regulation) Act, 1951, taking over the management
of Swadeshi Cotton Mills along with five other industrial units belonging to
the Cotton Mills Company which was the subject-matter of dispute in Swadeshi
Cotton Mills v. Union of India [1981] 51 Comp Cas 210 (SC); [1981] 2 SCR 533,
and the order of extension passed by the Central Government on November 26,
1983, which is the subject-matter of dispute in a case now pending before this
court. It is urged on behalf of the appellants that on the passing of the
above-said orders, the Cotton Mills Company lost its right to exercise its
voting rights in respect of the shares in question. There is no substance in
this contention. What was taken over under the above-said orders was the
management of the six industrial units referred to therein and not all the
rights of the Cotton Mills Company. The shares belong to the company and the
orders referred to above cannot have any effect on them. The Department of
Company Affairs, Government of India, rightly expressed its view in the letter
written by C. Khushaldas, Director in the Department of Company Affairs, on
April 9, 1979, to B.M. Kaul, Chairman of the Cotton Mills Company, that the
voting rights in respect of these shares continued to vest with the Cotton
Mills Company and the manner in which those voting rights were to be exercised
was to be determined by the board of directors of the Cotton Mills Company.
Hence, the passing of the orders under s. 18AA(1)(a) of the Industries
(Development and Regulation) Act, 1951, has no effect on the voting rights of
the Cotton Mills Company.
It is also significant that
the directors of the Polytex Company who knew that a receiver had been
appointed in respect of the shares in question, that they had been attached by
the Collector, that a part of them had also been pledged in favour of the
Government of Uttar Pradesh and that orders had been passed under s. 18AA(1)(a)
of the Industries (Development and Regulation) Act, 1951, taking over six
industrial units of the Cotton Mills Company, did not question the validity of
the notice. The Polytex Company had in this case rightly treated the registered
holder, i.e., the Cotton Mills Company, as the owner of the shares in question
and to call the meeting in accordance with the notice issued under s. 169 of
the Act. The appellants cannot, therefore, be allowed to raise any dispute
about the validity of the meeting on any of the grounds referred to above.
In the result, the appeal
fails and it is dismissed with costs. The costs of all the parties to the above
appeal and other connected cases shall, however, be borne by the Polytex
Company.
Subject to the above order,
the order passed by the court on February 1, 1985, shall remain in force.
[1955] 25 COMP CAS
57 (
HIGH COURT OF
Hindustan Investment Corporation Ltd.
v.
INCOME-TAX
REFERENCE NO. 22 OF 1953
CHAKRAVARTTI, C.J.,
AND LAHIRI, J.
AUGUST 31, 1954
Sukumar Mittar and Khaitan, for the Applicant.
E.R. Meyer and B.L. Pal, for the Respondet.
Chakravartti C.J.—The question involved in this reference is covered by the decision of the Bombay High Court in Shree Shakti Mills Limited v. Commissioner of Income-tax, Bombay City, by the decision of the Nagpur High Court in Jaluram Bhikulal Firm of Itwara v. Commissioner of Income-tax, Madhya Pradesh, and by a decision of ourselves in Bikaner Trading Co. Calcutta v. Commissioner of Income-tax, West Bengal. Mr. Mitra, who appears for the assessees, however, wanted to argue the point again. We readily agreed to allow him to do so, because in the case where we had occasion to decide the point, the assessee was not represented. In the next reference the same point is involved and Mr. A.K. Sen, who appears for the assessees in that reference, made a request to us that we might defer our judgment till we heard heard him. Accordingly, we heard the two references together and are now able to pronounce our judgment after having had the benefit of elaborate and careful arguments.
The facts of the present case are simple and may be given in the words of the Tribunal. They have stated them as follows:—
"The assessee is a public limited company. It had during the previous year relevant to the assessment year 1948-49, received dividend income out of which income amounting to Rs. 24,318 was not grossed up under section 16(2) and the assessee was not given credit under section 18(5) for the relevant tax paid by the various companies. The shares in respect of which this dividend income of Rs. 24,318 was received were held by the assessee company in blank transfer. The transfer of these shares had not thus been registered in the name of the assessee company with the various companies. Thus, the registered shareholders in the books of those companies were some other persons from whom the assessee company purchased the shares."
The contention of the assessees (I shall use the plural number) was that since the amount of Rs. 24,318 was a dividend amount and it was being included in their total income, it had to be grossed up under section 16(2) of the Income-tax Act for the purposes of such inclusion and they were to be given credit under section 18(5) of the Act for the sum by which the amount might be increased, as tax paid on their behalf by the companies which had paid the dividend. The Income-tax Authorities repelled that contention on the ground that the assessees, not being registered holders of the shares on which the dividend had been paid, were not entitled to the benefit of sections 16(2) and 18(5) and, in support of the view taken by them, they relied on the decision of the Bombay High Court to which I have just referred. On behalf of the assessees, reliance was sought to be placed on a subsequent Circular of the Board of Revenue, Circular No. 1 of 1949 dated the 5th of May, 1949, but it was pointed out that while the Circular gave directions for not applying the Bombay decision to certain cases, it expressly excluded the case of persons holding shares on blank transfers without having their names registered. Before the Tribunal, the Bombay decision was sought to be distinguished on the ground that, there, no certificate granted under section 20 of the Act had been produced, as had been done in the present case, but the Tribunal held that the basis of the decision was that the benefit of section 18(5) could be claimed only by a registered shareholder and, therefore, the production of certificates issued under section 20 of the Act could not take the present case out of the principle of the decision.
In due course, the assessees asked for a reference to be made to this court and the following question was referred:—
"Whether on the facts and in the circumstances of the case, the assessee is entitled to the process of grossing up under section 16(2) of the Income-tax Act and getting credit under section 18(5) in respect of the shares held by it in blank transfer."
It was broadly contended on behalf of the assessees that since the amount in question was undoubtedly a dividend amount and tax had, in fact, been deducted before it had been paid, which the Revenue would get in due course, it was plainly unjust that the amount should be included in the assessable income of the assessees, and yet they should not be given the benefit of section 18(5). It is impossible to say that there is not great force in that contention, but, at the same time, it must be pointed out that there is no equity in matters of taxation. If the Act, on its true construction, be found to have limited the benefit of section 18(5) to registered shareholders, the courts must declare such to be the law.
The decision of
the question depends upon three sections of the Income-tax Act. First comes
section 16(2) which says that "for the purposes of inclusion in the total
income of an assessee, any dividend shall be deemed to be income of the
previous year in which it is paid, credited or distributed or deemed to have
been paid, credited or distributed to him" and shall be increased to such
an amount as would leave an amount equal to the dividend, if income-tax at the
rate applicable to the company were deducted from it. A larger amount,
inclusive of the tax paid, is thus to be brought under assessment. Next comes
section 18(5) which says that "any sum by which a dividend has been
increased under sub-section (2) of section 16 shall be treated as a payment of
income-tax on behalf of ... the shareholder." Thus, what is added to the
assessable income under section 16(2) is given back under section 18(5) as credit
for tax paid. Lastly, comes section 49B which furnishes the reason for the
credit given under section 18(5).
It says:—
"Where any dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed to any of the persons specified in section 3 who is a shareholder of a company which is assessed to income-tax in the taxable territories or elsewhere, such person shall, if the dividend is included in his total income, be deemed in respect of such dividend himself to have paid income-tax (exclusive of super-tax) at the rate applicable to the total income of the company for the financial year in which the dividend has been paid, credited or distributed or is deemed to have been paid, credited or distributed on so much of the dividend as bears to the whole the same proportion as the amount of income on which the company is liable to pay income-tax bears to the whole income of the company."
Thus, the tax which is to be treated under section 18(5) as paid by the company on behalf of the shareholder is to be deemed under section 49B as paid by the shareholder himself and, understandably, he gets credit for the payment in his own assessment.
It is to be noticed that as regards acquiring the right to the credit, nothing really turns on the provisions of section 18(5) and section 49B. Once a dividend is grossed up under section 16(2), the person, as whose income it is grossed up, must be given the benefit of section 18(5), because the only condition laid down in the section is that the dividend has been increased under section 16(2).
But who is the person which these sections have in view. Section 16(2) describes him simply as the "assessee". Section 18(5) describes him as the "shareholder". Section 49B describes him as "a shareholder of a company." He is thus a shareholder and section 16(2) adds that the dividend is "paid, credited or distributed to him." What tests must a person satisfy in order to come under that description?
Mr. Mitra
contended that the "shareholder" contemplated by the sections was any
holder of a share, whether registered as such or not. He pointed out that the
Income-tax Act had used the word "shareholder" and not the word
"member" and submitted that the two terms were not synonymous. A
share, it was said, was movable property under section 28 of the Indian
Companies Act and could be transferred by blank transfer forms and when they
were so transferred, the transferee became the full owner of the shares, that
is to say, a "shareholder" and as such entitled to receive the
dividend declared on the shares. A member of a company, it was further argued,
had to be a shareholder of it, but a shareholder was not necessarily required
to be a member borne on the register of the company. That he held certain
shares was sufficient to make him a shareholder and to entitle him to receive
the dividend thereon. The object of the Income-tax Act, it was said, was to tax
profits and in construing the word "shareholder", as used in the Act,
it would be proper to hold that the Legislature intended to indicate by that
word the person by whom the profits had, in fact, been received.
On the main argument of Mr. Mitra, Mr. Sen took somewhat the same line and gave us the interesting history of how the word "shareholder" came into the legislation relating to joint stock companies and how it had been replaced by the word "member". It appears that in section III of 7 & 8 Viet. 1844 Cap. CX., "shareholder" was defined as "any person entitled to a share in a company, and who has executed the deed of settlement, or a deed referring to it." The rights which a shareholder enjoyed accrued to him on his complying with certain further conditions. Section XXVI of the Act provided that "no shareholder of any joint stock company completely registered under this Act shall be entitled to receive any dividends or profits, or be entitled to the remedies or powers hereby given to shareholders, until he shall have executed the deed of settlement of the said company, or some deed referring thereto, and also have paid up all instalments or calls due from him, and shall have been registered in the registry office aforesaid."
It is thus clear that in order to be entitled to receive a dividend a shareholder had to have his name registered as such under the English Act of 1844. Transfers of shares were provided for in section LIV of the Act and it said that subject to the regulations contained in the Act or any deed of settlement relating to the company, shares could be transferred by a deed, a memorial of which was to be entered in a book called "the Register of Transfers." Then came the Act of 1862, 25 & 26 Viet., Cap. LXXXIX, which dropped the word "shareholder" and introduced the word "member" in section 23, defining it in the same way as section 30 of the Indian Companies Act. Transfers were provided for in Regulation VIII of Table 'A' which was in the same terms as Regulation 18 of Table 'A' of the Indian statute. Mr. Sen's contention was that the word "shareholder" had an ancestry and it would be proper to construe it as used in the Income-tax Act in the old sense of the definition section of the English Act of 1844 under which, in order to be simply a shareholder, it was not necessary to have one's name registered in the books of the company. Even the Indian Companies Act, Mr. Sen contended, used the word "shareholder" in a sense different from that of the word "member" and he referred to section 79(1)(e) as an illustration.
I am unable to
agree that the Indian Companies Act makes a distinction between a shareholder and
a member or that the word ''shareholder", as used in the Income-tax Act,
can be construed as meaning merely the holder of a share who may or may not be
a member. There can be no question that the Indian Companies Act is framed on
precisely the same lines as the English Companies Act, nor that the words
"shareholder" and "member" have been used in the Indian Act
in the same sense as in the parent statute. As to the terms as used in the
English Act, their meaning has been given in Palmer in a passage remarkable for
its terseness and brevity: "In the case of a company limited by
shares," observes the learned author, "the terms 'member' and
'shareholder' are synonymous. A member is a shareholder, and a shareholder is a
member." (See Palmer's Company Law, Nineteenth Edition, page 81). Mr.
Mitra contended that with reference to the Indian Act, that statement would not
be wholly accurate and he referred to the holders of share warrants who were
not shareholders, but who might be deemed to be members under section 46 of the
Act. That submission, to my mind, has no point in it, because a similar
provision occurs in section 112(5) of the English Act and if in spite of it
Palmer has stated that the words "shareholder" and "member"
are synonymous, he has done so for the obvious reason that the holder of a
share warrant can only be deemed to be a member if the articles of the company
so provide, but he is not really and in fact a member as of right and in the
primary sense of the term. Indeed, there are indications in the Indian Act
itself from which it is abundantly clear that the expressions
"member", "shareholder" and "the holder of a
share" have been used in the same sense, meaning persons holding shares in
a company and registered as such in the Register of Members. Reference need
only be made to sections 49(1), 57, 58, 66A, 78, 138 and 146(1) of the Indian
Companies Act. It would be tiresome to refer to the provision of all of them,
but I shall refer to some. Section 66A(1) authorises the holder of not less
than 10 per cent. of the issued shares of a particular class to apply to the
Court to have a variation of their rights cancelled and sub-section(3) of the
section provides that the Court may disallow the variation if it is satisfied
that it will "unfairly prejudice the rights of the shareholders of the
class represented by the applicant." It is thus clear that the expression
"holder of shares" and "shareholder" have been used in the
same sense. Again, section 135 provides that any "member" of a
company shall be entitled to be furnished with copies of the balance-sheet,
profit and loss account or the income and expenditure account and the audit
reports; and section 146(1) provides that holders of preference shares and
debentures shall have the same right to receive the balance-sheets and profit
and loss accounts and the reports of auditors and other reports as is possessed
by the "holders of ordinary shares" in the company. There can be no
doubt that the expressions "holder of shares" and "member"
have been used as synonymous. Lastly, section 49(1) authorises a company to
make arrangements upon the issue of shares for a difference between the
"shareholders" in the amounts and times of payment of calls on the
shares, while section 49(2) authorises the company to receive from
"members" the amount remaining unpaid on the shares held by them,
although the same may not have been called up. It is again clear that the words
"member" and "shareholder" have been used in the same
sense. Indeed, it is difficult to conceive how a person can be a share-holder
in the true and full sense of the term without being a member of the company
whose name is borne on the register, because, to mention only one circumstance,
if his name is not borne on the register, the company would not be in a
position to make calls on him for the unpaid part of the amount payable on the
shares held by him. Section 79(1)(e) which was particularly relied upon by Mr.
Sen does not suggest that there can be shareholders whose names are not entered
in the register of shareholders. The section is concerned with meetings and
votes and clause (e) of sub-section (1) provides that "any shareholder
whose name is entered in the register of shareholders of the company shall
enjoy the same rights and be subject to the same liabilities as all other
shareholders of the same class." It is perfectly clear that by the phrase
"shareholders of the same class" unregistered shareholders could not
have been meant, because such shareholders could have no concern with meetings
of the company and the right of voting at them. What the clause plainly means
is that all shareholders of a particular class whose names are entered in the
register shall have the same rights and liabilities as between themselves,
irrespective of the date of the entry of their names in the register. It is a
provision intended to defeat regulations, which are sometimes found to the
effect that in order to be entitled to exercise the rights of a shareholder,
the holder of a share must have held his share for a certain length of time.
If the terms "member" and "shareholder" have the same meaning in the Companies Act, I am unable to hold that the latter term has been used in a different sense in the Income-tax Act. Both Mr. Mitra and Mr. Sen referred us to the position of a person who purchases a share by blank transfer forms and the rights as to the receipt of dividend which such transfer of shares confers on the transferee as against the transferor. Mr. Mitra cited the decisions in Black v. Homersham and In re Wimbush: Richards v. Wimbush and pointed out that, according to those decisions, a transferee of shares acquired the right to the dividends even as respects a period prior to the transfer when the same was declared subsequently, because as it was picturesquely put in the latter of the two cases, he had bought the tree, and with it the fruits ripening on it. Reference was also made to the decision in Bank of India Ltd. v. Jamsetji A.H. Chinoy and Messrs. Chinoy and Company, for the proposition that what was crucial was not the period in which the dividend was earned, but the date or dates of its declaration. It was lastly pointed out that a transferee of shares under blank transfer forms was entitled to put in his own name even after the death of the transferor and have his name registered with the company, as was held in the case of In the matter of Bengal Silk Mills Co., Ltd.
I do not see that the position as between the transferor and the transferee of shares under blank transfer forms furnishes any answer to the question we have to decide in the present case. When a dividend is distributed, the tax before its distribution is deducted by the company for payment to the Revenue, and the person who, under the Income-tax Act, can claim credit for the payment is the person on whose behalf the company can be treated as having paid it. Obviously, such a person can only be a person whom the company knows to be its shareholder, to whom it allots a share of the divisible fund, from whose share it makes a deduction and for whose benefit it pays it as tax. It is true that under section 28 of the Companies Act, shares are transferable in the manner provided by the articles of a company, but regulation 18 of Table A provides that while a share can be transferred by an instrument of transfer and no deed is required, "the transferor shall be deemed to remain holder of the share until the name of the transferee is entered in the register of members in respect thereof." There is no information in the present case as to what the provisions were in the articles of the companies which had paid the dividend amount concerned, but all parties have proceeded on the footing that there was a provision of the nature of regulation 18. Indeed, Mr. Sen stated that he could not think of an ordinary trading company which would not have an article of that kind. It, therefore, follows that an unregistered transferee of shares is not a holder of the shares in the eye of the company and it will not and cannot pay dividends to him and does not make any deduction from any dividend paid to him or pay any tax on his behalf. It is wholly immaterial that a transferee of shares is entitled to fill in his own name and obtain registration of himself as the holder of the shares. Till he has done so, he has no rights as against the company and the company does not deal with him. We had a lengthy argument before us as to the rights of a transferee of shares under blank transfer forms, but I think it will be sufficient if I set out the summary of the law, as given in the standard work of Buckley. The learned author states as follows:—
"Where the articles of association do not require a deed, but permit transfers to be made by 'instrument in writing,' a transfer in blank carries to the person whose name is subsequently filled in as transferee, not only the equitable, but also the legal interest—meaning, it is conceived, the legal right to call upon the company to register the transfer. For there is no legal title to the shares until registration; or at any rate until all necessary conditions have been fulfilled to give the transferee as between himself and the company a present absolute and unconditional right to have the transfer registered." (See Buckley on the Companies Acts, Twelfth Edition, page 808).
It is thus clear that although a purchaser of shares under blank transfer forms may acquire the right to the dividend declared thereon after the transfer as against his own vendor, he does not acquire the full legal title to the shares as against the company till his name is registered; and so long as he remains an unregistered purchaser, he does not come into consideration by the company at all as regards either payment of dividend or deduction of tax for his benefit. I can, therefore, see no reason for construing the word "shareholder", as used in the Income-tax Act, in a sense different from what it bears in the Companies Act. Credit for payment of tax given to a shareholder under section 18(5) presupposes and indeed requires that he should be among the persons between whom the company has distributed the dividend, from the amount payable to whom it has made a deduction and on whose behalf it may be treated as having paid the amount of the deduction as tax. In other words, the section cannot be construed in any sense according with reality, unless the word "shareholder" is taken to mean a registered shareholder.
Pausing here for a moment, I might point out that a transferee of shares under blank transfer forms whose name is not registered in the books of the company becomes the owner of the shares in a very limited sense. Although for purposes of transfer a share is to be treated as movable property, it is not in fact like just so much chattel, but is bound up inextricably with the company of whose share-capital it is a share and carries certain rights and obligations inseparable from the company. As to the true nature of a share, I can do nothing better than refer to the exposition by Far well, J., as he then was, in the case of Borland's Trustee v. Steel Brothers & Co., Limited, which has now become almost classical. "A share," observed the learned Judge, " is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with section 16 of the Companies Act, 1862. The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money settled in the way suggested, but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount." It will thus be seen that a share is a share of the share-capital of a particular company and carries with it certain rights and obligations arising out of covenants as between all the shareholders. The purchaser of a share, if he is to become a shareholder in the full sense of the term, must be admitted to the company of the shareholders, if I may use the expression, which he can do only by getting his name registered and thus introducing himself into the circle of persons who, between themselves, have agreed to be members of the company and to conduct its business. It is a mistake to suppose that a share is movable property in the sense of a garment or an article of furniture. As I have pointed out, it is linked up with the company of which it is a share in a very peculiar manner and since the Income-tax Act confers a benefit which is founded on the relationship, not as between the vendor and the purchaser of a share but as between the holder of a share and the company, I think that the purchaser of a share cannot become a shareholder within the meaning of the Income-tax Act unless he gets his name registered. Section 16(2) of the Act, to my mind, makes the intention of the Act clear, because after referring to the assessee it speaks of the dividend "paid, credited or distributed to him."
In addition to contending that a shareholder, as contemplated by the Indian Companies Act, was not a registered shareholder, Mr. Sen adopted an alternative line of argument. He contended that assuming that a company paid and could pay dividend only to a registered shareholder, yet when, after an unregistered transfer, the transferor continued to receive dividend on the shares from the company, he received it as a trustee for the transferee and the dividend paid to him was paid to the transferee within the meaning of section 16(2). It was in that form that Mr. Sen attempted to satisfy the expression "to him", as occurring in section 16(2), in the case of an unregistered transferee of shares. He relied on the decisions in Commissioners of Inland Revenue v. Roberts, and In re Rose: Rose v. Inland Revenue Commissioners. In the first case, two companies were amalgamated and the condition of the amalgamation was that the shareholders of both the companies would transfer their shares to a holding company to be formed for the purpose and would be paid by the allotment of shares in the new company in certain proportions. The transfer was to take effect from the 1st April, 1921. While one of the transferor companies had declared a dividend for the year ending on the 31st March, 1921, the other company, whose financial year was the calendar year, had done so only for the year ended on the 31st December, 1920. It was therefore necessary to make some provision for the dividend which might be declared in respect of the three months between the 31st December, 1920, and the 1st April, 1921. The provision made in the agreement for sale was that the new company would have to account for such dividend to the shareholders of the second transferor company and that the dividend for the three months should be paid to them. The transfer of the shares of the second company was thus expressly ex-dividend. When the company declared a dividend sometime later, the new company, which was then the owner and the registered holder of the shares, wrote to the transferor company to pass on the dividend to persons who were borne on its register as shareholders on the 1st of April, 1921, and the same was done. The question really decided in the case was that the amount of dividend so received by the shareholders of the second transferor company was not a part of the consideration paid for the transfer of the shares and not a capital receipt, but was a revenue or income receipt, because the sale had been ex-dividend and the dividend came to the shareholders as dividend and as nothing else. In the course of his judgment, however, Atkin, L.J., as he then was, made the following observation, apparently on some misapprehension of fact:
"I think", observed the learned Lord Justice, "it was a payment which was received by the purchaser as a trustee for the seller, that he received it in that capacity as trustee of income for the seller and when he handed it over it to the seller, it was part of his income exactly as in the ordinary case of a sale ex-dividend where the purchaser receives income on behalf of the seller and has to account for it."
As I have pointed out, the new company did not actually receive the dividend, but Atkin, L.J., might have meant that since it was the new company which was the registered holder of the shares on the date on which the dividend was declared, it was that company which had received it in the technical sense, although it had not done so physically. The facts were correctly stated by Lawrence, L.J., who observed that "if they," meaning thereby the new company, "had received it, which, as a matter of fact, they did not, they would have held it as bare trustees for their vendors." In the second case cited by Mr. Sen, a person transferred 10,000 shares in an unlimited company to his wife and then transferred a further 10,000 shares in the same company to certain other persons as trustees to hold upon the trusts of a settlement. The transfers and the settlement were executed respectively on the 30th March, 1943, and the 5th April, 1943. In order not to be liable to estate duty, it was necessary that the gifts should have been completed before the 10th of April, 1943, and the question was whether they had been so completed in view of the fact that although the relative share certificates had been handed over to the transferees, the transfers were not registered till the 30th June, 1943. It was held that the deceased having done everything in his power by executing the transfers to transfer his legal and beneficial interest in the shares to the transferees, the transferees had become beneficial owners of the shares and between the date of the execution of the transfers and their registration, the deceased could not have asserted any beneficial title by virtue of his position as the registered holder. It was held further that having regard to the form and operation of the transfers, the nature of the property transferred and the necessity for registration in order to perfect the legal title, coupled with the discretionary power in the directors to withhold registration, the deceased was, pending registration, in the position of a trustee of the legal title in the shares for the transferees. On the basis of these decisions, Mr. Sen contended that a transferor of shares under blank transfer forms would be a trustee for the transferee in respect of dividends declared and received thereafter and that it ought to be held that the payment of dividend to such transferor would be payment in trust for the transferee and therefore in law a payment to the latter within the meaning of section 16(2).
In my opinion, the cases cited by Mr. Sen have no direct bearing on the question which we have before us. If the question had been whether the amount of the dividend income had been rightly included in the assessable income of the assessees, the decisions would have been strong authorities for holding that it had been rightly included. But, as I have said, the only use which Mr. Sen wanted to make of the cases was to utilise the expression of opinion that the transferee in one case and the transferor in the other would be in the position of a trustee for the transferor and transferee respectively and on that basis he argued that the payment of dividend to a shareholder who had sold off his shares to a person who had not got his name registered would be payment to the purchaser.
As I have stated
already, in my view, cases dealing with the position as between the transferor
and the transferee do not help up us in diciding the question we have to deal
with in the present case. In the second of the decisions cited by Mr. Sen, the
learned Judges of the Court of Appeal made it perfectly clear that they were
not deciding any question of rights which an unregistered purchaser of shares
would have against the company or what the relationship between the two would
in law be. "If the company had declared a dividend," observed
Evershed, M.R., "during this interregnum, it is not open to question that
the company must have paid that dividend to the deceased. So that vis-a-vis the
company, this document did not, and could not, operate to transfer to Mrs. Rose
the right against the company to claim and receive that dividend." (See In re Rose:
Rose v. Inland Revenue Commissioners). Jenkins, L.J., was even more explicit. His Lordship
observed as follows:—
"In my view, in order to arrive at a right conclusion in this case, it is necessary to keep clear and distinct the position as between transferor and transferee and the position as between transferee and the company. It is, no doubt, true that the rights conferred by shares are all rights against the company, and it is no doubt true that, in the case of a company with ordinary regulations, no person can exercise his rights as a shareholder vis-a-vis the company or be recognized by the company as a member unless and until he is placed on the register of members."
His Lordship then proceeded to deal with the point before him which was a point limited to the transferor and the transferee. The passages which I have extracted from the judgments of the learned Master of the Rolls and the learned Lord Justice are sufficient to make it clear that even after a transfer has been effected by a holder of shares who has done everything in his power to effect it, the company can pay the dividend only to him and he is the only person who can claim and receive that dividend, till the purchaser gets his name registered in the books of the company. The expression "paid to him" in section 16(2) cannot, therefore, be taken to cover a case of payment to a transferor of shares in trust for the transferee who has not yet got his name registered.
Indeed, it seems impossible to fit in payment of dividend to anyone other than the registered holder with the language used in section 16(2) of the Act. The section refers to the assessee and speaks of "income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him." The word "deemed" does not refer to the payment itself, but only to the year to which the payment is to be attributed and this was conceded by Mr. Sen. The section thus contemplates a person to whom dividend is paid or credited or distributed. It cannot for a moment be argued that any of the three words can refer to a person other than the person contemplated by the remaining two words. Taking the word "credited" first, it cannot possibly be disputed that it refers to a registered shareholder, because no amount can be credited to a person whose name does not appear in the books of the company. Taking next the word "distributed", there can again be no doubt that it refers to a registered shareholder, because the company cannot and does not distribute dividend to a person whose name does not appear in the register of shareholders. There remains the word "paid". Payment is made to the persons among whom the dividend is distributed and, therefore, the word "paid" also must be understood to refer to a registered shareholder. Mr. Mitra referred to section 43 of the Indian Companies Act and pointed out that a company did not pay dividend to shareholders or registered shareholders alone, but paid it to others as well, for example, the holders of share warrants. But payment of a dividend to holders of share warrants is specifically provided for by a separate section in the Companies Act. Section 16 (2) does not contemplate a holder of share warrants, but contemplates a shareholder, as is apparent from section 18(5) and section 49B, and therefore the only payment we need consider is payment possible under the Companies Act to the holder of a share. In the case of shareholders, payment of dividend by a company to any holder of shares other than registered shareholders is impossible and, therefore, it appears to me that the theory of payment in trust for the transferee will not work, because, as I have shown, the language of section 16(2) is appropriate only to payment or distribution or the giving of credit to a person who is, in fact, registered as a shareholder. It is not without interest to note that section 33 of the Companies Act expressly forbids any notice of any trust expressed, implied or constructive, to be entered on the register or to be received by the registrar.
For the reasons I have given, I am of opinion that the expressions "assessee" in section 16(2), "shareholder" in section 18 (5) and "a shareholder of a company" in section 49B contemplate a registered shareholder and that an unregistered shareholder is not entitled to the benefit of those sections.
As I said at the beginning of this judgment, looked at broadly, it does appear somewhat unjust that the dividend received by an unregistered transferee should be included in his total income for the purposes of assessment, but at the same time the benefit of section 16(2) and section 18(5) should be denied to him. It is not for courts to speculate as to the reasons for a particular legislative policy, but it might be that the confusion which would result if unregistered transfers were to be recognised was intended to be avoided. For example, if a particular person holds a block of shares on which he has received dividend in the past and for which he has paid tax, he will be regarded by the Department as still holding the shares so long as his name appears in the register. If he wants to prove that he has, in fact, transferred his shares, he may find it extremely difficult to do so, because having been transferred on blank transfer forms, the shares may have, in the meantime, passed through many hands and travelled a long distance away from the original transferor. In those circumstances, it would be extremely difficult to come to a right decision on the contention of the registered holder of the shares. Again, when shares have passed from hand to hand under blank transfer forms, a claim under section 18(5) may be made not only by the person who is holding the shares at the time, but also by an intermediate holder who had received some dividend in the past when he was holding the shares. It appears to me that it will be by no means an easy task to carry out the process of assessment when such claims in respect of the same shares are made by a succession of unregistered holders. On the other hand, the obvious injustice of taxing an amount which is, in fact, dividend income and withholding from it the benefits contemplated by the Act cannot be ignored. Since transfers under blank transfer forms are permitted by law and since it is of the essence of the dealings in the stock exchange that such transfers should take place, it seems desirable and even necessary that a suitable adjustment in regard to the matter of taxation should be undertaken and made by legislation. But till such legislation comes to be undertaken, the courts must declare the law as it is under the present Act.
For the reasons given above, the answer to the question referred must, in my opinion, be in the negative.
The Commissioner of Income-tax, West Bengal, will have his costs of the reference.
Lahiri J.—I agree.
[1953] 23 COMP CAS
103 (NAG.)
HIGH COURT OF
Jaluram Bhikulal Firm of Itwara
v.
MANGALMURTI AND
DEO, JJ.
APRIL 22, 1962
J.M. Thakar, for the assessee.
M. Adhikari,
for the Commissioner.
JUDGMENT
The Income-tax Appellate Tribunal has referred the following question for our opinion:—
"Whether in the circumstances of the case, the assessee is entitled to the benefits of Sections 16(2) and 18(5) of the Indian Income-tax Act in respect of the sum of Rs. 6,086?"
2. The
assessee had purchased certain shares but did not get his name registered in
the books of the company. In the assessment year 1948-49 he returned the
incomes from dividend on these shares and produced the relevant dividend
certificates. As the shares did not stand in the name of the assessee but other
persons, the Income-tax Officer did not treat this income as income from
dividends and did not grant the relief under Section 16(2) and Section 18(5) of
the Indian Income-tax Act. The receipt was treated as income from other
sources. This order was confirmed by the Appellate Assistant Commissioner and
the Appellate Tribunal.
3. Under
Section 4(1) the total income of any previous year of any person includes all
income, profits and gains from whatever source derived which are received or
are deemed to be received in British India in such year by or on behalf of such
person. Section 16(2) provides:—
"For the purposes of inclusion in the total income of an assessee any dividend shall be deemed to be income of the previous year in which it is paid, credited or distributed or deemed to have been paid, credited or distributed to him, and shall be increased to such amount as would, if income-tax (but not super-tax) at the rate applicable to the total income of a company for the financial year in which the dividend is paid, credited or distributed or deemed to have been paid, credited, or distributed, were deducted there from, be equal to the amount of the dividend."
This is what is known as grossing up dividends, and the amount by which the income from dividend is increased under this section is treated as tax paid on behalf of the assessee. That is Section which, so far as it is material for this case, runs:-—
"...any
sum by which a dividend has been increased under sub-section (2) of Section 16,
shall be treated as a payment of income-tax .... on behalf ... of the
shareholder . . . and credit shall be given to him therefore in the assessment,
if any, made for the following year under this Act."
Section 48(3) and Section 49B were also referred to by the learned counsel for the assessee. Under the latter section if the income from dividend is included in the total income of a shareholder, he shall be deemed in respect of such dividend himself to have paid the income-tax though the tax on this income has in fact been paid by the company which has distributed that dividend. Section 48(3) is not relevant. It says that where an income of one person is included under any provision of the Act in the total income of any other person, such other person only shall be entitled to a refund under the section in respect of such income. The sum in question is not the income of any other person which under the provisions of the Act is included in the total income of the assessee.
4. From the foregoing provisions it is clear that the person who is entitled to the benefit of the income-tax paid by a company on the dividend distributed by it is the shareholder. Relying on Shri Shakti Mills Ltd. v. Commissioner of Income-tax, Bombay, the Tribunal has held that "shareholder" mentioned in Section 18(5) of the Act is a person who owns shares and who is shown as a shareholder in the register of the company. The word "shareholder" is not defined in the Act or in the Indian Companies Act. Under the Companies Act the subscribers to the memorandum of a company and every other person who agrees to become a member of the company and whose name is entered in the register of members shall be a member of the company. As every company incorporated under the Indian Companies Act is not limited by shares, a more comprehensive word, namely, "member" was used. But where a company is limited by shares, the terms "member" and "shareholder" are synonymous. A member is a shareholder and a shareholder is a member. See Palmer's Company Law, 19th Edition, page 81. Under Section 28 of the Indian Companies Act the share of any member in a company is movable property transferable in the manner provided by the articles of the company. Section 34, read with the articles of the company, provides the mode of transfer of shares. Where the articles of a company provide that an instrument of transfer is to be executed both by the transferor and the transferee, a transfer executed by the transferor alone does not pass title. Where a shareholder has, under the article, an unrestricted right to transfer his shares, the transfer is complete as soon as the parties sign the deed of transfer. The assesses has led no evidence to prove that the transfers in his favour were complete.
5. Under
Regulation 18 of Table A in the First Schedule to the Companies Act the
transferor shall be deemed to remain holder of the share until the name of the
transferee is entered in the register of members in respect thereof. The right
to transfer may be subject to conditions. The learned counsel has not brought
to our notice any article of the company in respect of whose shares the amount
in question was received which dispenses with this requirement of Regulation
18. Pending registration the transferee has only an equitable right to the
shares transferred to him. He does not become the legal owner until his name is
entered in the register in respect of shares transferred to him. Delay in
registration involves danger to the transferee, for some prior equity may come
to light as in
6. The reference is answered in the negative. The assessee will pay the costs of this reference. Counsel's fee Rs. 100. Paper book costs will be paid by the assessee.
v.
Aviat Chemicals (P.) Ltd.
S.S.
Nijjar, J.
Company
Application No. 152 of 1999 in C.P. No. 646 of 1998, company
application Nos. 144-145 of 1998 and c.p. no. 647 of 1998
April 9,
1999
Section 394, read with sections 391 and 41,
of the Companies Act, 1956 - Amalgamation of companies - Amalgamation of petitioner-company
with respondent-company which had earlier purchased its 100 per cent shares was
sanctioned after due notice and wide publicity - Applicants claiming that they
had purchased earlier 50 per cent shares from Chawlas, former directors of
petitioner-company, and thus become its deemed members, challenged amalgamation
on ground of its having been passed behind their back by defrauding court as to
facts - Whether any objection to order of Court under section 394 should be
raised in appeal under section 391(7) and not through application before
company court for revoking its order - Held, yes - Whether applicants whose
names were not entered into register of members of petitioner company could not
be treated as members or deemed members and hence no notice of proposed merger
was required to be given to them - Held, yes - Whether while applicants might
have a case against Chawlas for breach of contract, etc., they had no case
against petitioner-company or respondent-company since there was no mis-statement
in their pleadings that Chawlas were 100 per cent members and that petitioner
was wholly-owned subsidiary of respondent having 100 per cent shares therein -
Held, yes - Whether, therefore, neither of them could be said to have played a
fraud on court - Held, yes - Whether, application having no merit, had to be
dismissed - Held, yes
The petitioner-company had filed company
petition seeking its merger and amalgamation with the respondent-company. The
notices of the said petition and company petition filed by the
respondent-company were given to the official liquidator and the regional
director and after receiving their reports that the petitioner company had not
conducted its affairs in a manner prejudicial to the interest of its members or
to the public interest and there was no apparent objection to the proposed
amalgamation scheme, the court observing that the same would result in proper
co-ordination and would be more economically viable and efficient, made the
said petition absolute. Subsequently, the applicants, who claimed to be 50 per
cent shareholders and directors of petitioner-company filed an application with
a prayer for setting aside the said orders on the ground that the same had
been passed behind their back by defrauding the court and depriving them of
their right as shareholders. It was contended by the applicants that by an
agreement dated 22-12-1992 Chawlas, the then directors and their relatives who
wholly subscribed the share capital of the petitioner company, entered into an
understanding with them to divide and share equally the land and building and
to dispose of all the asset except land and building and pay off all its
liabilities. Pursuant to the said agreement, the 50 per cent shares of the
petitioner company were alleged to have been transferred to the applicants on
payment of full considerations therefor and two of the applicants were made
directors of the said company and this fact was intimated to the Registrar of
Companies in Form No. 32 filed by the petitioner company. It was also alleged
by the applicants that direction of the Court for dispensing with the
shareholders’ meeting was obtained without the knowledge of the two directors
and that after passing of the impugned order the respondent took possession of
the immovable property of the petitioner-company and commenced
demolition/construction work thereon.
The preliminary issue regarding
non-maintainability of application in view of position contained in section
391(7) was squarely covered by the judgment of the Calcutta High Court in the
case of Bank of Mymensing Gouripur Ltd., In re [1948] 53 CW 143, in which it
was held that once a scheme was sanctioned and the order granting the sanction
had been perfected, the court sanctioning the scheme had no jurisdiction under
the Companies Act to alter or amend the scheme except by way of a fresh scheme
and in such circumstances the other remedy available to the aggrieved party was
to appeal from the order under section 153.
Thus, it followed that the remedy of appeal
was open to the applicants. The views expressed by Calcutta High Court are in
consonance with the provisions of the Act as well as the Code of Civil
Procedure, 1908. It is settled proposition of law that inherent powers of the
Court have to be used sparingly, with circumspection, in order to prevent
miscarriage of justice. These powers are generally not to be used when an
adequate remedy is available to the parties. Hence, this application was not
maintainable.
With regard to the allegation of the Scheme
having been sanctioned on the basis of fraud, since admittedly applicants were
not entered on the register of members, a case had been put forward that they
were deemed members. Provisions of the Act do not provide for any deemed
membership of a company. Prima facie fraud, if any, might have been committed
by the Chawlas on the applicants. After selling the shares to applicant, the
Chawlas did not enter the applicants in the register of members. This enabled
respondent to purchase 100 per cent equity shares of petitioner company and
claim it to be wholly-owned subsidiary of respondent. This was not sufficient
to constitute fraud on the court. Thus, this was not fit case where the
application ought to be entertained. There was no merit in the submission that
the appellate court can only correct erroneous judgments. The powers of the
appellate court are as wide as of the trial court. Thus, an order patently
without jurisdiction would also have to be corrected in appeal.
On merits, the applicants could only succeed
if they were accepted as members of petitioner company. Apparently the applicants
were not recorded as members. On the other hand, respondents were recorded as
members. In such a situation, the settled law was that the deed of transfer in
favour of applicants might be effective qua the Chawlas. It could create no
relationship with petitioner company. This was so because until the transfer
of the shares is actually registered, the transferee’s title to the share is
inchoate. The legal title remains vested in the transfer. The applicants ought
to have applied to the petitioner company for entry of their names in the
register of members in place of Chawlas. This they failed to do. Thus they
could make no claims against the petitioner company. Section 41, when read
along with section 2(27), which provides that member in relation to a company,
does not include a bearer of a share warrant of the company issued in pursuance
of section 114. It becomes evident that entry in the register of members is a condition
precedent to membership even if there be a resolution allotting the shares and
the letter of allotment is issued. The applicants, having failed to get
themselves on the register of members, could not claim any right on the basis
of the share certificates held by them. Thus, there was no deliberate
mis-statement made by respondent or petitioner companies with regard to the
fact that Chawlas were 100 per cent members of petitioner company prior to
July, 1997. Also there was no mis-statement about the desirability of the
merger of petitioner with respondent company. These conclusions were quite
evident from the various facts contained in the pleadings. The applicants had
proceeded on the footing that merely because they were holders of the shares of
petitioner company to the extent of 50 per cent, they were ipso facto members
of petitioner company. The consideration of various provisions of the Act would
make it abundantly clear that a bare shareholder does not become a member of
the company unless and until the name was entered in the register of members.
Moreover, the applicants claimed to be members of the company from 1992
onwards. Yet no steps had been taken to even make a cursory inspection of
register of members of petitioner company. There was no record of the
applicants ever having attended any meetings. They did not care to take issue
when amalgamation petitions were advertised.
They now merely pleaded that the circulation
of the newspapers was not significant and, therefore, the advertisement could
not be treated as a public notice. This kind of a plea could not be
countenanced. The two newspapers were quite well known and had wide
circulation. There had thus been no mis-statement of material facts. There was
also no evidence of fraud having been committed on the Court.
It is a settled proposition of law that fraud
must be proved beyond reasonable doubt. The Court cannot proceed merely on
suspicions, conjectures and surmises. There must be clear and cogent evidence
to show beyond reasonable doubt that fraud has indeed been committed on the
court. In the present case, the applicants may well have a case against Chawlas
for breach of contract etc. They could certainly have no case against petitioners
and respondent company. There was no deliberate mis-statement inpleading before
the Court that Chawlas were 100 per cent members of petitioner company. There
was also no mis-statement to the effect that petitioner company was
wholly-owned subsidiary of respondent company. After July, 1997, 100 per cent
shares of petitioner company vested in respondent. In all the official records,
respondent was shown as members of petitioner. Therefore, it could not be said
that either of them had played a fraud on the Court. There could be no deemed
membership of a company. A shareholder will become a member of the company in
accordance with the provisions of the Act. If legally applicants were not
members, necessarily no notice was required to be given to the applicants of
any proceedings whatsoever. On the other hand, if petitioner company was the
100 per cent owner, then it was perfectly valid for it to make an application
for dispensing with holding of any meetings of the creditors. All the creditors
had given consent. The conduct of applicants in keeping silence for a period of
almost 6 to 7 years lent credence to the fact that the application was merely
speculative in nature. It had been disguised as a demonstration against a
party who was said to have defrauded the Court. Hence, the application having
no merit, was to be dismissed.
Bank of Mymensing Gouripur Ltd., In re [1948]
53 CW 143 (Cal.), Kanak Vinod Mehta v. Vinod Dulerai Mehta AIR 1991 Bom. 337,
Smt. Shrisht Dhawan v. Shaw Bros. AIR 1992 SC 1555, S.P. Chengalvaraya Naidu
v. Jagannath AIR 1994 SC 853, Bedrock Ltd., In re [1999] 33 CLA 430, Mannalal
v. Kedarnath Khetan [1977] 47 Comp. Cas. 185 (SC), Bombay Gas Co. (P.) Ltd. v.
Central Government [Company Application No. 21 of 1995 in Company Petition No.
134 of 1986], Howrah Trading Co. Ltd. v. CIT AIR 1959 SC 775, Balkrishan Gupta
v. Swadesi Polytex Ltd. AIR 1985 SC 520, Karachi Oil Products Ltd. v. Kumar
Shree Narendrasinghji AIR 1950 Bom. 149, Killic Nixon Ltd. v. Bank of India
[1985] 57 Comp. Cas. 831 (Bom.), World Wide Agencies (P.) Ltd. v. Mrs. Margaret
T. Desor AIR 1990 SC 607 and Jermyn Street Turkish Baths Ltd., In re [1971] 3
All. ER 184.
1. This
company application has been filed with a prayer for setting aside the order
dated 17-12-1998, on the ground that the same has been passed behind the back
of the applicants who are the 50 per cent shareholders and directors with equal
powers of the petitioner-company. The petitioner-company with the intention to
cheat and deprive the rights of the shareholders of the applicants,
fraudulently, maliciously and mala fide defrauded the court by suppressing the
fact that the applicants are 50 per cent shareholders of the
petitioner-company. A prayer is also made that pending the hearing and final
disposal of the Judge’s Summons, the order dated 17-12-1998 be stayed.
2. On 4-2-1999 leave was granted. Ad interim
relief in terms of prayer clauses (i) and (ii) were granted.
3. By order
dated 17-12-1998, Company Petition No. 646 of 1998, with Company Application No.
145 of 1998 and Company Petition No. 647 of 1998 with Company Application No.
145 of 1998 were allowed. Company Petition No. 646 of 1998 was filed by the
company, viz., Sant Chemicals (P.) Ltd. (‘the transferor-company/Sant’) seeking
its merger and amalgamation with Aviat Chemicals (P.) Ltd. (‘the
transferee-company/Aviat’). Aviat had filed Company Petition No. 647 of 1998. A
perusal of the order shows that the notice of the Company Petition No. 646 of
1998 was given to the official liquidator and the regional director and notice
of the Company Petition No. 647 of 1998 was given to the regional director.
The official liquidator had reported that Sant has not conducted the affairs of
the company in a manner prejudicial to the interest of its members or to the
public interest. Regional director also stated that there is no apparent
objection to the proposed amalgamation scheme being sanctioned. This court
perused the scheme and observed that the proposed amalgamation of the
transferor-company with the transferee-company would result in proper
co-ordination and would be more economically viable and efficient. The court
also noticed that no objection had been raised by any concerned person. Thus,
the amalgamation was found to be in public interest as well as being in the
interest of the concerned parties. Thus, Company Petition No. 646 of 1998 was
made absolute in terms of prayer clauses (a) to (f).
4. In the
present application, being Company Application No. 152 of 1999, it is pleaded
that Sant is a company incorporated under the Companies Act, 1956 (‘the Act’).
Prior to 22-12-1992. Gunwant Singh Chawla, Manjit Singh Chawla and Hardeep
Singh Chawla were the only directors of the company. This company’s issued and
subscribed capital was Rs. 5 lakhs divided into 5,000 shares of Rs. 100 each,
wholly subscribed by the aforesaid directors and their relatives (‘the
Chawlas’). By an agreement dated 22-12-1992, the Chawlas entered into an
understanding with the applicants, inter alia, to divide and share equally the
land and the building of the petitioner-company and further agreed and undertook
to sell and dispose of all the assets of the Sant except land and building and
pay off all its liabilities. Pursuant to the agreement, the shares of Sant were
transferred in favour of the applicants (‘the Aroras’). Thus, Aroras become
holders of 50 per cent shares of Sant, i.e., 2,500 shares. The full
consideration for the aforesaid shares was paid by the Aroras to the Chawlas.
The shares are said to be duly transferred in the names of the respective
applicants. Hardeep Singh Chawla (since deceased) resigned and as such,
Jagmohan Singh Arora and Kuljit Singh Arora, applicant Nos. 1 and 3 were
appointed as directors of Sant thereby giving equal representation on the
company’s Board. Sant filed Form No. 32 with Registrar of Companies (‘the ROC’)
wherein applicant Nos. 1 and 3 shown as directors appointed on 22-12-1992.
Thereafter umpteen times the applicants enquired with Gunwant and Manjit Singh
Chawla about the implementation of and progress of memorandum of understanding
(‘MoU’). There were no reply and there was no compliance of the MoU. The
applicant Nos. 1 and 3 by their advocate’s letter dated 14-2-1996 gave
statutory notice of winding up to Sant. Thereafter, in December 1998 there was
an income-tax raid at the premises of the Aroras. The applicants, therefore,
reminded Sant to give certified copies of the balance-sheet of Sant for
accounting purposes. Therefore, it is stated that the applicants took a search
in the company Registrar’s office and were surprised to note that Sant together
with Aviat had filed company petitions as noticed above, for passing of the
scheme of amalgamation. The Aroras were kept in dark. From the records of this
court it appeared that Sant had obtained consent letters from one Mrs. Geeta
Tushar Thakkar holding one single share of Sant and Aviat alleging to be the
only shareholders of Sant. Thus, fraudulently without the knowledge of the two
directors belonging to Aroras obtained direction from this court for dispensing
with the meeting of the shareholders. No notice of any meeting was given to the
applicants. It is further the case of the applicants that Sant owns an
immovable property, i.e., land and building situate on Plot No. D-115
admeasuring about 4,050 sq. mtrs. In the Trans Thana Creek Industrial Area,
Village Shievane, Distt. Thana. After the order dated 17-12-1998 was passed,
Aviat has taken possession of the property and has commenced construction
thereon. Thus, it is pleaded that a fraud has been played on the applicants as
well as the court.
5. An
affidavit in reply has been filed by a director of Aviat. It is stated that the
application has been filed for collateral purposes. It is said to be vexatious
and liable to be dismissed in limine. The applicants are neither the members
nor creditors of Sant. Thus, the applicants have no locus standi to make the
present application. It is pleaded that the only remedy available to a person
aggrieved by a sanction of a scheme amalgamation is to prefer an appeal as
provided under sub-section (7) of section 391 of the Act. This application is
not maintainable before the Company Judge. The applicants are not members of
the transferor-company. Therefore, it is not necessary to give any notice of
any meeting to them. Aviat had purchased 100 per cent shares from Chawlas on
and from 31-7-1997. Thus, Aviat was the only member of the transferor-company.
The register of members of Sant does not show that the applicants are the
members of Sant. Even the records available with the office of Registrar of
Companies does not show that the applicants are members of Sant. The
application proceeds on the erroneous assumption that Chawlas are members of
Sant. Even if shares had been transferred in favour of Aroras, that fact by
itself cannot confer any rights of membership on them. The applicants have not
taken any steps to get themselves on the register of members. Thus, if the
prayer is now allowed, it would mean that the court is recognising the
applicants as members of the company when in fact they have not even
established their rights as alleged members. It is categorically asserted that
the present application is made by Aroras in collusion with the Chawlas with a
view to blackmail Aviat to shell out further monies. The Chawlas and Aroras are
stated to be close relatives. Father of Gunwant and the mother of Arora are
said to be brother and sister. This fact has been deliberately suppressed by
the Aroras. Thus, in view of the relationship, it cannot be believed that
Aroras were unaware of Aviat acquiring 100 per cent shares of Sant or of the
petitions being filed or the orders passed therein. The present application is
said to be strategically timed in such a manner that Aviat is placed in
vulnerable position to submit to the unreasonable demands of the
applicant-Aroras. According to the Aviat, it is clear that Aroras have got all
the information from Chawlas themselves and the present proceedings are a
collusive action. Since Chawlas could not themselves have filed the present
application, they have apparently conspired with Aroras for making the
applications and raising false and bogus claims. It is, therefore, claimed that
the applicants not have come to court with clean hands but with ulterior
dishonest and collateral motives. Thus, the application deserves to be
dismissed.
6. Aviat
further claims to be a bona fide purchaser for value of shares of Sant without
notice of any defect of title. It is reiterated that neither the available
records of Sant nor the available public records at the office of the ROC
contain the name of Aroras as members of Sant or as directors. Thus, Aviat have
acquired good title in respect of the shares purchased by Aroras. It is stated
that the silence of the Aroras since 1992 indicates that the claim put forward
is not bona fide. Aroras did not bother to claim their rights as members on the
issuance of public notice advertising the hearing of the company petitions of
Aviat and Sant. Company petitions were advertised in September 1998. The
Aroras, however, remained completely silent. The two Arora nominees on the
board of directors of Sant have not produced anything to show that they have
acted in any manner in their capacity as directors. These directors never
called any Board meeting nor attended any Board meeting. Thus, in any event,
they would have vacated or in any event be deemed to have vacated their office
as directors as there is no claim by the Aroras to have been appoitned as
full-fledged directors at any general meeting. For seven years, when Sant was
loss making company, the Aroras did not stake their claim as members. It is now
only when Aviat has pumped in huge amounts of money and the production activity
is to commence that Aroras suddenly woke up to claim rights as members. After a
period of seven years, the Aroras cannot be heard to agitate their status as
members especially when bona fide third party rights have already been created.
Even if Aroras have purchased shares from Chawlas, they are free to take action
against Chawlas and they cannot have any cause of action against Aviat or Sant.
7.
Additionally it is stated that Aviat is a company incorporated under the Act on
4-1-1996 with the object, inter alia, of manufacture, sale and distribution of
drugs and pharmaceutical products. Aviat acquired brands initially, and started
earning income by licensing the said brands as it did not have its own
manufacturing unit. Aviat was looking forward to acquire its own manufacturing
unit. Sant was owned and controlled by Chawlas. Prior to July 1997, 100 per
cent of Sant were held by Chawlas. Sant owned its own manufacturing unit on a
plot of land at MIDC. Sant had, however, stopped/suspended its manufacturing
activity and was embroiled in huge liabilities. For the past several years,
Sant was a loss making unit with hardly any business. Chawlas were, therefore,
interested in disposing of Sant. Negotiations, therefore, ensued between Aviat
and the Chawlas. On conclusion of the negotiations it was decided that Aviat
would acquire the 100 per cent shareholding of the Chawlas in Sant and
consequently, acquire the MIDC plot belonging to Sant. Thus, by an agreement
dated 22-1-1997, Aviat acquired the entire shareholding of Chawlas for a
consideration of Rs. 1,367 crore. Out of this, 1,20,00,000 was given by Aviat
to Sant by way of unsecured loan towards the purpose of discharging the
liabilities that Sant had incurred. Rs. 16 lakhs was paid by Aviat to Chawlas
in the manner specified in the agreement. Aviat caused search to be taken in the
records of Sant. In none of the available records did the name of any Aroras
appear either as members of Sant or directors of Sant. Upon payment of the
entire consideration amount, the entire 5,000 equity shares held by Chawlas and
constituting the entire shareholding capital of Sant were transferred in
favour of Aviat on 31-7-1997. As noticed earlier, one share was transferred in
favour of one Mrs. Geeta Thakkar as nominee of Aviat. Necessary forms under
section 187C of the Act were filed in that behalf. Name of Aviat was also
entered in the register of members of Sant. Consequently, on and from
31-7-1997, Sant became a wholly owned subsidiary of Aviat. Subsequently, Aviat
also appointed its nominees as directors of Sant. The object of acquiring the shares
of Sant was to avail the benefit of the MIDC plot by Aviat. This was the only
available asset of Sant. As the manufacturing unit of Sant had been
non-functional, it was agreed to demolish the old structure and a new structure
with latest equipment was to be constructed. In any event the existing plant of
Sant which was a chemical plant could not be of much use to the proposed
business of Aviat of starting a formulation unit. For the purposes of
demolition, an application was made to MIDC which was granted by the letter of
MIDC dated 1-7-1997. With the acquisition of Sant, it was decided that Sant and
Aviat be amalgamated so that eventually Aviat, which already had brands, would
also obtain its own manufacturing unit. Thus, a draft scheme of amalgamation
was prepared and at a meeting of the board of directors of Sant as well as
Aviat held on 18-12-1997, it was decided to merge Sant with Aviat in terms of
the draft scheme of amalgamation. Thus, an application was made to this court
for dispensation of the meetings of members and creditors of the concerned
companies, since all the members and creditors of the respective companies, had
consented to the same. As stated above, all the liabilities of Sant that were
incurred whilst Chawlas were in management were cleared out of the monies paid
by Aviat. As noticed earlier, by order dated 12-3-1998, the application was
allowed. Subsequently, on 13-4-1998, the respective companies filed their
respective petitions for sanction of the scheme of amalgamation. By an order
dated 13-8-1998, the petitions were admitted. Notice of hearing of the
petitions was directed to be advertised in Free Press Journal and Nav Shakti.
Hearing of the concerned company petitions were duly advertised. None of the
applicants bothered to respond to the notices. By an order dated 6-11-1998, the
court appointed Haresh Upendra & Co. as the chartered accountants for
assisting the official liquidator in preparing his report as required under
section 394 of the Act. The official liquidator submitted his report on
30-11-1998. In this report, it is clearly stated that the transferor-company is
a wholly owned subsidiary of the transferee-company and all the shares of the
petitioner-company are owned by the transferee-company. The regional director was
also given notice as required by law. It was only thereafter that the order
dated 17-12-1998, came to be passed. The old structures standing on the land
were demolished in December 1997. The construction activity for the new
building stated on or about 10-1-1998. No objection certificate/permission
issued by MIDC on 6-1-1998 is placed on the record. Thus, the construction at
the site has been going on since January 1998. It is stated that plumbing and
electric work in the manufacturing unit is virtually complete. A state of the
art laboratory and formulation equipment and machinery have already been
installed and the formulation unit is now geared up to commence production,
inter alia, of multi-vitamin syrups and drops. The amount of approximately Rs. 3
crore have already been spent by Aviat. The manufacturing unit is said to be
over 95 per cent complete. On 3-2-1999 the Inspector of Drugs had also
inspected the plant for issuing manufacturing licence. Aviat has already
employed 34 persons in respect of the manufacturing unit in anticipation of the
commencement of the production activity.
8. The
averments made in the affidavit dated 29-1-1999 by the applicants have also
been denied. It is stated that the alleged MoU dated 22-12-1992 does not
reflect the alleged understanding as stated by the applicants. The alleged
agreement is stated to be without consideration and not enforceable. In any
event, since the alleged agreement is dated 22-12-1992, any attempt on the part
of the applicants to enforce the same is clearly time barred on the date of
filing of the present application. It is also denied that pursuant to the MoU
any shares were allegedly transferred in favour of the applicants. The
purported transfer deeds and the purported share certificates are apparently
got up and ante-dated documents. It is denied that there was any Board meeting
on 19-12-1992, for allegedly transferring the alleged shares. The purported
shares could not have been transferred on 19-12-1992, pursuant to the alleged
MoU dated 22-12-1992. None of the applicants are shown as members in the
register of members of Sant or in the records available with the ROC. It is
further denied that any consideration was paid by any of the applicants for the
transfer of shares. The certificates dated 4-2-1999 are stated to be completely
vague. No receipt has been produced by Chawlas. Thus, it is denied that the
shares have been duly transferred in the names of the applicants. It is also
denied that Hardip Singh Chawla resigned as director or that the applicant Nos.
1 and 3 were appointed as directors of Sant. It is also denied that any Form
No. 32 has been validly signed or filed with the ROC. The genuineness and the
correctness of this form is denied. The income-tax raid is also denied.
Thereafter, the facts as noticed above earlier have been reiterated.
9. In the
rejoinder, the applicants have reiterated the averments in the affidavit in
support. The relationship of the father of Gunwant and the mother of Arora as
brother and sister is denied. It is denied that Chawlas had any knowledge of
the petitions and the orders passed thereon. The collusion and conspiracy
between Chawlas and Aroras is also denied. It is denied that Aviat is a bona
fide purchaser of value of shares of Sant. It is stated that even the names of
Chawlas are not in the records at the office of ROC and hence, there is no
question of the applicants name having been entered as members in public
records at the office of the ROC and the same is not required. In any event, it
is stated that the names of applicant Nos. 1 and 3 are shown as directors in
Form No. 32 filed with the ROC. It is further stated that the applicants were
not aware of any public notice advertised in September 1998, about the pendency
of the petitions in this court. The advertisements are said to have been
purposely given in the remote newspapers like Free Press Journal and Navshakti,
which do not have wide circulation. Thus, the applicants are not ware of any
public notice. In any event, that does not take away any rights of the
applicants by not reading the said alleged advertisements. It is denied that
Chawlas were 100 per cent members of Sant prior to the agreement dated
22-1-1997 with Aviat. It is denied that Aviat has paid the consideration
alleged for the entire 5,000 equity shares or that the entire share capital of
Sant has been transferred in favour of Aviat, 2,500 shares are stated to be
with the applicants as the applicants have not transferred any of the shares
either to Aviat or to any third party. Aviat has not even bothered to see the
serial numbers of the share certificates and also of the missing share
certificates. It is also denied that all the creditors had given consent for
dispensing with the meetings of the members of Sant, since the applicants are
50 per cent shareholders. This consent was fraudulently recorded. With regard
to the transfer of shares in favour of Aroras, it is denied that the shares
could not have been transferred on 19-9-1992.
10. Aviat has filed
a sub-rejoinder in which all the earlier pleadings are reiterated. Both sides
have claimed that the inspection of the documents has not been given.
11. Relying on
these pleadings, counsel for the parties have made their submissions. Mr.
Dwarkadas, the learned counsel appearing for Aviat, has raised a preliminary
objection to the effect that the company court has no jurisdiction to set aside
the orders passed under section 394 of the Act. He submits that an appeal is
provided by sub-section (7) of section 391. All the matters which are sought to
be raised in the present application could well be agitated by the applicants
in appeal. In support of his submission, the learned counsel has relied on a
judgment of the Calcutta High Court in Bank of Mymensing Gouripur Ltd., In re
[1948] 53 CW 143. Mr. Dwarkadas submits that this judgment is binding on this
court as the Act is a Central Act. He relies on a judgment of Division Bench of
this court in the case of Kanak Vinod Mehta v. Vinod Dulerai Mehta AIR 1991
Bom. 337.
12. In reply,
Mr. Chagla, the learned counsel appearing for the applicants, submits that his
arguments are based on demurer. He submits that if the order is obtained by
fraud it is nullity and non est. Appeals are filed only against erroneous
orders. The Court has inherent powers to set right the orders which are passed
without jurisdiction. He refers to rule 9 of Company Court Rules, 1959 in
support of his submission. He says inherent powers can be used in spite of the
fact that an appeal is provided in sub-section (7) of section 391. He further
submits that this application is a more appropriate remedy as the appeal court
can only appreciate matters which are on record. The matters which are sought
to be placed on the record by way of the present application would not form the
record in the appeal court. Further, he says that if ex parte orders can be
set aside by the court in exercise of its power under order 9, rule 13 of the
Code of Civil Procedure, 1908 (‘the CPC’), there is no reason why the same
cannot be done by virtue of rule 9 of the Company Court Rules. Thus, he submits
that the applicant has one of the two remedies, viz., to move the trial court
or the appeal court. He relies on an unreported judgment of this court given in
Company Application No. 21 of 1995 in Company Petition No. 134 of 1986. He
submits that rule 6 makes CPC applicable to the company court also. Thus, the
court will have inherent power to set aside an order which is grounded on fraud
having been committed on the court. He further submits that an order passed by
the court on account of fraud and collusion would be entirely vitiated. In
support of this proposition, the learned counsel relies on a judgment of the
Supreme Court in Smt. Shrisht Dhawan v. Shaw Bros. AIR 1992 SC 1555, para 20.
Thereafter, the learned counsel relies on the oft quoted judgment of the
Supreme Court in the case of S.P. Chengalvaraya Naidu v. Jagannath AIR 1994 SC
853, para 1. In order to establish fraud, the learned counsel relies on the
averments made in the original petition filed by Sant. The learned counsel had
made particular reference to the averments made in paras 3, 12, 13 and 15. In
para 3, Sant had claimed that the company had been carrying on business of
manufacturing and processing certain bulk drugs and chemicals with effect from
2-11-1973. The manufacturing plant and factory of the petitioner-company was
stated to be situated at Plot No. D-115, MIDC, village Shrivane, PO Nerul,
Thane-Belapur Road, New Mumbai, Distt. Thane. In para 12, Sant had stated that
the petitioner is a wholly owned subsidiary of the transferee-company (Aviat)
and consequently, all the shares of the petitioner-company are owned by the
transferee-company. Both the petitioner-company and the transferee-company are
companies under the same management. In para 13, it is stated that the
petitioner-company as well as the transferee-company can be considered to be in
the same line of business, viz., the manufacture of bulk drug formulations. The
two companies cater to the need of same industry, viz., the chemical/
pharmaceutical industry. The petitioner is in possession of manufacturing unit
as stated above but it does not possess a viable product in the competitive
pharmaceutical market. The transferee-company, on the other hand, does not
possess its own manufacturing plant and hence, it acquired several brands and
licensed the same to manufacturers and earns income by way of royalty. It is
further stated that Aviat required an adequate manufacturing unit for manufacturing
its products for which it had brands. It was, therefore, felt necessary to
merge the two companies. In para 15 it was stated that the draft scheme of
amalgamation has been proposed and approved by the directors of the
petitioner-company. It was, inter alia, averred that the petitioner-company has
not been able to utilise its manufacturing capacity due to non-availability of
brands and products and lack of advanced marketing efforts which are extremely
relevant in the pharmaceutical industry. Aviat has the necessary
products/brands and is capable of having an independent marketing organisation
with branches and representatives spread all over India. These averments,
according to the learned counsel, are contrary to the averments made in para
5(c), (d), (i) and (q) of the affidavit in reply. He submits that a perusal of
these averments would show that even when the affidavit is filed in February
1999, the manufacturing unit was still not completed and it is stated that it
is about to commence production. Thus, the averments made earlier in the
petition are contrary to the averments made in the affidavit in reply. That in
April 1998 it was projected to the court that Sant had a factory and that its
activities would blend with the activities of Aviat. The actual situation is
totally different. In April 1998, there was only a plot which was held by Sant
as its only asset but the picture given to the court was that Sant was a going
concern. Thus, it is submitted by the learned counsel that a true picture was
not depicted before the court. Had this correct state of affairs been brought
to the notice of the court, the order of amalgamation would not have been
passed.
12.1 He submits
that the averments about Chawlas being 100 per cent shareholders of Sant is
false on the face of it. The Aroras are 50 per cent shareholders of Sant. The
shares were purchased from Chawlas by the Aroras way back in December 1992. The
directors were also in equal share. This is evident from the MoU (ex. 1 to the
affidavit in support). Under this MoU, all assets were to be sold except the
land. Form No. 32 was filed with the ROC. According to the counsel, a perusal
of the said form would show that Hardeep
Singh Chawla resigned as a director on 22-12-1992. Jagmohan Singh Arora was
appointed in place of Hardeep Singh Chawla. Kuljit Singh Arora was newly
appointed. Thus, according to the learned counsel, it leaves no manner of doubt
that the Aroras were 50 per cent shareholders of Sant. The learned counsel
thereafter referred to the share certificates which give distinctive share
numbers of the share transferred to the Aroras. Photostat copies of the
certificates have been attached as ex. 3 to ex. 33 to the affidavit in support.
He submits that the name of the Aroras is not shown in the company records as
the same was not even functioning. The Aroras did not care to check the records.
However, a notice of winding up was given on 14-2-1996. But the winding up
petition was not filed. The learned counsel further submitted that the
agreement between Chawlas and Aviat is dated 22-1-1997. In this it is
represented that Chawlas are registered holders of 5,000 equity shares of Rs.
100 each and claim to be 100 per cent members of Sant. The entire share capital
is stated to have been sold for Rs. 16 lakh. He submits that the loan of Rs.
1,20,00,000 is given by Aviat to its own subsidiary. It is for this reason
that no provision has been made for repayment of the loan. It is provided that
the loan was to be used for repayment of liabilities of Sant. He, thereafter,
refers to clause 9 of the agreement, wherein it is provided that simultaneously
on the completion of the sale the vendors will ensure that all their nominee
directors shall resign so as to enable the purchasers to appoint their
nominees. The sale was completed on 4-7-1997. Shares had been transferred on
31-7-1997. Therefore, Chawlas should be out of the picture with effect from
1-8-1997. But even on 9-9-1997, Chawlas are still shown as directors. Hardeep
Singh Chawla ceased to be a director on 12-1-1995, whereas Gunwant Singh
Chawla continued till 9th September, 1997. According to the case of Aviat
itself, Manjit Singh Chawla still continues to be a director. This, according
to the counsel, is depicted on the table which is given on page 11 of the
affidavit in reply in para 4(n). Even in the report of the official liquidator
it is stated that Chawlas are the 100 per cent members of the company. He
submits that the claim put forward by Sant are wholly fraudulent as the entire
shareholding of Sant Chemicals was issued and allotted between 30-3-1974 and
6-12-1983. The share certificates with regard to 2,500 equity shares are still
with the Aroras. He submits that the share certificates, which are in the
possession of Aroras, would show that they are continuous in the distinctive
numbers of the shares, whereas the share certificates which have been issued to
Aviat are wholly out of sequence. He submits that the certificates which have
been issued to Aviat are mirror images of the certificates which are issued to
Aroras. As examples, he submits that Share Certificate No. 16 and Share
Certificate No. 5 are with the Aroras. Share Certificate No. 16 has now become
75 and share certificate No. 5 has become 74 in the hands of Aviat. If the sum
total of the certificates and the distinctive numbers of the shares in the
hands of Aroras is taken, it amounts to a total 2,500 equity shares. These very
shares are sought to have been transferred to Aroras. He submits that since the
entire share capital has been subscribed by 1983, no other share certificates
could have been issued to Aroras unless there was a corresponding increase in
capital. The share certificates are, therefore, said to be fabricated. The
entire share capital having been exhausted by 6-12-1983, there could be no
other issue of certificates. He submits that although the share certificates
have been issued after 6th December, 1983, the authorised capital is shown as
2.5 lakh. This, according to the counsel, throws suspicion on the authenticity of
the said certificates. The capital was admittedly 5 lakh divided into 5,000
equity shares as from 6-12-1983. He submits that the whole case placed before
the court for sanction of the amalgamation scheme smacks of fraud and collusion
between Aviat and Chawlas. For this reason, he submits that the defence of the
respondents that they have depended on the representations of the Chawlas
cannot be accepted. The misrepresentation of the Chawlas has resulted in
misleading the court. Thus, the orders of the court cannot be permitted to do
harm to a stranger. The petition proceeded on the basis that there is consent
of the parties. Justice Lodha’s order shows that the court order was procured
on this basis. He submits that the facts stated in the petition are not true.
The air of innocence portrayed by Aviat is misconceived. He submits that while
sanctioning a scheme, the court does not act as a rubber stamp. For this
proposition he relies on a decision rendered by me in an earlier case in the
matter of Bedrock Ltd., In re [1999] 33 CLA 430. Similarly, he submits that
Justice Lodha did not act as a rubber stamp but accepted the submissions made
in the various pleadings which were wholly misleading. Thus, he submits that
the order deserves to be set aside.
13. Mr. Dwarkadas,
in reply, has submitted that focus of the matter must not be lost. The
applicants have come to court on the ground that they are members of Sant.
Secondly, that a fraud has been committed on the court because notice of the
scheme was not given to them. Affidavit in support proceeds on this basis. In
para 8, the applicants claim to be 50 per cent shareholders and directors. It
was, however, not disclosed to the court that the applicants are not entered as
members in the register of members of the company. It was also not disclosed
that the applicants are not recorded as members in the office of the ROC. Thus,
the applicants have now come with a plea that the applicants had to do nothing
further once the shares of Sant had been transferred in favour of the
applicants, i.e., Aroras. He submits that it is for this reason that the
applicants have now come with a case that Aroras need not have investigated as
to whether or not their names were entered in the register of Sant or not. He
submits that this plea has been taken to overcome the difficulty that a bare
holder of a certificate does not become a member of the company. Rights of
membership are not available to a shareholder whose name does not appear in the
register of members. He submits that the court in the present application is
not deciding a petition for rectification of the register. Only after a person
establishe his right by a company petition for rectification, a member can
complain of oppression. He submits that in the affidavit in rejoinder in para
7 the applicants rely on register of members which is ex. 3 to the said
affidavit. Now they cannot say that the register does not reflect the correct
position. He points out the relevant provisions of the Act to support his
submissions. Section 2(46) of the Act defines ‘share’ to mean a share in the
share capital of a company. Member is defined in section 2(27) in the negative.
This section provides that member does not include a bearer of a share warrant
of a company. Section 83 provides that each share in a company having a share
capital shall be distinguished by its appropriate number. These are known as
the distinctive numbers of the shares. Thus, the distinctive numbers are not to
be confused with the number of a share certificate. He reiterates that in the
present case the register of members shows that in respect of the same
distinctive numbers of the shares which were issued to Aroras, Aviat is shown
as member in the register of members. He submits that section 84(1) has to be
read with section 113(1). Section 84 provides that a certificate under the
common seal of the company specifying any shares held by any member shall be
prima facie evidence of the title of the member to that share. Section 113(1)
provides that every company shall, within two months after the application for
registration of the transfer of any shares, deliver, in accordance with the
procedure laid down in section 53 of the Act, the certificates of all shares
transferred. The transfer must be duly stamped. This section also provides that
the transfer must be otherwise valid and does not include any transfer which
the company is for any reason entitled to refuse to register and does not
register. In the facts of this case, Mr. Dwarkadas submits that there is no
registration of any transfer. There is no Board resolution to that effect. This
is not a company, according to him, having capital divided by bearer shares. In
that event the holder of the shares has the title. On merits he submits that
Sant was a sick industrial unit. After the merger it will become a profit
making concern. Now that prosperity of the firm is foreseeable this speculative
application has been filed.
14. To further
establish his case, Mr. Dwarkadas referred to various other provisions of the
Act. Section 114 provides for share warrants. Section 114(3) makes it
transferable by delivery. Section 41 defines ‘member’. By virtue of section 41,
sub-section (2) name must be registered. The aforesaid provision has to be read
along with section 108 which provides for transfer of shares. Section 82
provides for the nature of shares and transferable in the manner provided by
articles of the company. He submits that provisions of section 108 have not
been complied with in transfer of the shares to the Aroras. He refers to form
of instrument of transfer to show that the stamp on the transfer deed has not
even been cancelled. He submits that provisions of section 108 is mandatory.
This section not having been complied with, the applicants can hardly maintain
the present application to claim to be members of Sant. For this proposition,
he relies the judgment of the Supreme Court reported in Mannalal v. Kedarnath
Khetan [1977] 47 Comp. Cas. 185. Similarly, provisions of section 113 have not
been complied with as admittedly the transfer shares have not been registered
in the register of members.
15. At this
stage, Mr. Chawla had objected on the ground that the original had not been
offered for inspection and that the plea is not taken but Mr. Dwarkadas has
pointed out to page 14 of the affidavit in reply where the plea is specifically
taken. Mr. Dwarkadas has submitted that the documents are ante-dated. According
to him, the transfer form has been created in a back date. This is to get over
the difficulty which would arise in view of the fact that the Aroras have not
cared to get themselves registered as members.
Nothing has been done from 1992 till 1999 when
the present application has been filed. He submits that the plea of Arora is
patently false. They claim that the shares have been transferred pursuant to
the MoU. the shares have actually been transferred on 18-12-1992 and
19-12-1992. The MoU is dated 20-12-1992. Thus, obviously the shares have not
been transferred pursuant to the MoU. The persons mentioned in the MoU are not
the same as the transferors. He further submits that a reading of the MoU will
show that it is a totally incomprehensible document. No consideration is
mentioned for the arrangement therein. Yet the Chawlas are to sell all the
assets except the land. The present application has been filed by six Aroras
and the MoU is only by applicant Nos. 1 and 3. Nothing is mentioned in the MoU
about the division of land and building. Even the assets were to be sold by
31-3-1993.
16. I have
considered the various arguments put forward by the learned counsel. Initially
I was of the opinion that this application ought to be decided only on the
preliminary issue. However, both the learned counsel were agreed that in order
to obviate a second round of arguments in the event of the matter being
remanded by the appeal court, it would be more appropriate to give a composite
order on the preliminary issue as also on merits.
17. Let
me first consider the preliminary issue to the effect that in view of the
appeal provision contained in section 391(7) this court would not entertain the
application. In my view, the issue is squarely covered by the judgment of the
Calcutta High Court in Bank of Mymensing Gouripur Ltd.’s case (supra) relied
upon by Mr. Dwarkadas. In that case Das, J Held :
“When a scheme is sanctioned by the court it
is final so far as the court sanctioning it is concerned. As long as the order
is not perfected, the court may in exercise of its inherent power re-hear the
application for sanction. After the order is completed and filed, the court
can do nothing except correcting accidental omissions or mistakes in the
order, and in a proper case reviewing the order under the Code. In such
circumstances, the other remedy of the party aggrieved is to appeal from the
order under section 153. In a proper case the court may, for sufficient cause,
extend the time for preferring the appeal. It is not necessary for me now to
say whether a regular suit will lie to set aside a scheme and, if so, on what
ground such a suit will lie. In Nicholl v. The Fberhardt Co. it was held that
as long as the order sanctioning the arrangement was not set aside, no suit
would lie to set aside the scheme. The observations of Cotton, J in that case
indicates that the only way to set aside the order is to appeal therefrom. It
appears clear to me, however, that once a scheme is sanctioned and the order
granting the sanction has been perfected, the court sanctioning the scheme has
no jurisdiction under the Companies Act to alter or amend the scheme except by
way of a fresh scheme. It is significant that there is no provision in the
Companies Act, similar to section 31 of the Presidency Towns Insolvency Act.
Further, the fact that the transferor bank has been dissolved and struck off
the register creates procedural difficulties as to making a defunct company a
party to any proceeding and as to service of any notice or process on it. The
doctrine of the court’s inherent power, like that of public policy, should be
sparingly used, for otherwise there is a great risk of all rules of procedure
evolved out of the experience and practical wisdom of the past being set at
naught by the varying idiosyncrasies and notions of justice of individual
judges.”
Thus, it follows that the remedy of appeal was
open to the applicants. The view expressed by Justice Das are in consonance
with the provisions of the Act as well as the CPC. It is settled proposition of
law that inherent powers of the court have to be used sparingly, with
circumspection, in order to prevent miscarriage of justice. These powers are
generally not to be used when an adequate remedy is available to the parties. I
am in respectful agreement with what has been held by Das, J. of the Calcutta
High Court. Apart from the fact that this court is independently of the view
that the present application is not maintainable, there is another good reason
for following the Calcutta High Court judgment. In the case of Kanak Vinod
Mehta (supra) a Division Bench of this court was required to determine the
following question of law :
“Whether, on the plaint as it stands, it is
the Family Court which has the jurisdiction in respect of this suit by virtue
of the Family Courts Act and, therefore, on the establishment of the Family
Court this court has ceased to have jurisdiction in respect of this suit by
virtue of clause (a) of section 8 of the Family Courts Act and the suit stands
transferred to such Family Court by virtue of clause (c) of section 8 of the
Family Courts Act ?” (p. 337)
Before this question could be adjudicated upon
by this court, it was considered by a Full Bench of the Madras High Court. The
Division Bench of Bombay High Court followed the view taken by the Madras High
Court as follows :
“8. This is a Central statute. It is
recognised principle that, so far as is possible, the same construction should
be placed by a High Court upon a Central statute as has found favour with another
High Court. Upon that principle alone we would be obliged to hold as the Full
Bench of the Madras High Court has held. Additionally, the point here concerns
the jurisdiction of the High Court. It would be awkward if suits and
proceedings of the nature referred to in the Explanation to sub-section (1) of
section 7 were entertained by one High Court and not by another. We have read
the Full Bench judgment of the Madras High Court in Mary Thomas’ case and are
in respectful agreement with what is held therein. We may, however, set out
further grounds for taking the same view.” (p. 339)
17.1 In view of the
above, following Das, J of the Calcutta High Court, it has to be held that this
application is not maintainable. Mr. Chagla had, however, relied on an
unreported judgment of this court in the case of Bombay Gas Co. (P.) Ltd. v.
Central Government [Company Application No. 21 of 1995 in Company Petition No.
134 of 1986]. A perusal of the aforesaid judgment would show that the objection
raised by Aviat herein was not raised before Dhanuka, J. This judgment is,
therefore, of no avail to the applicant. Mr. Chagla then relied on Shrisht
Dhawan’s case (supra). In para 20 the Supreme Court observed : ‘fraud and
collusion vitiate even the most solemn proceedings in any civilised system of
jurisprudence’. He submits that the scheme having been sanctioned on the basis
of fraud is open to challenge in any proceedings. For this, he relies on S.P.
Chengalvaraya Naidu’s case (supra) wherein Kuldip Singh, J, quoted with
approval the observations of COKE, CJ and observed :
“‘Fraud-avoids all judicial acts,
ecclesiastical or temporal’ observed Chief Justice Edward Coke of England about
three centuries ago. It is the settled proposition of law that a judgment or
decree obtained by playing fraud on the court is a nullity and non est in the
eyes of law. Such a judgment/decree by the first court or by the highest court
has to be treated as a nullity by every court, whether superior or inferior. It
can be challenged in any court even in collateral proceedings.” (p. 853)
This judgment would be fully applicable in the
case of proven fraud. But then the Aroras’ will have to prove that they were
members of Sant. Since admittedly they are not entered on the register of
members, a case has been put forward that they are deemed members. Provisions
of the Act do not provide for any deemed membership of a company. From a
perusal of the pleadings, it becomes prima facie apparent that fraud, if any,
may have been committed by the Chawlas on the Aroras. After selling the shares
to Aroras, the Chawlas did not enter the Aroras in the register of members.
This enabled Aviat to purchase 100 per cent equity shares of Sant and claim it
to be wholly owned subsidiary of Aviat. This, in my view, is not sufficient to
constitute fraud on the court. Thus, I am unable to accept the submission of
Mr. Chagla to the effect that this is a fit case where the application ought
to be entertained. I do not find any merit in the submission that the appellate
court can only correct erroneous judgments. The powers of the appellate court
are as wide as the trial court. Thus, an order patently without jurisdiction
would also have to be corrected in appeal.
17.2 On merits, the
applicants can only succeed, if Aroras are accepted as members of Sant. From a
perusal of the facts narrated above, it becomes apparent that the Aroras are
not recorded as members. On the other hand, Aviat are recorded as members. In
such a situation, the settled law is that the deed of transfer in favour of
Aroras may be effective qua the Chawlas. It can create no relationship with Sant.
This is so because until the transfer of the shares is actually registered, the
transferee’s title to the share is inchoate. The legal title remains vested in
the transferor. In Palmer’s Company Law, London, 24th edn., Vol. I, the
Treatise Chapter, para 40-08 the following passage sums up the situation as in
the present case :
“A transfer is incomplete until registered.
Pending registration, the transferee has only an equitable right to the shares
transferred to him. He does not become the legal owner until his name is
entered on the register in respect of these shares. But delay in registration
involves danger to him, for some remedy existing prior equity may come to
light, as in Ireland v. Hart where a husband had mortgaged shares of which he
was trustee for his wife and before the mortgagee had become the registered
holder of the shares, the wife took proceedings claiming that here equitable
title prevailed over that of the mortgagee, a claim which the court upheld; or
a second transfer may be passed and registered, and thus, the first transfer
may be defeated.
The rule on this point is that, as between two
persons claiming title to shares in a company like this, which are registered
in the name of a third party, priority of title (i.e., equitable title) prevails
unless the claimant second in point of time can show that as between himself
and the company, before the company received notice of the claim of the first
claimant, he, the second claimant, has acquired that full status of a
shareholder; or at any rate that all formalities have been complied with, and
that nothing more than some purely ministerial act remains to be done by the
company, which as between the company and the second claimant the company could
not have refused to do forthwith; so that as between himself and the company he
may be said to have acquired, in the words of Lord Selborue, a present,
absolute, unconditional right to have the transfer registered before the
company was informed of the existence of a better title.”
17.3 This position
is further clarified by the Supreme Court in the case of Howrah Trading Co.
Ltd. v. CIT AIR 1959 SC 775. The Supreme Court held thus :
“5. It was contended in the High Court that inasmuch as section
16(2) referred to an ‘assessee’, the assessee-company was entitled to have the
dividend ‘grossed up’ by the addition of income-tax paid by the various
companies at source and consequently to have the benefit of the credit allowed
under the two remaining sections. In the opinion of the High Court, an assessee
whose name was not in the register of members of the companies was not entitled
to the benefit of these provisions. The learned Judges of the High Court were
of the opinion that the word ‘shareholder’ in section 18(5) had the same
signification as the word ‘Member’ used in the Indian Companies Act; and that
the assessee was not qualified to be considered as a shareholder, even though
by a blank transfer it had purchased the relevant shares. In our opinion, the
High Court was right in its conclusion.
** ** **
7.
The position of a shareholder who gets dividend when his name stands in the
register of members of the company causes no difficulty whatever. But transfers
of shares are common, and they take place either by a fully executed document
such as was contemplated by regulation 18 of Table A of the Indian Companies
Act, 1913, or by what are known as ‘blank transfers’. In such blank transfers
the name of the transferor is entered, and the transfer deed signed by the
transferor is handed over with the share scrip to the transferee, who, if he so
chooses, completes the transfer by entering his name and then applying to the
company to register his name in place of the previous holder of the share. The
company recognises no person except one whose name is on the register of
members upon whom alone calls for unpaid
capital can be made and to whom only the dividend declared by the company is
legally payable. Of course, between the transferor and the transferee, certain
equities arise even on the execution and handing over of ‘a blank transfer’,
and among these equities is the right of the transferee to claim the dividend
declared and paid to the transferor who is treated as trustee on behalf of the
transferee. These equities, however, do not touch the company and no claim by
the transferee whose name is not in the register of members can be made against
the company if the transferor retains the money in his own hands and fails to
pay it to him.” (p. 778)
18. The Aroras
ought to have applied to Sant for entry of their names in the register of
members in place of Chawlas.This they failed to do. Thus, they can make no
claim against Sant. In the case of Balkrishan Gupta v. Swadeshi Polytex Ltd.
AIR 1985 SC 520, the Supreme Court has held :
“15. It is clear from the relevant provisions
of the Act which are referred to hereafter that a member can participate and
exercise his vote at the meeting of a company in accordance with the Act and
the articles of association of the company. Section 41 of the Act defines the
expression ‘member’ of a company. The subscribers of the memorandum of
association 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. A subscriber of the memorandum is liable as the holder of shares
which he has undertaken to subscribe for. Any other person who agrees to become
a member of a company and whose name is entered in its register of members
shall be a member of the company. In his case the two conditions, namely that
there is an agreement to become a member and that his name is entered in the
register of members of the company are cumulative. Both the conditions have to
be satisfied to enable him to exercise the rights of a member. . . . (p. 529)”
Thus, it is clear that in order to be a
member, a shareholder has to agree to become a member and his name must be
entered in the register of members of the company. Both the conditions have to
be satisfied. In the case of Karachi Oil Products Ltd. v. Kumar Shree
Narendrasinghji AIR 1950 Bom. 149 a Single Judge of the Bombay High Court also
held thus :
“. . . This judgment of cozens - Hardy, LJ
truly sets out the legal position. The same position has been enacted by our
own section of the Indian Companies Act, viz., section 30, which defines a
‘member’ as under :
‘(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 to become a member of a company
and whose name is entered in its register of members, shall be a member of the
company.’ ” (p. 153)
It is section 30, sub-section (2), which comes
in for consideration so far as the defendant is concerned. Incidentally, I may
observe that the very same position is set out in Palmer’s Company Law, 17th
edn. at p. 87. So every person who comes under the category of members under
section 30(2) is one who agrees to become a member of a company and one whose
name is entered in its register of members. Here the section contemplates two
things : (1) an agreement; and (2) entry in the register. An agreement alone
does not create the status of membership. It is a condition precedent to
acquiring such status of membership that the shareholder’s name should be
entered on the register. So also at p. 95 :
“Entry on register where membership is
constituted otherwise than by subscribing the memorandum of association, entry
in the register of members is by section 25, made a condition precedent to
membership”.
Section 30 of the 1913 Act is para materia to
section 41 of the 1956 Act. When this is read along with section 2(27) which
provides that member in relation to a company does not include a bearer of a
share-warrant of the company issued in pursuance of section 114, it becomes
evident that entry in the register of members is a condition precedent to
membership even if there be a resolution allotting the shares and the letter of
allotment is issued. In Killick Nixon Ltd. v. Bank of India [1985] 57 Comp.
Cas. 831, the same position is reiterated by a Division Bench of this court. In
this case a petition under sections 397 and 398 was filed against the company.
The petitioners were transferors of shares whose names continued in the
register of members and the transferees presented the petition on their behalf
as their duly constituted power of attorney agents. After the petition was
admitted, the company took out a Judge’s Summons praying that the order
admitting the petition be revoked as it was not maintainable. It was held that
the transferors as constructive trustees of the transferees were competent to
file the petition. Therein it was urged that the transferors could not be
considered as members of the company for the purpose of sections 397 and 398 of
the Act inasmuch as they had sold their shares and as such, they did not have
the necessary ‘interest’ to maintain the petition. This contention was rejected
by the learned Single Judge. On appeal, the Division Bench formulated the
question for consideration thus :
“The basic question that requires
determination is whether a member of a company who has transferred his
shareholding to another person but whose name continues to be on the register
of members of the company because the company has not deleted his name and
entered the name of the transferee in his place, can maintain a petition under
sections 397 and 398.” . . . . (p. 836)
Thereafter the Division Bench examined the
ambit and scope of section 41 of the Act which gives the definition of ‘member’
as follows :
‘Definition of “member”.—(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.’
18.1 The Division
Bench held that under section 41(2) a person whose name is entered in the
register of members shall be a member of the company. It was submitted on
behalf of the company that there is a distinction between the rights of member
and the rights of a shareholder. It was submitted that there are certain rights
which are given to a member irrespective of his shareholding while there are
other rights which are directly proportionate to his shareholding. The former
were put forward as rights of the member and the latter as rights of a
shareholder. Thus, the Division Bench considered the question whether to read
down the term ‘member’ to exclude from its ambit ‘bare’ members whose names
continue on the register of members although they have sold their shares. After
examining the various kinds of rights of members, it was held that insofar as
some of these rights are in direct proportion to the number of shares held, it
may be possible to look upon such rights as rights attached to the shares. But
the rights of all types are rights enjoyed by members of the company. It was
further held that there is no distinction between the rights of a member and
the rights of a shareholder. A company recognises only its members as its
shareholders and confers upon them certain rights. The Division Bench held :
“The company, however, recognises only the
person who is its member as a shareholder. In other words, the rights that may
exist between the company and its members or shareholders can be exercised only
by members. Similarly the company can look to its members for the discharge of
their obligations to the company as its shareholders. The only person,
therefore, who is entitled to exercise these rights and privileges or discharge
these obligations is the transferor. The transferee is an outsider as far as
the company is concerned and his only right is to have the transfer registered
and thus to get himself accepted as a member and shareholder of the company. .
. . (p. 840)”
The Aroras, having failed to get themselves on
the register of members, cannot claim any right on the basis of the share
certificates held by them.
19. Mr. Chagla
had submitted that the Aroras had paid the consideration. They had forwarded
the completed transfer forms to the company (Sant). Thereafter there was no further
act to be performed by the Aroras. They had stepped into the shoes of the
Chawlas with regard to 2,500 shares. They could presume that they were members
of Sant. They, in fact, acted on that assumption. In any event, they would be
deemed to be members. The provisions of sections 41 and 2(27) cannot be so
strictly construed as to defeat the claim of bona fide purchasers of shares,
only on the technical ground that the company has failed to register the
transferees as members. Thus, the Aroras were entitled to notice before the
scheme of amalgamation was sanctioned. For this proposition, the learned
counsel has relied upon the judgment of the Supreme Court in the case of World
Wide Agencies (P.) Ltd. v. Mrs. Margaret T. Desor AIR 1990 SC 607. This judgment
is of no avail to the applicants. In that case the question considered by the
Supreme Court was with regard to the death of the member, and the consequences
thereof on the succession to membership by the heirs. On the death of the
member, the widow applied as the legal heir for transmission of shares held by
the member. A resolution was passed to transmit the shares to the widow on her
obtaining no objection from the RBI. It was also resolved to appoint the widow
as a director in place of the deceased member. Later the widow filed a
composite petition under sections 397, 398 and 433(f). A preliminary objection
was raised on behalf of the company regarding the maintainability of the
petition on the ground that the petitioners were not members of the company as
their names had not been entered in the register of members. The other
objection with regard to the composite petition not being maintainable is not
relevant for our purpose. The learned Single Judge of Delhi High Court held
that the petitioners, being the wife and children of the late member (S K
Desor) and having obtained letter of administration and the permission of RBI,
should be treated as members for the purposes of maintaining the petition under
sections 397 and 398 of the Act. The Division Bench dismissed the appeal
against the judgment of the learned Single Judge. On appeal, the Supreme Court
posed the question to be determined in the case, namely, whether the legal
heirs of a deceased shareholder can be treated as members of the company for
the purpose of maintaining a petition under sections 397 and 398 and whether a
composite petition under sections 397, 398 and 433(f) of the Act is
maintainable. On behalf of the appellants, it was contended that the right
which is a specific statutory right is given only to a member of the company
and until and unless one is a member of the company, there is no right to
maintain the petition under section 397 of the Act. It was said that there is
no automatic transmission of the shares in case of death of a shareholder to
his legal heirs and the Board has discretion and can refuse to register the
shares. Hence, the legal heirs had no locus standi to maintain the application
under sections 397 and 398. It was further submitted that right under sections
397 and 398 are statutory rights and must be strictly construed in terms of the
statutory. The right, it was submitted, was given to ‘any member’ of a company
and it should not be enlarged to include ‘any one who may be entitled to become
a member.’ The Supreme Court considered the special provisions contained in
section 109 together with articles 25 to 28 which deal with transmission of
shares on the death of a member in juxtaposition with the para materia
provisions in the English Companies Act. It was held that the reasoning of the
English Courts, on the para materia provisions of the English Act, would be a
valuable guide. The Supreme Court approved the observations of Pennycuick, J.
in the case of Jermyn Street Turkish Baths Ltd., In re [1971] 3 All ER 184. In
that case it was contended that the petitioners were not members of the company
and hence, had no locus standi to present the petition bearing in mind that a
petition under section 210 of the English Companies Act could only be presented
by a member of the company. In facts of that case, Pennycuick, J. held that the
petitioners were duly registered as members of the company but he proceeded to
hold that even if it were not so, the personal representation of a deceased
member must be regarded as members of the company for the purposes of section
210 of the English Companies Act. Thus, it was held that the legal heirs of a
member are to be treated as members. Aroras cannot be said to be the legal
heirs or legal representatives of the Chawlas. The Aroras claim to have
purchased the shares for valuable consideration. Thus, the aforesaid
observations of the Supreme Court are of no avail to the applicants. The Aroras
are not members of Sant. They can have no claim against Sant.
20. After
having anxiously considered the various averments made, I am satisfied that
there is no deliberate mis-statement made by Aviat or Sant with regard to the
fact that Chawlas were 100 per cent members of Sant prior to July 1997. I am
also satisfied that there is no misstatement about the desirability of the
merger of Sant with Aviat. These conclusions of mine are quite evident from the
various facts contained in the pleadings which have been noticed above in
extenso. The applicants have proceeded on the footing that merely because they
were holders of the shares of Sant to the extent of 50 per cent, they were ipso
facto members of Sant. The consideration of various provisions of the Act would
make it abundantly clear that a bare shareholder does not become a member of
the company unless and until the name is entered in the register of members.
The applicants have come to court on the ground that 2,500 shares are
transferred by the Chawlas to the Aroras pursuant to MoU dated 22-12-1992,
while examining the record it show that it does not make much sense. No
consideration is provided for all the acts which are supposed to be done by the
Chawlas. There is no mention of transfer of shares in lieu of the acts being
performed by the Chawlas as indicated in the MoU. The MoU does not mention any
consideration whatsoever. Mr. Chagla agreed that the MoU does not make such
sense. This circumstance in itself is sufficient to knock out the very claim of
the Aroras. More important, however, is the fact that although the Aroras
claim to be holders of 2,500 shares of Sant, there is no such entry in the
record of the company or in the office of the ROC. The name of Aroras is not
mentioned in the register of members nor in the office of ROC. No resolution of
the board of directors of Sant appears to have been passed by which the transfer
in favour of the applicants were approved. Even the shares have been
transferred on 19-12-1992, whereas the MoU is dated 22-12-1992. Yet it is the
pleaded case of Aroras that the shares were transferred in pursuance of the
MoU. There is no direct evidence of any consideration having been passed. Thus,
it would be difficult to hold that even if the shares had been transferred to
Aroras, they will become members of Sant without being registered in the
register of members. There are no Board resolutions about appointment of
Chawals to the board of directors also nor were the Chawlas elected as
directors. Even the official liquidator in his report filed before the court
stated that prior to July 1997 only the Chawlas were members/directors of Sant.
The Aroras do not figure anywhere as directors. There is another significant
reason to indicate that the application is not bona fide. The Aroras claim to
be members of the company from 1992 onwards. Yet no steps have been taken to
even take a cursory inspection of register of members of Sant. There is no
record of the Aroras over having attended any meetings. They did not care to
take issue when amalgamation petitions were advertised. They now merely pleaded
that the circulation of the newspapers was not significant and, therefore, the
advertisement cannot be treated as a public notice. This kind of a plea cannot
be countenanced. The two newspapers are quite well known and have wide circulation.
In my view, there has been no mis-statement of materials facts. There is also
no evidence of fraud having been committed on the court.
21. I have considered the matter at great length, as setting aside of the
order on the ground of fraud would have serious consequences. It is a settled
proposition of law that fraud must be proved beyond reasonable doubt. The court
cannot proceed merely on suspicions, conjectures and surmises. There must be
clear and cogent evidence to show beyond reasonable doubt that fraud has indeed
been committed on the court. In the present case the Aroras may well have a
case against Chawlas for breach of contract, etc. They can certainly have no
case against Sant and Aviat. There was no deliberate misstatement in pleading
before the court that Chawlas were 100 per cent members of Sant. There was also
no mis-statement to the effect that Sant was wholly owned subsidiary of Aviat.
After July 1997, 100 per cent shares of Sant vested in Aviat. In all the
official records Aviat is shown as members of Sant. Therefore, it cannot be
said that Sant or Aviat have played a fraud on the court. There can be no
deemed membership of a company. A shareholder will become a member of the
company in accordance with the provisions of the Act. If legally Aroras were
not members, necessarily no notice was required to be given to the Aroras of
any proceedings whatsoever. On the other hand, if Sant was the 100 per cent
owner, then it was perfectly valid for Sant to make an application for
dispensing with holding of any meetings of the creditors. All the creditors had
given consent. The conduct of Aroras in keeping silence for a period of almost
6 to 7 years lends credence to the submission of Mr. Dwarkadas that the
application is merely speculative in nature. It has been disguised as a demonstration
against a party who is said to have defrauded the court.
22. Keeping
the aforesaid facts and circumstances in view, I find no merit in the
application. The same is hereby dismissed with costs.
23. At the stage counsel for the applicants prays for stay of the order. I
see no justification in the aforesaid request. Rejected. Certified copy
expedited.
Application
dismissed.
[1933] 3 COMP. CAS. 256 (ALL.)
HIGH COURT OF
v.
Jamna Prasad
MUKERJEE,
C.J.
YOUNG,
J.
FEBRUARY
3,1933
Bhagwati Shanker and
Hazari Lal Kapoor for the Applicant.
K.N. Katju, N.P. Asthana,
Ambika Prasad and Shabd Saran for the opposite parties.
Mukerji A.C. J.—The case was partly heard and decided on May 31, 1932. The
result of that decision was that the application of the official liquidator was
dismissed as against all the opposite parties, except as against Ram Lakhan,
son of Jagmohan Ram.
We directed by our order
that Shiam Lal, witness, should be re-examined and he has been re-examined. Now
we proceed to decide the remaining issues.
Issue No. 1. The evidence
of Shiam Lal now clearly establishes that Jagmohan Ram signed the memorandum of
association as a promoter and made himself liable for 151 shares of the value
of Rs. 100 each. Shiam Lal swore that he attested the memorandum of association
in the presence of the executant, Jagmohan Ram. It was argued that this
evidence was not enough and that Shiam Lal ought to have said specifically that
he was present when Jagmohan Ram made his signature and that Jagmohan was
present when Shiam Lal signed the document as a witness. In our opinion the
statement made by the witness makes this clear, and if this was not clear,
questions should have been put in cross-examination to find out if Shiam Lal
meant to say something else. This not having been done, we hold that Shiam Lal did attest according
to law the signature of Jagmohan Ram, and Jagmohan Ram's liability arose.
Issue
No. 2 no longer arises, as on the question of fact involved in issue No. 1, we
have found that Jagmohan Ram did actually sign the memorandum of association
and his signature was attested in accordance with law.
Issue
No. 3 has already been decided so far as the question of benefit to the family
is concerned. We held that members of the joint family other than the son were
not liable. We have now to determine the liability of the son. This will be
considered in connection with issue No. 4.
Issue
No. 4. According to Section 160 of the Indian Companies Act, Ram Lakhan is
liable as a legal representative of Jagmohan Ram as a contributory 'in due
course of administration'. This means that so far as Jagmohan Ram may have died
possessed of separate property, that property in the hands of his son, Ram
Lakhan, is liable as indicated in Section 160 of the Indian Companies Act. It
is however argued that [not only the separate or self-acquired property of
Jagmohan Ram is liable, but also the share of Ram Lakhan in the family property
is liable to pay Jagmohan Ram's debt because of the pious duty of Ram Lakhan to
pay such debt.
There
can be no doubt that the debt in question is not tainted with immorality. Now
we have to find out how far the share of Ram Lakhan in the joint family
property is liable to pay Jagmohan Ram's debt.
The
relevant proposition of Hindu Law, when fully stated, would stand as follows:—A
son is liable to pay his father's debt out of the family property consisting of
his own share and the share of the father, the property which was in the
father's hand in the life-time of the father. It is not a complete statement of
the law to say, that a Hindu son is bound to pay his father's debt because of a
pious obligation to that effect. If that were the whole proposition of law, the
son would be liable to pay out of his personal earnings, which however is not
the law. The doctrine of pious obligation was invented to settle a conflict
between two positions that were bound to arise in a family consisting of a father and his sons. The first position was
that, in ancestral property, a son by his mere birth, got a share which was
equal to the share of the father. In accordance with this proposition of law,
the property in the hands of the father is not the absolute property of the
father. That being so, he cannot utilise that property for the payment of his
debts. The next position is this. A father is the head of the family.
Ostensibly, he owns the entire property which he manages, although, legally he
and his sons have equal shares in the property. On the strength of this property,
and on the credit of it, the father deals with the world at large and incurs
debts. If the father be unable to raise any money on the credit of the joint
family property, the result would probably be that in many cases, maintenance
of the sons and the family would become impossible; for there would be no
credit in the market and nobody would lend money or provisions to the father
because they would have no or a poor remedy against the father. To adjust
between these conflicting positions, a doctrine was invented that it is the
pious duty of the son to pay the father's debt, out of the entire family
property, including the shares of the sons, provided the debt is not tainted
with immorality.
The doctrine of pious
obligation to pay the father's debt would be available only when there is a
family consisting of father and sons. For, where the family consists not only
of the father and the sons, but of brothers of the father, the position becomes
entirely different. Then it is no longer a case of a father at the head of his
family, and incurring debts on the credit of family property. It is then a case
of a debt incurred by one of the members of a Hindu family. If the person who
has incurred the debt be the manager of the family, he can bind the family only
if he has incurred the debt for the benefit of the family. If he be not the
manager, he cannot bind the family in any circumstances. If there is no benefit
to the family, the debt can be realised, in the case of a simple money decree
being passed on it, by attachment of the share of the debtor in his life-time.
If an attachment be effected, that attachment would virtually take the property
attached out of the hands of the joint family and put it into the custody of
the court. In that case, the debtor's share, so attached, may be sold. But the
share of the debtor's son would not be liable to be sold. It is the property
which a father himself may sell to pay his own debt, that can be sold through the intervention
of the court. Where the debtor is not himself the head of a family consisting
of himself and his son, he can not sell any portion of the family property,
even his own share, to pay his own debt. (See Balgobind v. Narain Lall). If there be no attachment in the life-time of
the debtor, his interest would pass by survivorship to the remaining members of
the family and the creditor would be without any remedy whatsoever. See Binda
Prasad v. Raj Ballabh.
This state of the law has
been recently laid down by their Lordships of the Privy Council in the case of
Raja Brij Narain v. Mangala Prasad. The case that was actually before their
Lordships of the Privy Council was a case of a mortgage. But the Full Board of
seven Judges proceeded to lay down the entire propositions of Hindu law on the
question of payment of debts because a previous decision of their Lordships, in
Sahu Ram Chandra v. Bhup Singh had to some extent unsettled the law as it was
previously understood. In one sense, therefore, the propositions laid down by
their Lordships were mostly obiter dicta but in view of the fact that their
Lordships did mean to settle the entire law, we must accept their pronouncement
as conclusive for us.
At page 104 their Lordships
considered the several aspects that could arise in a Hindu family. The first
case that their Lordships considered was the case of a joint family which was
managed by one of the members. The law that was laid down was that the managing
coparcener could neither alienate the family property nor burden the estate in
his capacity as a manager except for purposes of necessity. It is important to
note that their Lordships laid down the extent of the capacity of a member, as
the manager. The reason was that in other circumstances the member's acts had
no effect.
In the second proposition
their Lordships lay down that where the manager is a father and the family
consists of a father and sons, the father has greater powers and so long as the
debt incurred by the father is not immoral, the whole estate of the family
(consisting of the father and the sons) was liable to be taken in execution
proceedings upon a decree for payment of that debt.
Their Lordships then state
two other propositions of law with which we are not concerned here, and then
they state as a fifth proposition that the liability of the estate in the case
of acts stated in case No. 2 was not affected by the question whether the
father was dead or alive.
Now in the case before us
we have a family which does not consist merely of a father and son or sons, but
which consists of several members who do not stand in relation to one another
as father and sons. The family of Jagmohan Ram consisted of himself, his
brothers and his nephews and his own son. In such a case, the debt incurred by
the manager could be enforced against the other members of the family only in
the case of there existing a family necessity for incurring the debt. In any
other case, like the present one, there is no liability at all on the family.
The case before us does not fall under proposition No. 2 as enunciated in Brij
Narain's case, because it was not the case of a family consisting of a father
and sons, but it was a case in which there were members of the family other
than sons.
The case before us not
being covered by proposition No. 2 of their Lordships, and being covered by
proposition No. 1, the liability of Ram Lakhan will be only to the extent of
the separate of self-acquired property (which did not merge in the joint family
estate) in the hands of Ram Lakhan. We accordingly decide that the liability of
Ram Lakhan is only to the extent of the property to which Section 160 of the
Indian Companies Act applies, namely, the separate property of Jagmohan Ram in
which no other person had any interest in the life-time of Jagmohan Ram.
Issue No. 5 does not
require any decision in the circumtances of the case.
Issues Nos. 6 and 7. No
evidence has been led before us to show that Jagmohan Ram's shares were
forfeited and they were sold and re-allotted to other persons.
Issue No. 8. There is no
evidence to substantiate it. Issue No. 9. It is not argued before us.
Issue No. 10. It was argued
on behalf of Ram Lakhan that Jagmohan Ram having died in the year 1921 he
ceased to be a member of the company and therefore became a past member of the
company within the meaning of Section 156 of the Indian Companies Act and
therefore his estate is not liable. This argument is not sound. Jagmohan Ram by
his death did not become a past member within the meaning of Section 156
(1)(i). Having died, he could not continue to be a member of the company, but
his estate continued to be liable. No authority has been produced before us to
show that by mere death, a member of a company becomes a ' past member ' within
the meaning of Section 156 of the Indian Companies Act. Section 156 deals with
the case of a member who has legally parted with his shares. We accordingly
hold that Jagmohan Ram's son is liable to be placed on the list of
contributories.
Issue No. 11. The learned
counsel for Ram Lakhan argued that because Jagmohan Ram did not pay anything
towards the shares subscribed by him there was only a liability to be enforced
by a suit for specific performance of the contract to make him take up shares
in the company. The argument is based on Section 30 of the Indian Companies Act
which says that the subscribers of the memorandum of company "shall be
deemed to have agreed to become members of the company." This section has
been interpreted in several cases in this Court and other courts and it has
been held that the words "shall be deemed to have agreed to become members
of the company" mean that the subscribers of the memorandum of a company
are to be treated as having become members of the company by the fact of the
subscription. This view was taken in In the matter of the Union Bank,
Allahabad, and in the case of the Official Liquidator of J. H. Chandler and Co.
v. H. I. Phillips. No decided case in conflict with these authorities has been
produced before us and we hold that by merely subscribing to the memorandum of
association Jagmohan Ram became a member of the company.
Issue No. 12. In view of
our findings on issues Nos. 3 and 4 recorded above this issue no longer arises.
We are not holding that the joint family property is liable in the hands of Ram
Lakhan and the other members of the joint family, and therefore, we need not
discuss the question whether the venture was a new one and how far Ram Lakhan
was entitled to bind the joint family by entering into a new venture.
The result is that we allow
the application of the official liquidator to this extent that we direct Ram
Lakhan to be placed on the list of contributories for 151 shares and that he be
liable "in due course of administration" as the legal representative
of Jagmohan Ram. The liquidator will have his costs from Ram Lakhan personally
inasmuch as Ram Lakhan unnecessarily raised pleas against his liability to be
brought on the list of contributories.
As to the sum of Rs. 500
which the opposite parties, other than Ram Lakhan, paid into court for the
appointment of a guardian ad litem for Ram Lakhan, the decision was postponed
till to day. We are now in possession of the entire facts and are of opinion
that that sum must be borne by those people who actually paid it into court.
Our reasons are that the case for Ram Lakhan could have been defended on its
proper lines by the other members of the family who lived jointly with Ram
Lakhan. The obstacles which these members put in the way of the decision of the
case could not be justified, and therefore they must pay those costs. Ram
Lakhan will pay his own costs.
[1931] 1 Comp Cas 262
(ALL.)
HIGH COURT of
U.P. Oil Mills Co. Ltd., In re
Young, J.
May 6, 1930
Hazari Lal Kapoor, Official Liquidator, for the company.
S.K. Dar and Baleshwari Prasad, for the applicant.
This is an application under ss. 184 and 160 of the Indian Companies Act. The Official Liquidator of the U. P. Oil Mills Co. Ltd., seeks to place upon the list of contributories of the company the heirs of one Syed Alay Nabi, who the liquidators allege, was a singnatory to the memorandum of association of the company, and a subscriber thereunder to the$extent of 50 shares in the company.
The memorandum of association was signed by Syed Alay Nabi and others on the 23rd June, 1920. It is admitted that he did so sign the memorandum, and that he subscribed thereunder for 50 shares. On the same day he signed the prospectus and later on signed a consent to become a director of the company. On the 17th July, 1920, the managing agents of the company, Paras Ram and Co., wrote to Syed Alay Nabi a letter of that date asking him to remit at his early convenience the application money which was due. Syed Alay Nabi never even answered this letter, and apparently paid no attention to it whatever. Six weeks latter, on the 3rd September, 1920, the managing agents again wrote to Syed Alay Nabi demanding again the money due on application. Again, there is no record in the company's books that Syed Alay Nabi paid any attention to this demand. Consequently, on the 23rd November, 1920, the managing agents wrote to the Registrar, Joint Stock Companies, a letter informing him that because of the failure of Syed Alay Nabi to pay for his shares he had in law ceased to be a director, and asking the Registrar to strike his name off the list of directors. Previously to this, however, the company had informed Syed Alay Nabi himself on the 5th November, 1920, by a letter of that date that he was no longer a director. The next item of evidence in the case is a letter of the 20th June, 1921, in which the managing agents write to the Registrar, Joint Stock Companies, that not only had Syed Alay Nabi ceased to be a director, but he had also ceased to be a member of the company. Mr. Dar, who appears on behalf of the minors in this case, asks me to draw an inference from the facts I have related that Syed Alay Nabi had repudiated the whole contract to take shares, and that the company had accepted that repudiation and in effect had accepted a surrender of the shares. I regret I am totally unable to accept Mr. Dar's view. The evidence is clearly to the contrary. There was no repudiation at all. There was merely a failure to pay for the shares, and a consequent legal position arising from the fact. If I am to assume anything or infer anything in this case, I think the only inference I can possibly arrive at is that Syed Alay Nabi had subscribed 50 shares which according to the articles of association subsequently adopted by the company, was the qualification for a director, solely for the reason that he was being made a director. When he was struck off the list of directors owing to his default, he, no doubt, may have thought, and no doubt the managing agents, who on matters of this sort were undoubtedly ignorant, may have thought that he thereby ceased to be a member of the company. In thinking this, however, they were entirely wrong in law. The position is clear. A subscriber to the memorandum of association remains a member of the company, until such time as either the company—which, of course, must be authorised to do so by the articles of association—accepts a surrender of the shares for valid reason, or the subscriber him self pays for the shares and validly transfers them to some body else. There is no doubt, that, had Syed Alay Nabi still been alive, his name would have been placed on the list of contributories. It is clear, therefore, that I have no alternative but to order that Syed Alay Nabi being dead, his heirs should be included in the list of contributories, and I order accordingly. However, this is a hard case. Syed Alay Nabi undoubtedly thought that he had ceased to be a member. The managing agents undoubtedly thought the same. There was no demand after the letters to which I have alluded, made upon him to contribute to the company the price of his shares or any part of it, and there was, therefore, no refusal or neglect, by him to comply with the lawful demand of the company.. The question, therefore, arises as to whether I should order interest to be paid on the amounts outstanding. I do not think that this is a case where interest should either be asked for by the liquidator or granted by the Court. The application under ss. 184 and 160 is granted.
[1948] 18 COMP CAS 309 (
IN THE
v.
Equity
Insurance Co., Ltd.
MISRA AND KAUL, JJ.
DECEMBER 11, 1947
Nasirullah Beg and J.K. Tandon,
for the Appellant.
M.B. Ramprasad Varma and Shri Ram
Gupta, for the Respondent.
This is a defendant's appeal in a
suit brought by the liquidator of Equity Insurance Co., Ltd.,
The facts material for the
decision of this appeal are as follows:—A limited liability company, called
Equity Insurance Co., Ltd.,
1. Jagat Kumar, Raja of Sahaspur District,
2. Govardhan Prasad Bhargawa.
3. D.C.H. Dinshaw.
4.
5. T.C. Jaini.
6. Chaudhury Mohammad Ismail.
7. Sikhar Chand Jaini.
8. H.N. Kitchlu.
The number of shares taken by
Raja Jagat Kumar, as noted opposite his name in the memorandum of association,
was 1500. Besides Raja Jagat Kumar, all the other promoters belonged to
It appears that on the assumption
of the superintendence of the estate of Raja Jagat Kumar by the Court of Wards,
the usual notice under Section 17 of the Act was published in the Gazette. In
response to this notice, the company intimated to the Collector of Moradabad
that the Raja held 1500 shares of Rs. 25 each, as promoter of the company, and
was also one of its directors. As no amount was paid by the Raja in respect of
the application and allotment money, Rs. 15,000 was due from his estate (at Rs.
5 application money and Rs. 5 allotment money per share). In reply to this, the
Collector intimated to the company that if the Raja had to pay any amount on
account of the shares alleged to have been held by him, the Court of Wards "would
like to withdraw from this position" as it no longer wanted to incur any
further expenditure of this kind. By the same letter (Exhibit 16) he asked the
general secretary of the company to send him a detailed explanation of the fees
claimed against the Raja. By a letter dated the 8th November, 1934, the
managing agents of the company informed the Collector of Moradabad that in
deference to his wishes, the company "would forego the claim."
On 26th February, 1936, a call in
respect of Rs. 12-8-0 per share was made by the directors of the company.
Jagat. Kumar being dead, and as superintendence of his estate was assumed by
the Court of Wards, (sometime in April, 1934), a notice of the call was served
upon the Collector of Moradabad who was the manager of the Court of Wards in
charge of Sahaspur Bilari Estate. The Court of Wards did not pay any money
towards this call. The directors of the company made a second call of Rs.
12-8-0 per share on 27th August, 1938. Notice of this call was served upon the
Collector of Moradabad who denied the liability of the estate of Raja Jagat
Kumar to pay anything.
The company went into voluntary
liquidation by a resolution of the shareholders passed on the 7th December, 1940.
The liquidator made an application to bring a suit against the estate of Raja
Jagat Kumar in respect of the money due for the second call, which was made in
1938, in forma pauperis. The application was dismissed. Thereupon the
liquidator, Mr. Shyam Manohar Rastogi, instituted on 27th August, 1941, the
suit which has given rise to the present appeal for recovery of Rs. 25,500
including Rs. 18,750 on account of the call money (due in respect of the second
call made in 1938) and Rs. 6,750 on account of interest at the rate of 12 per
cent, per annum.
On behalf of the defendant it was
denied that Raja Jagat Kumar signed the memorandum of association or agreed to
purchase 1500 shares. It was pointed out that no allotment of shares was made
to the Raja, and that the notice of the call in respect of which the suit was
brought was bad in law. It was further pleaded that even if the Raja be held to
have purchased any shares in the plaintiff company, they were surrendered by
the Collector after the Raja's death and the surrender was accepted by the
company. That a call in respect of Rs. 12-8-0 per share could not be made and
that the proceedings relating to the company going into liquidation were not
legal as the necessary formalities required by law were not complied with and
accordingly the present liquidator had no right to institute the suit. The
liability to pay interest was denied. It was also pleaded that the suit was
barred under Section 20 of the Court of Wards Act. Two other pleas namely that
the suit was barred by the law of limitation and that a fraud was practised
upon Raja Jagat Kumar in inducing him to put his signature to the memorandum of
association of the company, were also raised. It is, however, unnecessary to
consider these pleas as they were not pressed in appeal.
The learned Civil Judge of
Malihabad, by whom the case was heard, framed the following issues:—
1.
(a) Did the late Raja Jagat Kumar
sign the articles of association and memorandum, as alleged by the plaintiffs ?
If so its effect ?
(b) Did the late Raja
Jagat Kumar enter into an agreement to purchase 1500 shares at Rs. 25 each ?
(c) Did the
plaintiff make the calls as alleged ? Were the calls valid ? Could the
plaintiff make a call for Rs. 12-8-0 per share on 27th August, 1938, as alleged
in para. 5 of the plaint ?
2. Did the
plaintiff agree to forego the claim in respect of the aforesaid shares, and did
defendant surrender them, as alleged in para.15 of the written statement ? If
so, its effect ?
3. (a) Is the suit barred by time under Section
20 of the Court of Wards Act ?
(b) Is the suit barred by time under the
general law ?
4. Whether the
agreement about the purchase of 1500 shares is vitiated by fraud as alleged by
the defendant ?
5. Whether the
plaintiff is entitled to get any interest ? If so, at what rate?
6. To what relief, if
any, is the plaintiff entitled?
7. Was no
allotment necessary in case of the subscribers of memorandum of association, as
alleged by the plaintiff? Was any allotment made?
8. Did the plaintiff
company go into liquidation arid is the plaintiff entitled to sue?
The learned Judge held that Raja
Jagat Kumar signed the memorandum and the articles of association of the
company and agreed to take 1500 shares of Rs. 25 each, and that a call for
payment of Rs. 12-8-0 per share was made on 27th August, 1938, which was a good
and valid call. As regards the plea of surrender of shares, it was held that
the secretary of the company did forego the amount of the calls that had been
made up to 8th November, 1934, though he was not authorised to forego the
allotment money and the application money. The pleas based upon Section 20 of
the U.P. Court of Wards Act, the law of limitation and fraud were negatived. It
was further held that no formal allotment of shaves to Raja Jagat Kumar, who
was one of the promoters of the company, was necessary, that the proceedings
relating to the company going into liquidation were not vitiated by any defects
and that in the circumstances the plaintiff company was entitled to the interest
claimed. The suit was accordingly decreed. Dissatisfied with this decision the
defendant has preferred this appeal.
All the pleas raised in the lower
Court except those covered by issues 3(a) and (b) and issue 4 were raised
before us in appeal.
It was contended that the
plaintiff-respondent had failed to prove that Raja Jagat Kumar signed the
memorandum and the articles of association, or that he agreed to take 1500
shares (The judgment after referring to the evidence concludes as follows:)—We
hold that Raja Jagat Kumar Singh signed the memorandum of association as also
the articles of association and agreed to take 1500 shares. That he had
consented to become a director is not a point in controversy between the
parties.
Lengthy arguments were addressed
to us on the provisions of Section 24 of the Indian Companies Act and
considerable time was devoted to a discussion of Peel's case. In view of
the finding of fact at which we have arrived, it is unnecessary to examine in
detail either Section 24 of the Indian Companies Act or the dicta laid down in
Peel's case.
We may, however, point out that by Section 6(3) in the case of a company
limited by shares, each subscriber is required to write opposite his name the
number of shares he takes. We find that in the memorandum of association of the
company to which this appeal relates (Exhibit 2/P.W. 1) the concluding portion
of paragraph 6 is as follows:—
"We, the several persons whose names are subscribed,
are desirous of being formed into a company in accordance with this memorandum
of association and we respectively agree to take the number of shares in the capital
of the company set opposite to our respective names."
Just below this paragraph are given the names of the
persons who subscribed the memorandum of association and opposite each name is1
mentioned the number of shares taken by the subscriber. The first name is that
of Raja Jagat Kumar, Raja of Sahaspur, with the figure 1500 noted against ii.
in the column headed "number of shares taken by each subscriber." It
is difficult to believe that Raja Jagat Kumar signed the memorandum of association
in ignorance of what was clearly noted just above where he signed his name.
This is another reason which confirms the view taken by us.
Section 24(1) reads as follows:—
“A certificate of incorporation given by the Registrar in
respect, of any association shall be conclusive evidence that nil the
requirements of this Act in respect, of registration and of matters precedent
and incidental thereto have been complied with, and that the association is a
company authorised to be registered and duly registered under this Act."
This rule of evidence is applicable to associations
constituted under the Indian Companies Act. Section 6 lays down what the
memorandum of association of a company shall state. Admittedly a certificate of
registration was given by the Registrar in respect of Equity Insurance Go. Ltd.
The certificate is, therefore, conclusive evidence of the fact that each
subscriber wrote opposite his name the number of shares he took. It is not
disputed that Raja Jagat Kumar subscribed the memorandum of association. We
find the figure indicating the number of shares taken by him noted opposite his
name. In view of the provisions of Section 6, read with Section 25, the
appellant cannot be permitted to prove the contrary: (Section 4, Evidence Act 1
of 1872, and Moosa
Goolam Ariff v. Ebrahim Goolam Ariff).
It was suggested at one stage of
arguments that even if Raja Jagat Kumar signed the memorandum of association
for 1500 shares, there was no liability incurred to pay any calls made in
respect of those shares because "there was no allotment of any shares to
the Raja." The argument is without substance. A subscriber of the
memorandum of association of a company is deemed under Section 30 of the Act to
have agreed to become a member of the company, and on the registration of the
company the Act requires that his name shall be entered in the register of
members. Section 30 of our Act corresponds to Section 25 of the English
Companies Act of 1929 and to Section 24 of the English Companies Act of 1908.
It was held by Lindley, M.R., in Alexander v. Automatic Telephone Company that
subscribers to the memorandum of association of a company limited by shares are
liable, bat only liable by virtue of their subscription to pay up the amount of
their shares as and when called up. A subscriber of a memorandum of association
becomes by Section 23 (The Master of Rolls was dealing with the Act of 1862) a
member in respect of the number of shares subscribed by him without any further
application by him or allotment o£ shares to him. Every such subscriber becomes
a member ipso facto on the incorporation of the company, and liable as the
holder of whatever number of shares he has subscribed for. Section 30 of our
Act is the same as Section 25 of the English Act of 1929. The section deals
with two classes :—
1. Persons who have
subscribed the company's memorandum of association, and
2. Those who have agreed
to be members and whose names are entered in the register.
A
person may become a member or a shareholder in any of the following ways :—
1. By subscribing the
memorandum of association before its registration.
2. By agreeing with
the company to take a share or shares and being placed on the register of
members.
3. By taking a
transfer of a share or shares, and being placed on the register of members.
4. By registration on
succession to a deceased or bankrupt member, and
5. By allowing
his name to be on the register of members or otherwise holding himself out or
allowing himself to be held out as a member.
The original subscribers are by
the Act of legislature deemed to have taken shares set opposite their names,
the object being that the public might rely with confidence on the subscribers
of the memorandum becoming members of the company. In the case of subscribers
of the memorandum, no allotment of shares is necessary : see In Re London and
Provincial Consolidated Coal Co. Nor is the
entry of their names on the register of members necessary, Nicol's case, and
Vazirmal Kewalram v. Makran Coast Steam Navigation Co. Ltd.
It was next, argued that after
the death of Raja Jagat Kumar, the Collector of Moradabad, as manager of Court
of Wards, Sahaspur Estate, surrended the
shares held by the Raja and that the surrender was accepted by the Secretary of
the plaintiff company; accordingly Raja Jagat Kumar's liability in respect of
the shares was extinguished. (The judgment then deals with the evidence and
concludes as follows): We are unable to hold that there was a surrender of the
shares held by Raja Jagat Kumar, or that the company either through its
directors, or managing agents, accepted this surrender.
It appears to us however that even if the Collector
intended to surrender the shares, which is by no means clear, and the secretary
of the company intended to accept the same, the transaction would be ultra
vires. There can be no doubt that the secretary's act in the present case would
not only mean release by the company to the share holder of (he money due in
respect of the calls that it had already been made, but also release of
uncalled capital on the shares held by him. This is not permitted by law. Under
our law it is not open to a share holder to surrender the shares held by him,
or to the company to accept the surrender, unless the act of the company can be
brought within the rules relating to the forfeiture of shares. That a surrender
of shares amounts to a reduction of capital which is unlawful, unless
sanctioned by the Court, was laid down by Cozens-Hardy, L.J., in Bellerby v. Rowland and Marwood's
Steamship Co., Ltd., where it
was held that a surrender of shares in a limited company, the company releasing
the share holder from further liability in respect of the shares, is equivalent
to a purchase of the shares by the company and is there fore illegal and null
and void, on the principle of Trevor v. Whiteworth. Under
Section 55 of our Act the share capital of a company limited by shares can be
reduced only if so authorised by its articles, and subject to confirmation by
the Court. To reduce the share capital of the company in violation of the
provisions of Section 55, unless it is done in conformity with some other
provision of the Act, is illegal and cannot be recognised. Admittedly in the
present case; the reduction of the share capital of the company was brought
about not in any of the modes provided by the Act and so must be held to be
void. The result, therefore, is that the appellant cannot take advantage of any
acceptance of surrender of shares, even if it could be established.
Another point raised by the
learned counsel for the appellant was that the call of 27th August, 1938, was
invalid. Article 23 of the articles of association reads thus:—
"The directors may from time to time
subject to any terms on which any share may have been issued make such calls as
they think fit upon the shareholders in respect of all moneys unpaid on the
shares held by them respectively and
each member shall pay the amount of every call so made on him to the persons
and at the times and places appointed by the directors. A call may be made
payable by instalments."
It was urged that the directors
failed to appoint the time, place and parson to whom the call money was to be
paid. There is a short reply to this argument. (The judgment then deals with
the evidence on record and proceeds as follows) : It is not necessary that the
time and place of payment should be specified in the resolution authorising the
making of the call. This should be done subsequently (See In re
Another contention raised by the
learned counsel for the appellant was that, inasmuch as the provisions of
Section 207 of the Act were not complied with, the entire proceeding relation
to the winding-up of the company was bad in law. It was urged that the
declaration referred to in Section 207(1), Exhibit A-20, was not accompanied by
an affidavit. We find, however, that Exhibit A-19 is an affidavit sworn by
Jagannath, one of the directors of the company. It bears the same date as the
declaration though it was sworn before Kh. Qamaruddin Ahmed, Special
Magistrate,
The last point raised related to
interest. Article 27 of the articles of association reads thus :—
"If the sum payable in
respect of any call or instalment be not paid before or on the day appointed
for payment thereof the holder for the time being of the share in respect of
which such call or instalment shall be due shall be liable to pay interest for
the same at such rate as the directors may determine not exceeding 12 per cent,
per annum from the day appointed for payment thereof to the time of actual
payment."
There is no evidence, however,
that the directors fixed any rate in the present instance. By the plaint,
interest at the rate of 12 per cent, per annum "as provided in the
articles of association" was claimed from the date of notice, 27th August,
1938, and the whole of it was decreed by the lower Court. Interest can be
claimed by a creditor, (1) under a contract, (2) under a statute, or (3) on the
grounds of usage (See Deputy Commissioner, Kheri v. Dr. Ram Kumar Saxena). It was
held by their Lordships of the judicial Committee in Bengal Nagpur Railway Co.
Ltd. v. Ruttanji Ramji that
interest for the period prior to the date of the suit may be awarded if there
is an agreement for the payment of interest at a fixed rate, or it is payable
by the usage of trade having the force of law, or under the provisions of any
substantive law entitling the plaintiff to recover interest. Reliance in the
present case was placed on article 27 of the articles of association, but no
rate having been fixed by the directors, it is not possible to decree the claim
for interest on that basis. May be that the directors did not want to charge
any interest on this call. Their failure to fix any rate of interest is capable
of such a construction. Nor can the claim for interest succeed on any of the
two other grounds mentioned above.
We hold, therefore, that the
decision of the lower Court as regards the payment of the call money must be
upheld. The decree in so far as it awards interest up to the date of the suit
is set aside. But for the modification noted above the appeal is dismissed.
Parties shall get and pay costs in both Courts in proportion to their success
and failure. The stay order dated nth September, 1942, is vacated.
[1934] 4
Comp. Cas. 127 (
Rupchand,
A.J.C.
December 13, 1933
Pahlajsing B. Advani, for the applicant.
Chabaldas Rochiram, Kodumal Isardas and Kundanmal Dayaram, for the opponents.
This is an application under section 184, Companies Act, for settlement of a list of contributories of a bubble company called "The Makran Coast Steam Navigation Co., Ltd.," now in liquidation. On 20th November, 1929, this company was brought into its corporate existence at the instance of two inexperienced, raw and penniless youths, both brothers named, Raghunath and Dattatraya, sons of Atmaram Sonalker. The memorandum and articles of association of the company are signed by 12 persons and 10 out of them are mentioned in Art. 75 as the first directors. Each of the persons mentioned as a director is shown to have agreed to purchase 100 shares of Rs. 10 each, and the other two 10 shares of Rs. 10 each. The share capital of the company is rupees one lac divided into 10,000 shares. The managing agents of the company were Messrs. Sonalker & Co. The share money was payable in full on application. Arts. 78 and 79 of the articles of association which deal with the qualification of directors read as under:
"78. The qualification of a director shall be the
holding of shares in the company of the nominal value of Rs. 1,000.
79. A first director may act before acquiring his qualification but shall in any case acquire the same within one month from his appointment; and unless he shall do so, he shall be deemed to have agreed to take the said shares from the company and the same forthwith allotted to him accordingly."
The following persons filed before the Registrar of Companies, Bombay, the usual declaration form dated 19th November, 1929, (Exhibit 31/3) testifying under section 84 of the Act their consent to act as directors: (1) R.A. Sonalker of Sonalker & Co.; (2) Vazirmal Kewalram C/o Sonalker & Co.; (3) Manghanmal Gurnomal of Manghanmal Gurnomal & Co.; (4) Dinshaw H. Mehta; (5) Maganlal Shirji of M. Kanji & Co.: (6) Visvanatha B. Patel; (7) Shewaram Lekhraj Jumani; (8)Bassarmal Awatrai; (9) Ladharam Deomal; and (10) Dattatraya A.G. Sonalker of Sonalker & Co. The number of shares shown against each name is 100. The same persons filed a declaration, Exhibit 31/2 bearing the same date as Exhibit 31/3, agreeing to take and to pay for the shares noted against their names. Some meetings were held prior to 18th December, 1929, but there is no record of them.
A book has been produced containing notices issued by the managing directors of the meeting called. The first notice which is dated 19th December, 1929, (Exhibit 13/3), was issued on a loose sheet and is pasted in this book. It is a notice for convening a meeting of the Directors for the 19th December, and signed by all the Directors except Ladharam. The work to be done at that meeting is as under: (1) The completion of the managing agency agreement as approved at the last meeting; (2) The perusal and if approved, the authorization of the publication of the prospectus, and (3) Any other business that may be brought forward. Notice of meetings convened up to 25th August, 1930, are written in this book. But there is no knowing what was done at such meetings. All that can be gathered is that several of the directors whose names appear in the first list dropped out and others were added. The notice of 21st January, 1930, Exhibit 32/17, is addressed to three directors: (1) Dattatraya Sonalker; (2) Raghunath Sonalker and (3) Ladharam Deomal, the agenda being to select other directors. The last notice in this book Exhibit 32/28 which is undated reads are under:
"As the quorum of the qualified directors is not present, the directors who have paid up their qualifications have authorized and consented to appoint new directors from applications received: The meeting of the Board of Directors will be held at the registered office of the company in the Hasanali Building, Bunder Road, at 5 p.m. on 25th August, 1930, to transact the following business: 1. To appoint Chairman; 2. The perusal, and if approved, the authorization of the publication of the prospectus; 3. To appoint Bankers, and Legal Advisers; 4. To adopt managing agency agreement; and 5. To authorize the managing agents to secure any suitable steamer, and any other business that may be brought before the meeting."
It has been served on the following three directors and is signed by them: (1) Seth Harchandrai Lekhraj; (2) Seth Jairamdas Naraindas; and (3) Mr. R. A. Sonalker. Notices of resignations; of directors seem to have been given by the managing agents to the Registrar and the declaration submitted on 7th February 1931, shows that all the old directors except the two Sonalker brothers and Ladharam Deomal had resigned before that date and one Jhamandas had been substituted in place of Dinshaw H. Mehta. The company appears to have issued a prospectus although not sanctioned by the Registrar and to have received applications for shares accompanied with money or a part thereof. The prospectus Exhibit 32/11 contains the usual cry of help for Swadeshi concerns and contains inter alia the following three paragraphs:
"Present is the opportunate time to purchase suitable
steamers of the latest design and equipped with all modern fittings. Such
vessels are available at considerably low prices. The managing agents have
already placed themselves in communication with the leading ship-brokers as
well as ship-builders in
How far the Directors were very influential and public spirited gentlemen and what wide experience Sonalker had appertaining to shipping having served for a long time in Bombay Steam Navigation Co., are hardly matters which require any comment. Senior Sonalker has kept himself out of the box, but his brother who is only 27 years old has said:
"Before we thought of the company we were doing freight business. The company was actually thought of by my late father. He died in the beginning of 1929. Our father left us no property. We had about Rs. 2,000 of our own. We spent all this in floating the company. Both of us are penniless. My earning is uncertain. I get Rs. 50 or Rs. 60 a month at the most. My brother also earns the same amount."
The company does not appear to have received any great local response. Exhibit 33-3 is a letter addressed by Ladharam to the managing agents and reads as follows:
"As
arranged between yourselves and me, until the opening of a regular banking
account, the firm of Seth Bherumal Choithram will act as bankers for the
company. Accordingly I have collected the following amounts on behalf of the
company: Rs. 1,500 for shares from Seth Kakir Mahomed Mandost; Rs. 2,000 for
shares from Seth Deomal Odhavdas; Rs. 500 for shares from Seth Hassanand
Naraindas; Rs. 500 for shares from Seth Karimdas Vajoo; Rs. 250 for shares from
Seth Lilaram Kewalram; Rs, 100 for shares from Seth Kasem Suleman Surti; Rs.
100 for shares from Seth Ebrahim Hussain; Rs. 1,000 for shares from Seth
Lehchumal Lahorimal; and Rs. 1,000 for shares from Seth Lalchand Kalyandas. No
business appears to have been done, but a lot of money received from applicants
wasted in several ways. The Registrar of Companies sent to the managing agents
three notices under S. 247 (1), Ex. 31-6, dated 10th November 1930,
Exhibit 31-9, dated 29th September, 1931, and Exhibit 31/8, dated 30th October,
1931, informing the company that unless within three months from the date of
the notice sufficient cause is shown, the name of the company will be struck
off the rolls. The managing agents were however able to induce the Registrar to
put off striking the name of the company from the registers. A criminal
complaint was filed against the Sonalker Brothers and the police took
possession of some of the assets and papers. The Sonalker brothers, however,
prevailed upon the complainant to withdraw the complaint and promised a
composition. But nothing came out of it, and proceedings were taken in this
Court for liquidation of the company. This is briefly the history of this
Company which was intended to establish both passenger and cargo traffic
between
In order to afford relief to some of the unwary applicants who have parted with their money, the official liquidator is attempting to recover the application money from some of the persons who signed the memorandum and the articles. The defence of all of them except Ladharam is more or less technical. Before I deal with the defence of the other signatories to the memorandum of association and to the declaration that they had agreed to be directors, it is necessary to deal with the defence of Ladharam. He continued as a director until criminal proceedings were taken against the Sonalker brothers and so the only defence open to him was that he paid in full the amount due by him, and he has raised that defence.
[The learned Judicial Commissioner after considering the evidence held that Ladharam never paid Rs. 1,000 as share money to the managing agents or to any other person authorized by the company to receive the same, although he had advanced some money to Sonalker brothers to enable them to push on with the work and proceeded]. Opponents Nos. 1 to 12 are signatories to the memorandum of association. Opponent No. 9 is dead and the official liquidator has given up the claim against him. Opponents Nos. 2, 5, 6, 7, 8 and 11, are ex parte. Opponent No. 1 is represented by Mr. Chabaldas. Opponents No. 3 is represented by Mr. Kodumal, Opponents Nos. 4, 10 and 12 are represented by Mr. Kundanmal. I have already dealt with the case of Opponent No. 3.
Opponents Nos, 1, 3, 4, 10 and 12 had in addition to the signatures to the memorandum of association filed their declarations before the Registrar that they had agreed to act as directors. The objections filed on their behalf may be summed up as follows: (a) That they were induced to buy shares by misrepresentation and fraud. They were told that Mr. Wazirmal who is one of the objectors would be made a partner in the business of the managing agents and were also told that the Sonalker Brothers were thorough business men, but to their surprise they discovered that this was not so and that the Sonalker Brothers had started the company in order to obtain moneys from the public for their benefit and had misappropriated the same, (b) That no shares were as a matter of fact, allotted to any of the opponents, and that therefore they are not liable, (c) That the opponents repudiated their liability and their repudiation was accepted, (d) That they did not act as directors and withdrew their consent before the prospectus was issued and that as their names were not disclosed in the prospectus, no liability attached to them, (e) That they were not aware of the provisions of article 79 of the articles of association and are not therefore bound by its provisions. I am afraid there is no substance in any of the objections raised on behalf of these opponents.
It is well settled that the signatories to the memorandum of association of the company become the first members of the company as from the date of incorporation mentioned in the Registrar's certificate. They are deemed to have agreed to become members of the company and on its registration are to be entered as members in its register of members. But neither this entry nor the allotment of shares is a condition precedent. Each subscriber at once by subscribing irrevocably agrees to take from the company the number of shares placed opposite his signature unless all its share capital has been allotted to other persons. The fact that no shares are allotted to him and that he has ceased to be treated as a member for a considerable time does not relieve him from liability. Halsbury's Laws of England, paras. 380 and 381, Volume 5, Edition 2. In Drummond's case Lord Romilly has said: "The persons signing the memorandum are required by legislature to do so as an earnest that there are certain persons personally liable to pay money to the company." And at page 780, Jessel, M.R., has said: "A man who signs the memorandum of association agrees to become a shareholder, and so long as there are shares that can be allotted to him, he must fulfil that obligation." In the words of Scott, J., in In re Machine Exchange Co. Ltd., at p. 315 a subscriber to the memorandum of association is a guarantee of the bona fides of company. Reliance has been placed on the second part of section 30, Companies Act, but that part of the section merely lays down a rule of procedure and does not purport to declare that a failure to comply with its provisions shall relieve a signatory of his liability to pay for his shares, which, according to the first part of that section, he is deemed to have agreed to have purchased and to pay for: see In re J.H. Chandler & Co., Ltd. Apart from this it would appear that as the opponents were also the first directors, they were bound to see if the allotment was made. They cannot avoid their liability to pay for the shares by pleading their own default or negligence in not making the allotment of shares to themselves. Reliance was placed on Natal Investment Co., In re: Snell's case, United Service Co., In re: Hall's case, and Re London and Provincial Consolidated Coal Co., and on Halsbury's Laws of England, para. 381, for the proposition that a valid surrender of shares will have the effect of exonerating a subscriber, whether he be a director or not, from his liability to pay for the shares agreed to be purchased by him, in accordance with the memorandum.
But so far as the old rulings referred to by Mr. Kundanmal are concerned, they are not now good law. There can be no valid surrender of shares that are not fully paid except where shares are forfeited, as it involves a reduction of capital and before this can be done the sanction of the Court must be obtained. Bellerby v. Rowland and Marwood's Steamship Co., Ltd., it has been held that a surrender of shares in a limited company releasing the shareholders from further liability in respect of the shares, is equivalent to a purchase of the shares of the company and is therefore illegal and null and void on the principal of Trevor v. Whitworth, and that a surrender of shares which has the effect of reducing the capital can be supported only under circumstances which would have justified a forfeiture of the shares, the validity of forfeiture being recognized by the companies Act. In this case at p. 25, Collins, M.R., has said:
"I can see no distinction in principle between returning to a shareholder a part of the paid-up capital in exchange for his shares and wiping out his liability for the uncalled-up sum payable thereon. Both methods involve a reduction of the capital which, as Lord Watson pointed out in Trevor v. Whitworth, persons dealing with the company are entitled to rely upon as existing, either as paid-up or as still to be called-up, and such a reduction therefore can only hold good if sanctioned under the conditions prescribed."
And at p. 26 he has further said:
"The justification of forfeiture rests upon the statute itself, and I think that since Trevor v. Whitworth no authority can be relied on as justifying a surrender having the effect of reducing capital which cannot be supported as a form of forfeiture."
At p. 32, Cozen Hardy, L. J., has said:
"A company cannot be a shareholder in itself, every surrender of shares, whether fully paid-up or not, involves a reduction of capital, which is unlawful, except when sanctioned by the Court under the Companies Acts of 1867 and 1877. Forfeiture is a statutory exception, and is the only exception. For I regard a surrender, under circumstances which would justify a forfeiture, as merely equivalent to a forfeiture."
There was no question therefore, here that any valid surrender of the shares was made nor has any such plea been raised. Whatever might be the effect of the plea of fraud and misrepresentation with regard to the rights of the opponents against Sonalker brothers, such a plea even if established is of no greater efficacy than any of the other pleas raised on behalf of the opponents so far as the question of their liability as con-tributories in a winding up of a company is concerned. Section 156, Companies Act, proceeds on the assumption that the contributories are all innocent parties and that they must contribute equally towards the loss sustained by the company for no fault of theirs subject, however, to certain equities which are contained in the exceptions to that section.
The opponents' case does not fall in any one of those exceptions. The opponents are in no sense past members. They only ceased to be members and could not give up their shares without paying for them. The company was never empowered to transact business and no competent board of directors was formed before the company was ordered to be wound up. On the evidence again, there can be no doubt that some of the opponents were lured to join hands with the Sonalker Brothers on the pretext that this was Swadeshi movement and that the Sonalker Brothers had the requisite experience to make the venture a great success. But there is no evidence that any of the opponents except Vazirmal joined the venture on the representation that Vazirmal would have a share in the managing agency. Exhibit 37/1 is a draft agreement between Vazirmal and Sonalker Brothers. This exhibit and Exhibit 32/25 to 29 are evidence that Vazirmal like Ladharam wanted to make money by joining hands with the two brothers and that while Ladharam was to make money as a broker Vazirmal was to get a share in the takings of the managing agents. It is the greed of both these persons which has brought them to grief.
I hold that all these opponents are liable to have their names entered as contributories qua signatories to the memorandum of the company and I direct that names be entered as such. In the circumstances, there is no occasion for me to consider the further question of the liability of these opponents qua directors. I pass the same order in respect of opponents Nos. 2,5, 6, 7, 8 and 11 who are ex parte and who are also signatories to the memorandum. Opponent No. 13 is not a signatory to the memorandum. He is ex parte and therefore there is nothing on the record to show that he is not liable and I order that his name be also entered in the list of contributories. The official liquidator will have his costs from Opponents Nos. 1, 3, 4, 10, 12, but Opponents Nos. 1 and 3 will not be liable for the costs of the commission which was not issued in consequence of any objection raised by them.
[1939] 9 COMP. CAS. 126 (MAD)
HIGH COURT OF
v.
K.
Vannamuthu Pillai
BURN, J.
JANUARY 6. 1939
Messrs. V.T. Rangaswamy Ayyangar
and K. Venkateswaran, for the Ptitioner.
Messrs. R. S. Srinivasacharya and K.V. Rajagopalan, for the
Respondent.
Burn, J.—In my opinion
the dismissal of the suit by the learned Subordinate Judge was correct. The
defendant subscribed for 20 shares in the memorandum of association and
therefore by Section 30 sub-section (1) of the Companies Act, he must be deemed
to have agreed to become a member of the Company and on registration of the
Company, his name must be entered as a member in the register of members. The
fatal defect, in my opinion, in the plaintiff's case is that the 20 shares for
which the defendant subscribed were not validly allotted to him. It is no doubt
true as Mr. Rangaswami Ayyangar for the petitioner contends, that in the case
of a person who subscribes to the memorandum of association, no separate
application for shares is necessary, but I find nowhere any authority for the
view that no express allotment of shares is necessary in order to give rise to
a liability to pay up the value of the shares. The learned Advocate for the
petitioner refers me to Resolution No. 9 passed on the 21st of December 1936.
That runs as follows:—
"This meeting allots hereby the 517 shares subscribed
for by the signatories and the names of the signatories may be entered in the
register of members."
Mr. Rangaswami Ayyangar also refers to the prospectus which
was published later in which there is a statement on page 1 that 517 shares to
the value of Rs. 12,925 have already been subscribed for by the signatories to
the memorandum and allotted, and on pages 6 and 7 of the prospectus, the number
of shares taken by each of the signatories to the memorandum is set out. These
however are not sufficient to show that on the 21st of December 1936, there was
any "allotment" of shares to the defendant. It is provided in Section
28, sub-section (2) of the Companies Act that each share in a Company having a
share capital shall be distinguished by its appropriate number and by Section
31 sub-section (1), every Company is required to keep a register of members in
which the following particulars are to be entered:—
(1) the names
and addresses and the occupations, if any, of the members, in the case of a
company having a share capital, a statement of the shares held by each member,
distinguishing each by its number, and of the amount paid or agreed to be
considered as paid on the shares of each member.
Now, it appears from the notice sent to the defendant by
the plaintiff on the 8th of March 1937, informing him that his shares had been
forfeited, that the shares of which he was registered as owner were shares
numbered from 121 to 140. But the learned Counsel for the petitioner is not
able to show me any resolution in the Minutes Book of the Board of Directors
allotting shares numbered 121 to 140 to the defendant. I have looked through
the book and there is no record of any such resolution. It is not necessary, in
my opinion, to go so far as the learned Subordinate Judge has gone and to say
that the defendant's liability to pay for the shares cannot arise till
liquidation proceedings are started. But it is, in my opinion, clear that his
liability has not yet arisen, because the shares have not been validly allotted
to him, and consequently no valid notice of allotment has been given to him. It
is not necessary to consider the allegation that the defendant's shares have
been forfeited. I do not understand the plaintiff as having contended that the
defendant's liability to pay the value of the shares arises on forfeiture.
The dismissal of the suit was, in my opinion, correct and
therefore this petition is dismissed with costs.
[1937] 7 COMP. CAS. 345 (
HIGH COURT OF
v.
Kundan Cloth Mills
Co., Ltd.
SKEMP, J.
DECEMBER 23, 1936
Mr. J.G. Sethi, for the Appellant.
Mr. D.N. Aggarwal, for the Respondent.
Skemp,
J.—This second appeal is against
a judgment of the Senior Sub-Judge,
Mr.
Sethi has argued the second appeal on behalf of the defendant. The facts, as it
is necessary to state them, are that Company called the Kundan Cloth Mills was
promoted by Mr. Kundan Lal of
Mr. Sethi urges that Mr. Banwari Lal signed on the representation that if after consulting his sons he wished to withdraw from the Company he might do so. He quoted Peara Singh v. Peshawar Bank Ltd., and other rulings in support of this contention.
The Lower Appellate Court found as a, fact that there was no misrepresentation. It was, however, admitted by Mr. Kundan Lal that he had told Mr. Banwari Lal that if he did not wish to keep his shares he would transfer them to some one else or take them himself. The shares, however, cannot be transferred until the original call money is paid.
Out of the authorities quoted on behalf of the respondent Company by Mr. D.N, Aggarwal, who argued the case very well, that which gives the reason of the matter most clearly is an English case—Lord Lurgan's Case. Lord Lurgan had signed the memorandum of association for 350 shares before the company went into liquidation. He then urged that he had been induced to take the shares by untrue representations made by one of the promoters named Sims. Buckley, J., said:—
"Is Lord Lurgan entitled to rescission of his contract to take shares on the ground of the assumed misrepresentation? I think not. Before the incorporation of the company Sims was not the agent of the company, because the company did not exist, and therefore Lord Lurgan could not have been induced to sign for the shares by the misrepresentation of the company or its agent. The contract of the subscriber of a memorandum of association is of a very peculiar kind. Down to the moment when the memorandum and articles are taken to Somerset House to be registered there is no contract at all, because the corporation does not exist, and any contract by the signatories must be with the corporation. At the moment of registration two things take place by force of the Companies Act, 1862, the company springs into existence, and the subscribers to the memorandum of association become, by virtue of Sec. 23 of that Act, members of the company. There is no executory contract which is subsequently executed. There is no contract at all until the moment when the corporation and the character of membership in the signatories to the memorandum come simultaneously into existence. I must, therefore, hold that the Subscriber to the memorandum cannot have rescission on the ground that he was induced to become a subscriber by the misrepresentations of an agent of the company". Again he said "The contract effected by signature of the memorandum and registration of the company is not merely a contract created between the subscriber and the company. It is a contract whose existence is the basis of the creation of the corporation as one of the contracting parties, and every other person who becomes a member becomes such on the footing that that contract exists".
I quote this case because as pointed out
by Sir Shadi Lal in Peara Singh v. Peshawar Bank Ltd., and also by Mukerji, J.,
in Chandler & Co. v. Phillips the law on the point is the same in
I, therefore, dismiss the second appeal with costs.
There is, however, one other point. The Senior Sub-Judge in the course of his judgment said, "His (i.e., defendants') way of writing (as for example in Ex: P. 1) is sneaking and cringing. He wants, like people of his caste, to earn money and throw risks on others' shoulders". Mr. Sethi asks that these sentences should be expunged. The request is not opposed by Mr. Aggarwal, who indeed supports it.
I have had Mr. Banwari Lal's letter Ex: P. 1 read out; it might possibly be called obsequious or wheedling but it does not justify the terms sneaking or cringing. As for the other sentence reflection on all members of Banwari Lal's caste is entirely unjustified. I do not know what Banwari Lal's caste may be. It is not stated in the English papers put up in the second appeal and though it might be easily ascertained from the plaint I have studiously abstained from doing so. Not knowing his caste I say that the remarks are entirely unjustified. It may be necessary for a Judge or a Magistrate to pass reflections upon the conduct or honesty of a party or the truthfulness of a witness; when this is necessary it should be done in sober and becoming language. It is never necessary to make remarks about a whole class of society who are not before the Court. Remarks such as that made by the Senior Sub-Judge cause legitimate resentment, and I direct that these two sentences be now expunged from the judgment.
[1941] 11 COMP CAS 169 (
HIGH COURT OF
LORT-WLLLIAMS, J.
Applications in Suit No. 36
of 1939.
APRIL 22, 1940
J.C. Moitra, for Official Liquidator.
S.K. Basu, for two Contributories.
These are two applications on behalf of Kazi Abdul
Rashid Khan Bahadur and Baroda Kanta Ganguli Bahadur respectively who have been
included in the list of contributories made by the Official Liquidator in the
matter of the East Bengal Sugar Mills, Ltd., (in liquidation). They are
numbered 27 and 28 in that list. They object to their inclusion in the list on
somewhat similar grounds, namely that representations were made to them by
Ramanath Das, who was the promoter of this company, and that they were induced
by those representations to become shareholders, the allegation being that
prior to the incorporation of the company Ramanath Das showed each of them a
draft memorandum and articles of association with regard to which they made
various suggestions for amendment. They consented to become shareholders on
condition that these suggestions were included in the memorandum and articles of
association, but subsequently found that the memorandum and articles of
association eventually filed were different to the draft memorandum and
articles of association which had been shown to them, and did not embody their
suggestions. The answer to all this is that whatever happened, happened prior
to the incorporation of the company. At the time of incorporation it was the
duty of these two gentlemen to satisfy themselves that the memorandum and
articles of association were in accordance with their views. Then was the time
to object to become shareholders. Instead of that, both of them signed the
usual application for shares which were allotted to them and both of them
became shareholders of this company. Kazi Abdul Rashid Khan Bahadur, in a
letter written by his pleader on his behalf dated 16th July, 1935, set up
entirely different objections to the demand then made upon him for payment of
Rs, 1,841-14-11. In this he said that he had never agreed to purchase 200
shares in the company. That Ramanath Das had asked him to be a signatory to the
memorandum and articles of association saying that a Mahomedan gentleman's name
should be on it. That Ramanath Das gave him a distinct assurance that he would
not have to purchase any share or shares or pay any money out of his own pocket
and on account of his importunities he signed the memorandum and articles
telling Ramanath he would on no account purchase more than one share. These
allegations have been answered by Ramanath Das in two affidavits in which he
gives a complete denial to each and all of the allegations made by Kazi Abdul
Rashid (Khan Bahadur) and Rai Baroda Kanta Ganguly Bahadur and I accept his
version of what happened.
Learned counsel on behalf of these two share-holders,
in addition to relying upon the facts stated in the affidavits, has raised a
point of law, namely that a number of calls had been made from time to time by
the company prior to the winding up and had not been paid by either of these
share-holders and had become barred by limitation. Therefore, he argued that it
would not be proper to put their names upon the list of contributories because
they were no longer liable to subscribe anything to the assets of the company
in respect of calls or otherwise. The answer to this is that S. 156, Companies
Act, creates a new liability which provides that in the event of a company
being wound up, every member shall be liable to contribute to the assets of the
company to an amount sufficient for payment of its debts and liabilities and
the costs, charges and expenses of the winding up, etc., with the
qualification, inter alia, that in the case of a company limited by shares no
contribution shall be required from any member exceeding the amount unpaid on
his shares in respect of which he is liable as a member. This new liability
arises for the first time upon the winding up and is in my opinion unaffected
by the fact that previous calls have been made by the company and have become
barred by limitation. That this is the correct interpretation of the section is
confirmed by the judgment of Jessel, M.R., in In re Whitehcuse & Co., in
which he said at p. 599 as follows:
"First of all it must be remembered that the
38th section of the Act, which, directs what is to be paid in the case of a
winding up by the share-holders of a limited company, creates new rights and
rights which did not exist before the passing of the Companies Act, 1862, and
rights which do not exist till there is a winding up. That point was decided by
the House of Lords in Webb v. Whiffin, that
it was in fact a new right or rather a new liability as regards the
share-holders; and that section alore, for this purpose, regulates their
liability."
TheSection to which he referred is as follows:
"In the event of a company formed under this Act
being wound up, every present and past member of such company shall be liable
to contribute to the assets of the company to an amount sufficient for payment
of the debts and liabilities of the company"
the terms for all practical purposes being the same
as in Section 156, Companies Act. The learned Master of the Rolls went on to
say as follows:
"That is anew 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 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. This being a limited company the only limit which it
is necessary to refer to is that stated in the 4th sub-section of the 38th
section. 'In the case of a company limited by shares, no contribution shall be
required from any member exceeding the amount unpaid on the shares in respect
of which he is liable as a present or past member. 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 or 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."
The case in Hansraj Gupta v.
[1982] 52 COMP. CAS. 139
(BOM)
HIGH COURT OF
Vasant Investment Corporation
Ltd., In re.
MRS. MANOHAR, J.
OCTOBER 16, 1978
S.D. Parekh
and S. H. Doctor for the Applicants in support.
R.A. Kapadia for
the official liquidator and the liquidator of the
I. M. Chagla
and S. V. Bhatt for Bharat Estates P. Ltd., Ruby Trading Co. P. Ltd., Kardam R.
Dalai Ahmed Peerbhoy.
Mrs.
Manohar, J.—This is a
summons for directions taken out by the applicants under s. 391 of the
Companies Act for calling a meeting of the members to consider an arrangement
to re-start the Colaba Land and Mill Company Ltd. (In liquidation). The
official liquidator of the company in liquidation has opposed this application
mainly on three grounds at this stage. In the first place, it has been urged by
him that under s. 391 of the Companies Act when a company is being wound up the
only person who can frame an arrangement in respect of the company is the
liquidator and not anybody else. In this connection, he has relied on the
language of s. 391, sub-s. (1), which is as follows:
"391. Power to compromise or make arrangements
with creditors and members.—(1) Where a compromise or arrangement is proposed—
(a) between a company and its creditors or
any class of them ; or
(b) between a company and its members or any
class of them ;
the court
may, on the application of the company or of any creditor or member of the
company, or, in the case of a company which is being wound up, of the
liquidator, order a meeting of the creditors or class of creditors, or
of the members or class of members, as the case may be, to be called, held and
conducted in such manner as the court directs."
According to the liquidator, an application may be
made by the company or a creditor or a member of the company before the company
is being wound up, but once the company is wound up, then only the liquidator
can make such an application. This does not appear to be a correct
interpretation of the provisions of s. 391. When a company is being wound up a
liquidator is an additional person who enjoys a right to make an application
under this section. The rights of the creditors or the members of the company to
make ah application are not taken away when a company goes into liquidation.
The section does not say that when a company is being wound up the liquidator
alone will have a right to apply. In this connection, a reference may be made
to rr. 67 to 69 framed under the Companies (Court) Rules, 1959. Rule 68
provides for service of the summons on the liquidator in cases where the
company is being wound up. This can take place only in a case where a
liquidator is not an applicant. The rule, therefore, contemplates a case where
a person other than the liquidator is an applicant under s. 391 in respect of a
company under winding-up. A reference may also be made in this connection to
Rajendra Prosad Agarwalla v. Official
Liquidator [1978] 48 Comp Cas 476 (Cal) and Muhammed Abdulla Tharaganar v.
Official Liquidator, Cape Comorin General Traffic Co. Ltd. [1953] 23
Comp Cas 161 ; AIR 1952 Trav-Coch. 243. In the latter case, the court came to
the conclusion that under the old s. 153(1) of the Indian Companies Act, 1913,
which is in pari materia with the present s. 391 of the Companies Act, the
introduction of the words "in the case of a company being wound up, of the
liquidator" is intended to provide an additional and not an exclusive
person who could make the application.
In Rajendra Prosad Agarwalla v. Official Liquidator [1978] 48 Comp Cas
476 (
The next objection urged by the official liquidator
is that the applicants are not members of the company in liquidation and hence
they cannot maintain this application. In this connection, the official
liquidator has relied upon the definition of the word "member" under
s. 41 of the Companies Act and the commentary on it in Ramaiya's Company Law,
8th Edn., p. 120, where it is stated that a member ceases to be a member, inter
alia, on surrendering his share. Now, under r. 279 of the Companies (Court)
Rules, 1959, read with Form No. 141, it is stated that before a return is made
to a contributory the share certificate should be handed over to the official
liquidator. From this the official liquidator concludes that a person who hands
over his share certificates ceases to be a member of the company in
liquidation. The applicants have surrendered their share certificates on
receiving a return of capital. Hence, they have ceased to be members. This
argument does not appear to be correct. This handing over of the share
certificate does not constitute a surrender of shares by a member. A surrender
of shares can be made by a member to the company if the company's articles give
the directors the power to accept a surrender of shares. Such a power is
recognised as valid if it is used merely to avoid the formalities of forfeiture
but not otherwise. (Vide Palmer's Company Law, 21st Edn, p. 328). A handing
over of share certificates as mentioned in Form No. 141 can never constitute
such a surrender ; under s. 41(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. Hence, every person who has agreed
to be a member and whose name appears in the register of members is a member.
Section 150(1)(a) to (d) reads as follows :
"150. Register of members.—(1) Every company
shall keep in one or more books a register of its members, and enter therein
the following particulars:—
(a) the name and address, and the occupation, if any, of each member;
(b) in the case of a company having a share capital, the shares held by each member, distinguishing each share by its number, and the amount paid or agreed to be considered as paid on those shares ;
(c) the date at which each person was entered in the register as a member; and
(d) the date at which any person ceased to be a member........"
The applicants have not ceased to be members by
surrendering their shares or in any other way. Their names continue on the
register of members. Under s. 536(2) any transfer of shares in the company or
alteration in the status of its members, made after the commencement of the
winding-up, requires the sanction of the court. This section goes to show that
members do not cease to be members on a company being wound up nor do they
cease to be members on receiving a return of capital. In the present case, the
applicants were the shareholders of the company, now in liquidation, and they are
in the list of contributories. They are members of the company as defined under
s. 41 of the Companies Act and they have not ceased to be such members by
virtue of any surrender of shares, because handing over of the share
certificate to the official liquidator does not amount to a surrender of shares
to the company. In fact, even after the share certificates are handed over to
the liquidator, transfers have taken place with the permission of the court.
This could never have happened if the contributory had ceased to be a member of
the company in liquidation. There is, therefore, no substance in the second
contention of the official liquidator either.
It has further been argued by the official liquidator
that the proposed scheme is not a scheme or an arrangement contemplated under
s. 391 of the Companies Act because the scheme does not propose any arrangement
or re-arrangement regarding the rights of the creditors or shareholders of the
company. It is, however, not necessary that an arrangement under s. 391 should
be an arrangement with the creditors of the company or should involve any
changes in the rights of the shareholders of the company. In the present case,
all the creditors of the company have been paid off. There are, therefore, no
creditors of the company at present. Some of the members of the company now
propose to take the company out of the winding-up and for that purpose they
have proposed a scheme which is at Ex. C to their affidavit in support of this
summons for directions. There is no other provision under the Companies Act
apart from s. 391 under which a proposal for taking a company out of the
winding-up can be framed. The words used in s. 391 are very wide. They cover
all arrangements which may be made between the company and its members,
including an arrangement for re-starting the company which is in winding-up. It
has been argued that under s. 391 of the Companies Act, the expression
"company" means any company liable to be wound up under this Act (see
s. 390 of the Companies Act). It does not include a company which is liable to
be taken out of the winding-up. This argument also does not appear to be
correct. It is a company which is being wound up that can be taken out of the
winding-up. Section 391 in terms applies to a company which is being wound up,
and the section provides that in the case of a company which is being wound up,
an application under s. 391 can be made by a liquidator also, in addition to a
creditor or a member of the company. Therefore, s. 391 would apply to a company
which is being wound up. There is no reason why an arrangement under s. 391
should not cover an arrangement to take such a company out of the winding-up.
The present application, therefore, is maintainable under s. 391 of the
Companies Act. I do not see any reason why the scheme set out in Ex. C should
not be considered as a scheme under s. 391 of the Companies Act.
I also do not see any reason why the scheme as
proposed should not be put before the members of the company to ascertain their
wishes. It has been stated by the applicants that in the explanatory statement
they will put forth for the consideration of members proposals regarding the
business to be carried on by the company on its being re-started. If the
proposals are approved it would be open to the court thereafter to examine
whether in the light of all circumstances relating to the present company it
would be in the interest of the members to sanction such a scheme or not.
There will, therefore, be an order in terms of the minutes
which have been handed in.
No order as to costs.
[1934] 4 COMP. CAS.
345 (
HIGH COURT OF
v.
Byramji Hormusji Parsi
TEK CHAND AND ABDUL
RASHID, JJ.
JUNE 28, 1934
Madan Gopal, for the appellant.
D.C. Ralli, B.R. Puri and Kishen Dyal, for the respondent.
Tek Chand, J.—This is an appeal from the order of the District Judge, Lahore, passed under Section 184/38 of the Indian Companies Act, removing the name of the respondent Byramji Hormusji from "B list" of contributories of the Punjab Industrial Bank Ltd. (in liquidation) on the ground that he had been entered fraudulently and without sufficient eause in the register of members of the Bank.
The Bank was
incorporated as a limited liability company in 1920 and had its Head Office at
In April 1927 the Official Liquidator, under Section 220 of the Act, adopted the list of contributories as settled by the voluntary liquidator about two years before, which showed the respondent to be the holder of 500 shares of Rs. 20 each, having paid Rs. 2,500 towards the share-money. On the 11th of April, 1928, the District Judge, on the application of the Official Liquidator, issued a call on the respondent for payment of the remaining Rs. 7,500. In answer to this notice the respondent appeared and filed an application denying that he was a shareholder of the company and praying that his name be removed from the list of contributories.
In reply the Official Liquidator pointed out that the books and papers of the company in his possession showed that on the 6th of April, 1922, the respondent had made an application for purchase of 500 shares of Rs. 20 each, that these shares had been allotted to him and his name had been entered in the Capital Register where he is shown as having paid Rs. 2,500 and that subsequently those shares had been transferred to Diwan Mangal Sen on the 1st of November, 1923. But as the company went into liquidation within one year of the date of transfer the respondent was liable to pay the balance of the share money and therefore he had been placed rightly on the " B list" of contributories. The Liquidator also stated that it appeared from the Minutes Book of the shareholders of the company that the respondent had attended three meetings of the shareholders in April and October 1922, at one of which he had presided and moved the principal resolution.
The respondent admitted that he had signed the application for shares but pleaded that he had done so under the influence of Diwan Mangal Sen, who was the chief promoter and Managing Agent of the Bank as well as of the Hindustan Assurance & Mutual Benefit Society Ltd., and under whom the respondent was employed at the time in the insurance company as the Manager of its Lahore Office; that he had signed the application at the request of Mangal Sen on the clear understanding that it would net be used until and unless the respondent had actually paid Rs. 2,500 on account of application and allotment money. He averred that he never paid any money at all, and that Mangal Sen had fraudulently entered his name in the Register of shareholders without his knowledge or assent, and in contravention of the aforesaid stipulation with a view to do harm to him. He alleged that the entries in the Capital Register and other books of the company were fictitious and stated that he did not transfer the shares to Mangal Sen as was wrongly shown in the Capital Register. He also denied having attended two of the three meetings of shareholders, but admitted having presided at the general meeting on the 15th of October on an "act of friendship " for Mangal Sen who had requested him to do so, as in the absence of the permanent Chairman of the company it was thought desirable to have an "independent" person in the chair.
The learned District Judge has accepted the respondent's version in its entirety, and has ordered the removal of his name from the list of contributories.
It may be pointed out at the outset that the learned Judge was clearly in error in assuming that the onus was on the Official Liquidator to prove that the objector was a shareholder of the company. Under Section 40 of the Indian Companies Act the register of the members of the company is prima facie evidence of matters required by the Act to be inserted therein; under Section 83 the minutes of proceedings of the meetings of the shareholders and Directors, as entered in the books kept for the purpose, purporting to be signed by the Chairman of the meeting at which the proceedings were had or by the Chairman of the next succeeding meeting, are evidence of the proceedings of the meetings; and under Section 240, in the winding-up as between the contributories of the company, all documents of the company are prima facie evidence of the truth of the matters purporting to be recorded therein. It is clear, therefore, that in view of the entries in the Capital Register and other books ©f the company, the onus lay heavily upon the respondent to show that the entries were incorrect and had been made fraudulently or without sufficient cause.
The learned Judge, while holding that the respondent had signed the application for 500 shares, has assumed that the words "Rs. 2,500" as they appear in the application were in a different handwriting from that of the respondent. There is no allegation or proof that this is so, and there is nothing in the writing itself which might lend support to the learned Judge's assumption. Equally unsustainable is his suggestion that in the list of persons recorded in the proceedings book as present at the shareholders meeting of the 14th of April, 1922 and the extraordinary meeting of the 15th of October, the respondent's name had been "slipped in" subsequently by someone. The proceedings book itself does not warrant this suggestion, and there is nothing else on the record from which such an inference might be drawn. It will thus be seen that the learned Judge has entirely misdirected himself as to the onus of proof and has made several erroneous assumptions which vitiate his findings and ultimate conclusion.
Before us, counsel for the respondent has not attempted to support the learned Judge's view of the burden of proof. He frankly conceded that under the law, it lay on the respondent to prove that he was not a shareholder. He urged, however, that the respondent has succeeded in discharging this onus.
The real question for determination, therefore, is whether there is sufficient evidence on the record to prove that the respondent never agreed to become a member of the company. It is common ground that if on the evidence the finding on this point is against the respondent, he is clearly liable as a contributory. If, however, the finding is in his favour the decision of the lower Court must be upheld.
Now, as has been stated already, the respondent admits having
signed the application for 600 shares. He also admits having presided at one of
the meetings of the shareholders. The simple question for consideration!
therefore, is whether his explanation can be
accepted, that he had signed the application on the understanding that it was
to be used on certain conditions, and that he presided over the meeting of the
shareholders merely to oblige Mangal Sen, and not with the knowledge that he
was a shareholder. It is conceded that the respondent is a businessman from
His admitted
presence at
Mr. Ralli has
strenuously argued that there is no proof that the respondent paid Rs. 2,500 as
share and allotment money and he pointed out that the attempt by the Liquidator
to prove that the payment by cheques on the Chartered Bank of
I accept the appeal, set aside the order of the Court below, and dismiss the respondent's application under Section 184/38 Of the Act, praying for the removal of his name from the list of the contributories of the Punjab Industrial Bank (in liquidation).
The respondent shall pay the costs of the Official Liquidator in both Courts.
Abdur Rashid, J.— I agree.
[1936] 6 COMP.
CAS. 285 (
v.
Gouri Shankar Goenka
COSTELLO AND PANCKRIDGE, JJ.
NOVEMBER 13,
1935
K.P. Khaitan and G.P. Kar, S. Choudhury for Respondent.
Costello, J.—This matter comes before us by way of appeal from an order
made by Cunliffe, J., on 18th March 1935, whereby he refused with costs an
application made on behalf of the Marwari Stores Ltd. for permission to reduce
the share capital of that company. The application was opposed by Gouri Shanker
Goenka who is a share-holder of that company and the respondent in the present
appeal. The Marwari Stores Ltd., was originally incorporated as a private
company on 15th March 1919, having a nominal capital of Rupees two lacs divided
into fifty shares of Rs. 4,000 each. On 22nd March 1921, by an extraordinary
resolution, the capital of the company was increased by Rs. 3 lacs making a
total capital of Rs. 6 lacs represented by 5,000 shares of Rs. 100 each. Shares
of the value of rupees two lacs were applied for and issued and a sum of Rs.
1,92,000 was paid up. Shares out of the balance to the extent of Rs. 8,000 were
forfeited. The present position, therefore, is this: that the paid up capital
of the company is Rs. 1,92,000. A sum of Rs. 4,009 which had been paid in
respect of forfeited shares was transferred to the profit and loss account. The
Article of Association of the company contained the usual kind of provision
entitling the company to reduce its capital. The relevant article is No. 43. It
appears from the petition and from an affidavit of Motilal Lath, who is
described as a Managing Director of the company, that up to 8,1st March 1920
the company made a profit of Rs. 10,026 odd, and up to 31st March 1921 the
profit was Rs, 10,105 and some odd annas,
The present respondent became connected with the company on 8th April
1921. It appears that he was taken into "the service of the company on or
about that time. Towards the end of the year 1921, that is to say, on the 30th
November of that year, the company was converted into a public company and in
the following year the present respondent Gouri Shanker Goenka became a
shareholder in the company to the extent of 80 shares. It appears from the
years 1922 to 1924 the company sustained a loss amounting to the sum of Rs.
1,10,000 and that is shown in the balance sheets for the years 1022, 1923 and
1924. That fact is stated in para. 8 of the petition on which the present
proceedings were founded. It is also set out in that paragraph that the loss
has ever since been carried forward. It is further stated that the company was
not able to make any profit during the years 1923 and 1924, but since 1925 the
company has been making a profit. The amount of the loss has now been reduced
to Rs. 96,000. The said sum of Rs. 96,000 was stated to be a loss and not to be
represented by any available assets. In the year 1932 the respondent Gouri
Shanker Goenka became -a director of the company. It appears that in 1933 he
was party to the passing of the draft balance sheet which was submitted at the
directors' meeting. Actually from 6th April 1921, the date on which the
respondent joined the company down to 4th August 1934 he was functioning as the
Assistant Manager and, as such, he assisted in the preparation of each one of
the accounts and must be taken to have known the contents of those accounts. On
4th October 1934 Gouri Shanker ceased to be a director of the company. At the
end of October 1934 there was a transfer of certain shares which had been held
by the Managing Director, Motilal Lath, to some of his relations and in
December of that year, Mr. P.D. Himattsingka and Mr. Baijnath Prasad Deora
resigned from the Board of the company and in their places, about a month
later, two of Motilal Lath's nominees, if they can properly be called his nominees,
namely Mr. Bholaram Tibrewalla and Mr. Luxminarain Lath were appointed
directors of the company. On 20th January 1935 an ordinary general meeting of
the company was held, accounts were passed, and at that meeting the present
respondent was in attendance in his capacity as a shareholder of the company.
On the same day, namely on 20th January
1935, there was an extraordinary general meeting at which a resolution
was passed for the reduction of the capital of the company. That appears from
para. 9 of the petition set out at p. 3 of the paper book. That paragraph reads
as follows:
'Under the provisions of S. 50 of the Indian Companies Act, and in
pursuance of the power contained in that behalf in the Articles of Association
the company by special resolution of its shareholders duly passed and confirmed
at extraordinary general meetings duly convened and held on 20th January 1935
and 4th February 1935 respectively resolved: that the paid up capital of the
Marwari Stores Limited be reduced from Rs. 1,92,000 divided into 1920 Ordinary
Shares of Rs. 100 each to Rs. 96,000 divided into 1920 Ordinary Shared of Rs.
50 each and that such reduction be effected by cancelling the paid up capital
to the extent of Rs. 69,000 which had been lost and is not represented by
available assets and by reducing the nominal amounts of all the shares in the
company's paid up capital from Rs. 100 to Rs. 50 per share.
It appears therefore that the resolution which was passed at the meeting
on 20th January 1935 was duly confirmed at the subsequent extraordinary general
meeting held on 4th February 1935. A week later, namely on 11th February 1935,
a petition for reduction of capital was admitted by Cunliffe, J. The petition
had been verified on 7th February 1935. The 11th March 1935 was fixed as the
date for hearing of the petition and directions were duly given for necessary
advertisements. Those advertisements appeared in certain papers on 20th
February 1935 as directed by the Court. On 6th March 1935 Gouri Shanker
affirmed an affidavit in opposition to the company's petition and on 12th March
he put in a supplementary affidavit in opposition. On 18th March there was an
affidavit in reply by Motilal Lath on behalf of the company. Than finally, as I
said at the outset, the matter came before the Court on 18th March 1935 when
the application which the company was making was refused by Cunliffe, J. The
company now comes before this Court asking that the order made by Cunliffe, J.,
be set aside and the company be authorised to reduce their capital in the
manner asked for in their petition.
The application of the company is opposed by Gouri Shanker Goenka on two
grounds, and Mr. Chowdhury on behalf of the respondent says: (1) there was no
evidence before the Court that there had been in fact any loss of capital as
averred by the company, and (2) the resolution which purported to have been
passed on 20th January 1935 and confirmed on 4th February 1935 was not valid in
law by reason of the fact that certain persons who voted for the resolution
were not duly qualified as shareholders so to vote or to vote at all. The
respondent Goenka, so far as the second point is concerned, challenged the
validity of the transfer of certain shares made by Motilal Lath during the
month of October as I have already stated. The allegation made on behalf of
Goenka was to the effect that although the names of these transferees appear in
the register of share-holders of the company the entry in that register is not
a proper or a genuine entry and the transfers could not have taken place at the
time when they are alleged to take place, by reason of the fact that Motilal
was not in Calcutta on the dates which appear on the transfers or on 30th
October, the date on which the entries were made by Motilal in the register of
share-holders of the company.
with regard to the first mentioned point, it is not at all certain that
it is always essential or necessary for the Court to satisfy itself in
proceedings of this kind, that there has been a reduction of capital. The
principles on which a Court ought to act in a matter of this description, were
laid down by Lord Macnaghten in Poole v. National Bank of China, Ltd., [1907]
AC 229, at pages 238-239. The relevant passage in the judgment of his Lordship
is this:
'Such being the views expressed in this House without any dissent or
qualification, I was surprised to hear it argued by the learned counsel for the
appellants that the Court has no jurisdiction to entertain a petition for the
reduction of capital unless it be proved that the capital which the company
proposes to cancel is lost or unrepresented by available assets. No doubt some
countenance for that proposition may be found even in cases which have occurred
since the decision of this House in British and American Trustees and finance
Corporation v. Couper. In In re Barrow Hamatife Steel Co., where the scheme
proposed was obviously unfair to the preference share-holders and the petition
was very properly dismissed, there are some expressions in the judgment of the
learned Judge who decided the case which, taken apart from the context may
appear to support that contention. The decision of Buckley, J., in In re
Anglo-French Exploration Co., goes even further. His language, if correctly
reported, seems to imply that because the Act of 1877 specified certain cases
and declared that the power conferred by the Act of 1867 ' includes' those
specified it is to be inferred that in all other cases the jurisdiction of the
Court is excluded. If that is the meaning of what the learned Judge said, with
all respect I am unable to agree with his view. The condition that gives
jurisdiction is not proof of loss of capital or proof that capital is
unrepresented by available assets, or that capital is in excess of the wants of
the company. The jurisdiction arises whenever the company seeking reduction has
duly passed a special resolution to that effect.'
Then his Lordships stated this:
'In the present case creditors are not concerned at all. The reduction
does not involve the diminution of any liability in respect of unpaid capital
or the payment to any share-holder of any paid-up capital. The only questions,
therefore, to be considered are these: 1. Ought the Court to refuse its
sanction to the reduction out of regard to the interests of those members of
the public who may be induced to take shares in the company? and 2. Is the
reduction fair and equitable as between the different classes of
share-holders?'
It would appear from that passage in the judgment of Lord Macnaughten that
the only serious question with which the Court is concerned is whether or not
the company had duly passed its special resolution to the effect that the
capital should be reduced.
Since the decision in that case, however, there have been a number of other
cases and upon one them Mr. Chowdhury laid considerable stress as indicating
that the Court ought to require proof that there has been in fact a loss of
capital. The case to which I refer is the case of Caldwell v. Caldwell &
Co., (Paper Makers) Ltd., a resume of which appears in 1916 W N 70. The account
of the case in the Weekly Notes is as follows:
'Lord Parker of Waddington, after stating that the law in respect of
reduction of capital, as stated in Poole v. National Bank of China had not been
altered by the Companies (Consolidation) Act, 1908, said that where there
solution was expressed to be founded upon loss of capital he understood that
since the decision of the House of Lords the practice of the Courts in Scotland
had been to dispense with proof of the facts referred to in the resolution, at
any rate where there was no reason to suspect the bona fides of the parties.
The practice of the High Court of Justice in England had not been uniform. His
own practice had been to insist on prima facie evidence of the existence of the
state of facts referred to in the resolution. If no such prima face evidence
were forthcoming it might well be that the special resolution had been passed
under the influence of some mistake or misrepresentation as to the true facts,
and it would be unfair to the minority, if not also to the majority of the
shareholders, to confirm a reduction voted under such circumstances. Further,
inability to produce some such evidence might well suggest want of bona fides
in the matter. If capital not really lost or unrepresented by available assets
were cancelled, it might be possible thereafter, by some adjustment of the
figures in the company's balance sheet, to carry the amount so cancelled to
profit and loss account, and so indirectly return paid-up capital to
share-holders, thus affecting the rights of creditors. He still thought
therefore, that where the reduction of capital was based on the ground that
capital had been lost or was unrepresented by available assets, it was, though
not necessary, at any rate wise and prudent to insist on some evidence of the
fact.'
I have no doubt in the proposition that where a reduction of capital is
based on the ground that capital has been lost or unrepresented by available
assets, it is always prudent to proceed on some evidence. That is a sound
procedure and one which ordinarily should be acted upon. In the present
instance we are not, however, called on to lay down any general principle with
regard to that particular point, because there is clear evidence that in the
case of Marwari Stores Ltd., there had in fact been a loss of capital. I have
already mentioned the nature of that loss. The evidence with regard to it is
the definite statement in para. 8 of the company's petition dated 7th February
1935 as verified by the solemn affirmation of Motilal. The averments contained
in that paragraph are not disputed by Goenka. On the contrary in para. 3 of his
own affidavit, dated 6th March 1935, he says:
With reference to para. 8 of the
said petition I state that the amount of loss mentioned in the said paragraph
would have been very considerably reduced had the Managing Director conducted
the business of the company in a proper workmanlike manner.
It is clear, therefore, that
Goenka was accepting the statements that there had been a loss as stated by the
Managing Director, though he was saying that the loss was due to something done
or something not done by the Managing Director Motilal. We are of opinion,
therefore, that the learned Judge in the Court below ought to have acted upon
the assumption that there was evidence of loss of capital. With regard to the
other point, on which the objector sought to rely, viz., that the resolution
was not properly passed, his complaint is set out in para. 6 of the affidavit
at p. 13 of the paper book, where he says:
"The following are the
transfers alleged to have been made by the said Motilal Lath to the persons
hereinafter named who are his relatives as is mentioned: (1) Bholaram
Tibrewala, father-in-law of Motilal Lath; (2) Luxminarain Lath, cousin of
Motilal Lath; (3) Nurmal Lath and (4) Hanumanbux Lath, nephews of Motilal Lath,
employees of the company; (5) Hariram Khaitan, and (6) Jugalkishore Khaitan,
cousins-in-law of Motilal Lath, and employees of the company.
That I state that on the
respective dates the said Motilal Lath is alleged to have transferred the said
shares, namely 25th and 27th October 1934, and on the date when he is alleged
to have registered the said alleged transfers, namely 30th October 1934, the said
Motilal Lath was not in Calcutta at all and could not have transferred the said
shares in the manner alleged, nor could he have registered the said transfer in
the books of the company on that date. The alleged deeds of transfer purporting
to have been executed on 25th and 27th October 1934, by the said Motilal Lath
and by the respective transferees at Calcutta are all false and fictitious and
are in fraud of the company and its share-holders."
No answer to that paragraph, which
of course contains a very serious allegation against Motilal, is given. The
latter in his affidavit in reply dated 18th March 1935 in para. 2 (d) says
this;
"With regard to para. 4 of the said first affidavit I state that the
extraordinary general meetings were properly convened, constituted and held.
All the persons present as share-holders were in fact share-holders of the
company and registered as such by the company. The person who acted as the
Chairman was a shareholder duly and properly elected as Chairman and the mover
of the resolution was also a shareholder entitled to move the resolution which
he did."
And then in sub-para. (e) at p. 27 of the paper book he adds this:
'The six persons named in para. 6 of the first affidavit duly became transferees
of the shares which have been registered in their names after they were duly
approved and they became members of the company, and their names were duly
placed on the register of the company. Gourishanker Goenka inspected the
register of members several times in December 1934 and early in January 1935
and he saw the said names on the register of the company and he did not then
take any objection thereto. No application has yet been made for the removal of
the names of the said persons or rectification of the said register of members
either by Gourishanker Goenka or anybody else except that Gourishanker is not
attacking the said transfers by criminal proceedings and not by appropriate
civil proceedings, and by way of side issue in this application nobody else has
raised any objection regarding their becoming members.'
Now it is obvious that the allegations that these six persons whose names
appear in the register of shareholders were not shareholders, came entirely
from Goenka. If he was to be successful in opposing the application which the
company was making he was bound to show that the names of these persons were
not properly entered in the register or that their names were not on the
register for length of time sufficient to entitle them to vote at the meetings
which were held on 20th January 1935 and 4th February 1935. In my opinion he
has entirely failed to do so. We have examined the register for ourselves and
as far as one can see on the face of it, it is perfectly regular and in order.
It was open to Goenka to have taken appropriate proceedings under S. 38,
Companies Act, to have had the Register corrected had he been so minded. That
section is in the same terms as the corresponding section in the English Act of
1929, viz., S. 100 and runs thus:
'If (a) the name of any person is fraudulently or without sufficient
cause entered in or omitted from the register of members of a company; or (b)
default is made or unnecessary delay takes place in entering on the register
the fact of any person having 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.'
Section 40, Companies Act, provides that the register of members shall be
prima facie evidence of any matters by this Act directed or authorised to be
inserted therein. I think that we ought to take it, in the present instance,
that as no steps were taken to have, this register altered or rectified, the
person? whose names appear therein were qualified shareholders and therefore
entitled to take part in the meetings of 20th January and 4th February 1935. In
that view of the case Goenka has wholly failed to show any cause whatsoever why
the application put forward by the company for the reduction of capital should
not be granted by the Court. The result is that this appeal is allowed, the
order made by Cunliffe, J., is set aside, and the prayers Nos. 1 and 2 and the
first part of prayer No. 3 contained in the petition of the company and
affirmed by Motilal Lath on 7th February 1935 are granted. As regards costs of
these proceedings, we are of opinion that as, in any event, it was necessary
for the company to obtain the sanction of the Court for the reduction of the
capital, the company should pay their own costs in the Court below. But we
direct that the respondent must pay the costs of the appeal to the appellant
company.
Panckridge, J.—I agree.
[1977] 47 COMP. CAS. 356 (
V.
Official Liquidator, Indian
Electrim Tools Corpn. Ltd.
S.
RANGARAJAN J.
COMPANY
PETITION NO. 13-D OF 1965.
MAY
15, 1975
Ved Vyas and R.C.
Beri for the Petitioner.
P.C. Khanna for the
Respondent.
Rangarajan J.—The petitioner (the Maharaja of Tehri
Garhwal) had admittedly become a shareholder and director of the Indian
Electrim Tools Corporation Ltd. (in liquidation), a company registered under
the Companies Act, 1956 (hereinafter called "the company"). In this
petition he prays that the official liquidator (O.L.) may be directed not to
place him on the list of contributories ; he had 500 fully paid-up equity
shares ; he had also asked for the rectification of the register of members of
the company, which is stated to reveal that he had taken 50,000 equity shares
of Rs. 10 each in respect of which he had not paid anything, and not merely 500
equity shares, as admitted by the petitioner. Not only the facts leading to
this petition are somewhat interesting but one or two questions of law of some nicety
also arise for consideration.
On the record, as
admitted by the O.L., there is only one application for shares which was given
the mark "A" initially "C.W.1", has been written on it
probably by the Commissioner who was appointed to examine the petitioner as a
witness. According to the petitioner the said form of application for shares
was signed by him in blank. Many of the columns have been filled in later in
type, the form itself being a cyclostyled (typed) one. The figure 50,000 has
been written in manuscript in paragraph 1 which speaks of an application for
those shares being made after having read the statement in lieu of prospectus
relating to equity shares. In paragraph 3 the figure of Rs. 5 lakhs has been
entered. Even the manner in which the same was paid is not apparent from it
because all the three modes of payment in the form, namely, cash/cheque/draft,
appear to have been scored out. What is particularly intriguing is even though
a sum of Rs. 5 lakhs was said to have been enclosed along with the form it was
stated Rs. 5 per share was payable on application per share of Rs. 10 each, the
balance of Rs. 5 per share being payable on allotment. The date has been filled
up in handwriting to read that the application was made on the 30th day of April,
1962. According to the petitioner he had applied only for 500 equity shares ;
he had sent an application on April 25, 1962, for the same along with a cheque
(P-3) of the same date for Rs. 5,000, being the full amount of the aforesaid
shares through the stocks and share broker, H.P. Mehta, who has been examined
in this case as P.W.-4. 500 shares were the qualifying shares for becoming a
director. The said cheque for Rs. 5,000 was sent to the company for being
cashed only on May 2, 1962, and was cashed later. According to the petitioner
he did not give any cheque for Rs. 5 lakhs, allegedly for 50,000 equity shares.
Neither did he apply for the allotment of 50,000 shares, nor did he receive any
notice of such allotment. On the other hand, the company which was not
financially well-off had requested him to advance a loan of Rs. 10,000 in
November, 1962, out of which Rs. 3,000 alone had been returned some time on
November 10, 1962, details of these had been mentioned by the petitioner in his
letter dated March 23, 1964, to the O.L. (copy of which is annexure
"C" to the petition, exhibited as exhibit P-X and marked
"E" by the Commissioner).
Some time in
September/October, 1962, B.B. Lal Singhania (R-2), who was the promoter of the
company, came to the petitioner and informed him that the company's accountant
had made some obviously false entries in the account books and also a false
report against the company, the accountant had been dismissed for doing so. It
was then that the petitioner was informed for the first time that an entry in
respect of 50,000 equity shares in the company's records had been made in his
name, even though he had applied only for 500 shares. The petitioner was
further informed that since the Registrar of Companies was asking for an explanation
in this respect the petitioner may give him a reply on the terms set out in
annexure "B" to the petition, to the effect that the petitioner had
applied for shares worth Rs. 5 lakhs, that he wanted 50,000 shares to be
reserved for him, the subscription for which will be made before the public
issue and that he had not enclosed any cheque with the application though he
had mentioned therein that cheque was enclosed. The petitioner refused at first
but agreed to consult his own solicitors in
The petitioner
attended a meeting of the board of directors of the company when the minutes of
a previous meeting of the board of directors held on February 28, 1963 (at
which he was not present), were read out for confirmation. One of the
resolutions at that meeting, dated February 28, 1963, was that 50,000 shares
which had been allotted on April 30, 1962, be cancelled. The petitioner was
surprised to learn about this for the pretext given for cancellation, namely,
that the cheque for the share money had been returned, was false. But the
petitioner was assured that the accountant had made a wrong entry and that for
this and other acts he had been dismissed. The petitioner was assured that
since the allotment of shares had been cancelled there was nothing for him to
worry.
According to the
reply of the O.L. filed in this petition shares worth Rs. 5 lakhs were allotted
to the petitioner on April 30, 1962 ; a total of 50,000 equity shares were
allotted to the petitioner and he was intimated about the same.
In his
reply-affidavit dated March 15, 1966, B.B. Lal Singhania (R-2) supported in
some respects the petitioner's case ; he has not, however, been examined as a
witness for the petitioner. It is needless, therefore, to be detained by the
averments in the said affidavit which cannot be taken as substantive evidence
in the case in the absence of his being examined and cross-examined.
The following issues
were framed on March 18, 1966 :
"1. Was there a valid application for the
allotment of 50,000 shares of the face value of Rs. 5 lakhs ? It not, what is
its effect ?
2. Was this application accompanied by the
requisite application money ? If not, what is its effect ?
3. Was there any valid allotment of 50,000
shares in the name of the petitioner ? If so, was this allotment communicated
to the petitioner, and, if not, what is its effect ?
4. What is the effect of the resolution
dated 28th of February, 1963, for the cancellation of the allotment of 50,000
shares to the petitioner ?
5. Is the petitioner estopped from seeking
remedy by way of rectification by reason of acquiescence or delay ?
6. Is there any liability of respondent
No. 4 ?
7. Relief?"
An application by the
O.L. to reframe the issues was rejected and no appeal had been preferred
against it. Issues had been framed after recording the statements of some
persons.
Issue No. 4 ;
It is needless to be
detained about the effect of the resolution dated February 28, 1963, cancelling
the allotment of 50,000 shares to the petitioner, in the view that the petition
for winding up has been filed even earlier, namely, on January 15, 1963.
The legal position
cannot, I believe, be put better than what Cohen J. said in In re Derham and
Allen Ltd. [1946] Ch. 31 36 ; 16 Comp. Cas. 51, 54 (Ch. D.) :
"In the present
case the company has taken upon itself to rectify the register without any
motion to the court for that purpose, and in justification of this procedure I
was referred to the judgment of Jessel M.R. in In re Poole Firebrick and Blue
Clay Co. Ltd. [1874] LR 18 Eq 542 and to In re Reese River Silver Mining Co.
Ltd. (LR 4 KL 64) which constituted authority for the proposition that where a
person on the register of members has a right to rectification, and the company
itself recognises that right, it is not essential for a valid rectification of
the register that an order of the court should be sought and obtained. I wish
to say nothing to encourage directors to carry out rectification of a company's
register without an order of the court being obtained in proceedings in which
the right to rectification is duly established. The protection of the court's
order is in the ordinary case essential to any rectification of the register by
the removal of the name of a registered holder of shares, but in this case it
was inevitable that the matter should come before the court, because it
involved the sanction of the court to the issue of shares at a discount. I am
satisfied that no one will be prejudiced, and I shall not require what would be
a mere formality, that is to say, a motion to rectify the register".
(Emphasis
added)
Cozens-Hardy L.J. had
earlier put the matter thus when he agreed with the other learned judges in In
re Sussex Brick Company [1904] 1 Ch. D. 598, 609 (CA):
"It seems to me
that Mr. Gore-Browne's argument is really based on this hypothesis, that the
register of members is a thing which ceases to have any real operation or
existence after the winding-up order ; that the only right which can be dealt
with after a winding-up order is one with regard to making some change in the
position of persons on the list of contributories".
In this light it
would be best to discuss issues (1) to (3) in a composite manner :
Issues (1) to (3):
It would be necessary
to know what is the true position that applies to the facts of this case before
discussing the facts. If there was no allotment of shares at all then no
further question of any delay or laches in the matter of applying for relief
would be of any consequence. In the language of Cozens-Hardy L.J. after a
winding-up order the only right which can be dealt with is one with regard to
making some change in the list of persons as contributories. This is exactly
the position here ; section 467 of the Companies Act of 1956 provides for it :
"467.(1) As soon as may be after making a
winding-up order, the court shall settle a list of contributories, with power
to rectify the register of members in all cases where rectification is required
in pursuance of this Act, and shall cause the assets of the company to be
collected and applied in discharge of its liabilities :
Provided that, where
it appears to the court that it will not be necessary to make calls on, or
adjust the rights of, contributories, the court may dispense with the
settlement of a list of contributories.
(2)
In settling the list of contributories,
the court shall distinguish between those who are contributories in their own
right and those who are contributories as being representatives of, or liable
for the debts of, others".
The position in
India, in this respect, is thus the same as in England.
It may also be
instructive to refer to the observations of Wright J. in In re International
Society of Auctioneers and Valuers : Baillie's case [1898] 1 Ch. 110, 114 (Ch.
D) :
"Under these
circumstances, is Baillie to be allowed to repudiate his liability, or rather
to say that he never contracted with the company now in liquidation ? In my
judgment the case is governed by the principles laid down in Cundy v. Lindsay
[1878] 3 App. Cas. 459, 465 (HL). The evidence satisfies me that there never was
a contract between Baillie and the company voidable by him on the ground of the
misrepresentations which were made to him, but something which was void ab
initio. In other words, there never was any contract at all. When Baillie made
his application and received his certificate he thought that the company he was
dealing with was the old Auctioneers' Institute, and those who were acting for
the liquidating company knew of this belief and distinctly deceived him. Under
circumstances like these there is no contract, as is shown by the observations
of Lord Cairns, Lord Hatherley and Lord Penzance in Cundy v. Lindsay [1878] 3
App. Cas. 459 (HL) That being so, Baillie is entitled to the relief which he
claims, and it is no objection to his claim that he took no steps to have it
declared that he was not under liability before the winding-up took place. It
has been suggested that, whatever the effect of Cundy v. Linsday [ 1 878] 3
App. Cas. 459 (HL) may be where the contract is not in writing, where the terms
are contained in writing the parties cannot deny that there was a contract. In
Cundy v. Lindsay [1878] 3 App. Cas. 459 (ML) what was alleged to be a contract
appears to have been in writing. But whether I am right in that view or not,
there is not in this case a contract in writing, because there is no contract
at all".
Gore-Browne on
Companies, 42nd edition (Boyle & Sykes) states, on page 503, as follows :
"It there is in
fact no contract, or the contract under which the alleged shareholder is
supposed to have taken his shares is void from the beginning and not merely
avoidable, his name may be removed from the register even after a winding-up
has commenced ; for he never agreed to take the shares, (Oakes v. Turquand
[1867] LR 2 HL 325 ; Alabaster's case [1868] 7 Eq 273 ; Baillie's case [1898] 1
Ch. 110 (Ch. D.)) and in such a case delay is not a bar to the claim to rectify
the register [Gorrissen's case [1873] 8 Ch. App. 507 ; Wynne's case [1873] 8
Ch. App. 1002 ; Beck's case [1874] 9 Ch. App. 392: Baillie's case [1898] 1 Ch.
110 (Ch. D.)] as it is where relief is sought on the ground of
misrepresentation".
The case of no
contract at all has been treated differently from a case where a contract is
one which has to be repudiated ; if it is of the latter kind prompt steps to
have his name removed from the register of the company would be necessary. In
First National Reinsurance Company v. Greenfield [1921] 2 KB 260 (KB) McCardie
J. referred to Oakes v. Turquand [1867] LR 2 HL 325 and the explanation given
by Lord Cranworth therein as to why the Companies Act of 1862 opened the
register to the inspection of all the world : it is obvious that no creditor
could safely trust the company without having the means of first ascertaining
who the shareholders might be, and, secondly, to what extent they would be
liable. The shareholders also, in the same way, had an interest in knowing who
are liable and to what extent. If the applicant for shares had done nothing
till winding up, Oakes v. Turquand [1867] LR 2 HL 325 Jaid down the principle,
there is no right to avoid a contract to take shares after winding up
commences. In other words, the avoidance is not possible unless there has been
either proceedings constituted before the winding up or an agreement that the
shareholder shall be bound by the result of other proceedings which have been
taken for the avoidance of a contract to take shares. McCardie I. also added
that with regard to the rectification of the register an application to the
court was essential only when the company disputes the right to rectification.
There is no reason why the directors, if they bona fide agree that the
shareholder has a right to avoid the contract, should not thereupon assent to
the rescission of the contract and rectify the register in an appropriate
manner. An order of the court is not necessary in such a case. To this category
belong In re London and Mediterranean Bank (known as Wright's case [1872] LR 7
Ch. App. 55), Reese River Silver Mining Co. v. Smith [1869] LR 4 HL 64, 67 and
In re Poole Firebrick and Blue Clay Corn-any (known as Hartley's case [1875] 10
Ch. App. 157). In the last mentioned case Lord Cairns L.C. pointed out that an
application for rescission could not be made after winding up and, if even made
before winding up, the case will have to be proved strictly. In re Hull and
County Bank (Burgess's case [1880] 1 5 Ch. D 507 (Ch. D.)) did not allow an
application for rescission of shares on the ground of misrepresentation by the
promoter after winding up, even though there were sufficient assets in the
hands of liquidators. All these cases when examined would be seen to be cases
where allotment was made but the same was questioned later.
The question,
therefore, is whether there was in the present case an allotment of 50,000
shares ? If this question is answered in the petitioner's favour he would not
be held disentitled to relief on any other ground. I am unable to comprehend
how if the 50,000 shares had been allotted on April 30, 1962, there was any
need to allot 500 further shares on May 12, 1962.
In the light of the
fact that no other written application for shares has been produced and the
only application for shares on record purport to ask for 50,000, but not 500
shares it becomes exceedingly difficult to find how 50,000 shares were
allotted. The allotment of 500 shares only is admitted by the petitioner.
All does not seem to
be well with the application dated April 30, 1962, for the allotment of 50,000
shares. Section 41(2) of the Act prescribes that persons other than subscribers
to the memorandum of association of the company, who are to be entered as
members in the register of members, should agree in writing to become such
members and that their names should be written in the register of members. The
difference between English law and Indian law is that no such writing is
required for becoming a member of a limited company. By the Companies
(Amendment) Act, 1960 (65 of 1960), the words "in writing" were
inserted. The view expressed by Ramanujam J. in Sree Ayyanar Spinning and
Weaving Mills Ltd. v. V.V.V. Rajendran [1973] 43 Comp. Cas. 225 (Mad) that a.
written application for allotment of shares was not necessary and that an oral
application would be enough for the purpose does not, I am afraid, take note of
the above change introduced by the Amending Act, 65 of 1960.
Rule 7 of the
Companies (Issue of Share Certificates) Rules, 1960, requires that the
particulars of every share certificate should be entered in the register of
members maintained in the form set out in the Appendix to those rules
indicating the date of issues, the person(s) to whom it has been issued along
with particulars of every share certificate issued. The number and date of
allotment, amounts due and on what account (allotment of call, etc.). date when
due and other particulars mentioned in the said Appendix have to be given in
the register of members.
What has been made
available to court by the official liquidator is what is known as a "Share
Account Register" which is not according to what has been prescribed in
the Appendix. In respect of the petitioner there is an entry on page 20 with
date April 30, 1962. Regarding 50,000 shares alone the distinctive share
numbers have been given as 16503 to 66502 and there is a credit in respect of
Rs. 5 lakhs. It is surprising that if the petitioner had subscribed also for
500 shares (about which there is no dispute) there is no mention of them. On
its face the said register is not free from suspicion. Even the presumption
which is available under section 164 of the Companies Act, in respect of the
register of members, among other documents referred to therein, that it would
be prima facie evidence of matters directed or authorised to be inserted
therein by the Act would not be available to the official liquidator because
the above "Share Account Register" is not the prescribed register of
members to which alone the presumption referred to in section 164 applies. The
petitioner's liability to be placed as a contributory cannot be fixed,
therefore, on the basis of the said "Share Account Register". There
is a further difficulty owing to the said entry itself reading that the said
sum of Rs. 5 lakhs had been paid. It would not be permissible to fasten any
liability on the petitioner as a contributory in respect of those 50,000 shares
de hors the said entry which reads that Rs. 5 lakhs had been paid by the
petitioner. I am only referring to this aspect for the purpose of pointing out
the sheer futility of relying on the entry in the said Share Account Register
to fasten any liability on the petitioner on that basis. When, before any such
liability can be fastened on him, and the petitioner wants to guard himself
against by means of this petition, it would be necessary for the official
liquidator to show that there was an application for the said 50,000 shares by
the petitioner, and that the company had accepted the same.
It may be of help, in
this context, to refer to the discussion by James L. J. and Mellish L. J. in In
re United Ports and General Insurance Company (known as Beck's case) [1874] 9
Ch. App. 392, made while dismissing an appeal from the judgment of Bacon V.C.
The official liquidator had applied to have the name of Mr. Beck placed on the
list of contributories in respect of certain shares of the company. James L.J.
put the matter thus :
"Mr. Beck was
put on the register of shareholders without any authority from him. That was a
perfectly void act as utterly unauthorised by him, and yet he is now sought to
be charged with the consequences".
Mr. Beck had held
forty £5 shares (£210s. paid) in the Progress Insurance Company ; he had been
allotted 200 shares in the United Ports and General Insurance Company, in lieu
of 40 shares held by him in the former company as a result of amalgamation. The
amalgamation was decided to be void. Mr. Beck, who had applied fur shares, got
certain letters which contained some fresh terms. His subsequent application
for the certificates was held not to amount to acceptance of these fresh terms.
Both James L.J. and Mellish L.J. found that the parties had not come to an
agreement as to the terms on which the allotment of shares had to take place.
The consequence was that there was no agreement to become a shareholder. The
latter explained that Mr. Beck was only puzzled and when he wrote to the
company for his certificates he only wanted to know what really the truth was.
The essence of the
matter, therefore, is that there should be an agreement to become a shareholer,
which agreement can ripen into a concluded contract only by an offer to take certain
amount of shares and the same being accepted. There is nothing on record to
show that the allotment of 50,000 shares to the petitioners was even
communicated to him. If this was not done, there was clearly no acceptance,
even if there was an application for 50,000 shares, and hence there was no
concluded contract either.
It will be
appropriate in this connection to look at the auditor's note in the
balance-sheet for the period ending 30th April, 1962 (marked as exhibit
R.W.-1/A), which reads as follows :
"Note 2. 77,500
equity shares have been allotted on 30-4-62 by the directors. The amount due on
application and allotment was not received in cash but by cheques. The cheques
have not yet been sent to bank for collection and are in the hands of the managing
director as uncashed".
This report was by
the company's auditors, S. P. Chopra & Co. and G. S. Mathur & Co., and
is dated May 12, 1962. It may be recalled that on May 2, 1962, the cheque for Rs.
5,000 given by the petitioner was sent to the bank for collection and was
cashed. The question naturally arises how if the petitioner had given a cheque
for Rs. 5 lakhs in respect of 50,000 shares it was not sent to the bank for
being encashed ? The other 27,500 shares are said to have been taken by Bharat
Singh (the numbers of whose shares are said to be from 67503 to 94002 according
to the minutes book dated February 28, 1963). No explanation worth the name has
ever been advanced. The official liquidator is now under severe handicap
because the company has been wound up ; some fraud seems to have been
perpetrated. But these cannot by themselves dispense with the need for
acceptable proof that there was an application by the petitioner for 50,000
shares, that there was an allotment to him of those shares and that the same
was also communicated.
It may also be worth
noticing in this context thai the police had seized the records of this company
in June, 1962, including the minutes book. Item 7 of the minutes of the board
of directors of 30th April, 1962, relates to the above 50,000 shares but the
specified numbers have been allotted to the petitioner against his application.
Those who were present at the meeting were B.B. Lall Singhania, Smt. Prem Vati
Singhania and Mrs. U.R. Gupta (wife and brother's wife, respectively, of B. B.
Lall Singhania). If shares of this value had been allotted to the petitioner on
April 30, 1962, he would in all probability have been made a director at that
meeting itself ; as the subsequent discussion would show the petitioner had
agreed to become a director even when he says, he agreed to take 500 shares and
gave a cheque for the same on April 25, 1962, itself. The same remarks would
apply to Bharat Singh also who was said to have been allotted 27,500 shares
against his application as per the minutes of the said meeting.
Item 5 of the minutes
of the board's meeting dated May 12, 1962, contains a resolution to allot 500
shares (Nos. 97973 to 98472) to the petitioner and another 500 shares to one
Lt. Gen. B. Chaudhuri containing certain specific numbers of shares. Even at
that meeting the petitioner was not present. There are no further minutes of
the board recorded in the said minutes book which stops with the minutes dated
May 12, 1962 (at page 62), though the book, pages of which are numbered,
contains up to 99 pages (numbered in print) plus one page extra also. This is
perhaps understandable because of the police seizing it. The further
proceedings of the board incorporating the minutes from and after 2nd June,
1962, are in a different book (marked as exhibit R.W.-3/3). It was then for the
first time that resolution was passed (item 2) that the petitioner, in addition
to Lt. Gen. Chaudhuri and Bharat Singh, was appointed as director ; it was
stated that the consent of all of them to act as directors had been received in
the office. At this meeting an interesting record had been made as item 3 as
follows :
"It was stated
by the manager that the two cheques were returned by the old accountant, Mr.
G.S. Bambani to, (i) H.H. Tehri Garhwal, and (ii) S. Bharat Singh which had
discrepancies on May 14, 1962, and the same have not been sent back to the
company.
It was resolved that
in the next board meeting they may be requested to return fresh cheques in lieu
of those returned to them already, i.e. , H.H. Tehri Garhwal for Rs. five lakhs
and S. Bharat Singh for Rs. two lakhs and seventy-five thousand".
It is necessary to
notice in this context that there has been a publication by the manager of the
company in the Hinduslan Times dated May 28, 1952, (exhibit P.W.-2/1) that two
cheques had been lost by the cashier on his way from the bank to the office ;
the two cheques amounted to Rs. 7,75,000 on May 23, 1962. The finder was
requested to deposit them in the registered office of the company. It is
passing strange how in respect of the two cheques, which were said to have been
lost, a record could still have been made in the minutes of the company about
their having been returned by their old accountant to the petitioner and Bharat
Singh.
The next meeting of
the board was on June 7, 1962, in which the petitioner was not present ; Bharat
Singh was, however, present. The minutes of the meeting dated June 2, 1962,
were said to have been read and confirmed. Nothing is mentioned in this meeting
about the further action taken in respect of those two cheques said to have
been returned.
There was another
meeting on August 31, 1962, which was merely adjourned on the ground of
inability of the other members to attend the meeting. There was yet another
meeting of the board on September 7, 1962, at which also the petitioner was not
present. It was at the 'meeting of the board, held on November 14, 1962, the
petitioner was present for the first time. At that meeting Bharat Singh was not
present ; a resignation letter from him was stated to have been considered.
What is of relevance to our present purpose is item (1) of the minutes, which
reads that copies of the letter of Registrar had been circulated in advance and
that in the meeting it was unanimously decided that the reply, a draft of which
was approved by the board, should be shown to solicitors before it was sent to
the Registrar of Companies.
The petitioner, when
he was examined on commission, stated that he got a letter in June, 1962, that
he had been appointed as a director, he having agreed after some discussion
with his broker, H.P. Mehta (P.W.-4), to buy 500 shares ; he had seat a letter
with the application form (copy of which is marked as annexure "A" to
the petition). The cheque which he had sent has been proved by him and was
marked as exhibit P.W.-3/1 bearing the same date as the letter (April 25,
1962). He had never intended to take more than 500 shares. Apart from exhibit
P.W.-3/1 he had not given any other cheque. In fact, he had loaned a sum of Rs.
10,000 temporarily to the managing director of the company, B.B. Lall
Singhania, a November, 1962, out of which only Rs. 3,000 had been repaid to him
some time on November 10, 1962. He had occasion to contact his solicitor in
Bombay some time in September/October, 1962, because the managing director had
told him that the accountant had bungled or did something wrong on the basis of
which the Registrar of Companies had started enquiries ; he, therefore, wanted
the petitioner to sign a paper asking him to commit himself to the fact that he
had been allotted Rs. 5 lakhs worth of shares. He refused to do so but
ultimately he agreed to consult his solicitor on account of Singhania's
insistence.
T.S. Doctor (P.W.-5),
solicitor and a partner of Messrs. Hooseini Doctor and Co., Bombay, spoke to
the fact that the petitioner saw him some time in the last week of October,
1962, in connection with the letter which the company wanted from him. The
draft letter was marked "B". When he was talking to the petitioner,
B.B. Lall Singhania also came in whereupon he said he would have to consider ;
he asked for certain documents which he had referred to in his letter dated
October 27, 1962, to the petitioner. His advice to the petitioner was that he
should not sign that draft letter. The letter containing the objection of the
Registrar of Companies was also shown to P.W.-5 at the time the petitioner met
him. The petitioner told P.W.-5 that he had purchased only 500 shares and that
by some mischief an allotment of 50,000 shares had been made in the books of
the company. P.W.-5 admitted that the petitioner did not seek his advice as to
how to get rid of the liability in respect of 50,000 shares nor did he advise
the petitioner about his having to file an application for rectification. One
or two years afterwards he met the petitioner's secretary, (Verma), and asked
him why the petitioner was not going in for rectification. The petitioner had
not consulted P.W.-5 at the time of filing the present petition.
H.P. Mehta (P.W.-4)
had also supported the petitioner and stated that it was he who had asked the
petitioner to purchase shares in this company and that he had agreed to
purchase 500 shares. But B.B. Lall Singhania was keen on the petitioner taking
more shares than the minimum qualifying shares to become a director. He also
met the petitioner at this stage ; Singhania did not meet him. He did not get
anything for negotiating for these shares with the petitioner at the instance
of Singhania. He only suggested to the petitioner to take more shares but he
did not agree. The original letter dated April 25, 1962, was typed in the
office of the petitioner and was taken by him from there to the company.
On the same day, it
may be noticed that the company had written a letter (marked as "F")
to the petitioner referring to the fact that the company had been advised by
H.P. Mehta about the petitioner agreeing to join the board of directors of the
company and welcoming him. The letter also asked for the petitioner's consent
in triplicate along with share application through H.P. Mehta. This refers only
to a single application for shares for which a cheque, bearing the same date,
was also issued for Rs. 5,000.
Subsequently we have
the minutes dated February 28, 1963, of the company wherein there is a
resolution cancelling the shares (50,000) allotted to the petitioner as well as
the other shares allotted to Bharat Singh.
The entire effort of
Mr. P.C. Khanna, learned counsel for the official liquidator, was only directed
towards showing that some fraud had been perpetrated and that the conduct of
the petitioner in having agreed to consult his solicitor and, even after
consulting him, not taking steps to apply for rectification suggests that the
petitioner was himself a party to such fraud. While it seems that a bogus
company had been floated, in which the petitioner had been led to take shares,
the evidence falls far short of what is needed to establish that the petitioner
was a party to any fraud, along with the promoter. The evidence seems
consistent with the petitioner's embarrassment in having become involved in
this company as a shareholder and director and not being able to take any hasty
or drastic steps. He refused to sign a draft reply as per annexure
"B". In this respect he is supported by the solicitor (P.W. 5). If he
had agreed to consult his solicitor at Bombay, when the promoter was also
present, it was obviously to take legal advice. This is consistent with the
petitioner having been anxious to avoid any further injury to himself,
especially in the context of the records of the company having been seized
earlier by the police, even in June, 1962.
On the crucial
question whether 50,000 shares had been allotted to the petitioner and whether
there was a concluded contract in respect of those shares between members of
the company the evidence in this case is not sufficient to support such an
inference.
Dealing with the
powers conferred on the court to rectify the register of members at the stage
of settlement of the list of contributories given under the old section 184
corresponding to section 467 of the Act of 1956, A.N. Grover. J. (as he then
was), speaking for a Division Bench of the Punjab High Court, in S.K. Shankara,
Official Liquidator v. Sardar Haridhan Singh [1966] 36 Comp. Cas. 209 (Punj),
observed at page 218 as follows :
".........the
liquidator could ask for settlement of list of contributories only after the
winding up had been ordered and it is at that stage that he can invoke under
section 184 the power of the court to rectify the register of members. In my
opinion the intention to specifically confer the power to rectify the register
at the stage of settlement of list of contributories was with a very salutary
object in view, namely, to enable the liquidator to take necessary steps in the
matter of rectification when either due to fraud or collusion no one has made
an application for rectification under section 38 before the winding up of the
company".
The position in this
respect is the same except that the proviso to section 467(1), with which we
are not concerned, was adopted from section 257 of the English Companies Act of
1948.
On the sole ground,
even regardless of whether the company having rectified the same, the
petitioner is entitled to the relief prayed for, namely, that the register of
members of the company, if one exists, should be rectified so as to show that
the petitioner did not subscribe for 50,000 paid-up equity shares, but that he
was allotted only 500 paid-up shares, the official liquidator is directed not
to place the petitioner on the list of contributories.
My findings on issues
(1) to (3) are : There was no application at all for allotment of 50,000 shares
by the petitioner ; even if it was physically there and had been signed by the
petitioner it had been filled in without the petitioner's concurrence or
knowledge and contrary to his intention of subscribing for only 500 shares ;
the application was not accompanied by any cheque for Rs. 5 lakhs ; there was
no allotment of 50,000 shares to the petitioner and there has been no
acceptance by the company ; no allotment concerning 50,000 shares had ever been
communicated to the petitioner. In the result there was no contract, none which
had been concluded or was complete, in respect of 50,000 shares.
Issue (5) :
No estoppel can be
pleaded against the petitioner, there being no allotment of 50,000 shares.
Issue (6) :
This issue has not
even been argued before me. I do not see how such a question arises in the
present petition.
In particular, it may
be worth examining, in the light of the evils which the case on hand presents
whether stricter provisions concerning the allotment of shares than have been
provided even under the Companies (Amendment) Act (41 of 1974) should not be
thought of. Part II of the Act has no doubt been the subject of progressive
amendment aimed at controlling the evils usually encountered not only in the
matter of deposits invited by limited companies (in addition to sections 58A
and 58B recently added to the Act by Act XLI of 74), the Reserve Bank (Second
Amendment) Act also regulates deposits invited by non-banking financial
companies, but also by making provisions in the matter of mis-statements in
prospectuses providing for not only civil liability in respect of them (section
62) but also providing penalty (section 63) for fraudulently inducing persons
to invest money (section 68) and making personation for acquisition of shares
(section 68A). Certain prohibitions regarding allotment of shares (sections 69
and 70) have been imposed ; the legal effect of certain irregular allotments,
contravening the above provisions, has also been statutorily stated (section
71); the applicants for shares have also been given time to study the
prospectuses and withdraw their offer to subscribe for shares in case they are
not satisfied with the same (section 72). In the light of the evils which the
present case brings to light and may further bring to light if there is going to be a detailed probe into the affairs of this
company, it may be rewarding, in the public interest, to consider whether even
more stringent control and regulation than have been yet provided for are
necessary not only up to the pre-registration stage but also up to the stage
when the shares are finally allotted. In this respect, it seems to me, the
provisions of the German Stock Corporation Act of 1965 (see Mueller-Galbraith :
Aktien-gesetz, 1965,
The German Stock Corporation Law in English and German), in so far as they could be made applicable and modified to
suit the Indian context, may be worth close attention. I may only draw
attention to one provision, among many others, which requires that all
transactions pertaining to shares should be gone through banks—in our context,
the nationalised banks. It may be possible to combat at least some if a
provision is made that all applications for shares should be accompanied by
cheque on a nationalised bank to the extent prescribed and that no share would
be allotted unless and until the concerned bank intimates to the company, in
writing, that the cheque has been cashed. There are, surely, many other
provisions in the German Stock Corporation law which may be useful to us and be
capable of adaptation, but it is needless for me to refer to them all at the
present moment. I may, however, point out that even in England, from whom we
have largely borrowed our company law, efforts are currently under way to
introduce reforms in the company law in an effort to gear private effort also
to national growth (see Lord Watkinson's Committee Report).
I am directing a copy of this judgment to be
sent by the Registry to the Company Law Board not only for considering what
further safeguards may be provided than what have been provided so far, but
also for the purpose of more needed action (I am not aware of the details of
any action so far taken) being taken against the persons responsible for such a
sorry state of affairs.
In the result, the petition is accepted, as stated above, but, in the circumstances, without costs.
[1990]
69 COMP. CAS. 209 (HP)
v.
Kanwar Papers Private Ltd.
V.K. MEHROTRA, ACTG., C.J.
Company Petition No. 2 of 1984 and Company Applications Nos. 9, 10 and 11 of 1984
DECEMBER 22, 1988
Dev Raj for the Petitioners.
K.D. Sood for the Respondents.
V.K.
Mehrotra, Actg., C.J.—Kanwar Papers P. Ltd. was incorporated under the Companies Act, 1956, on January 14, 1981, as
a private company limited by shares. Its registered
office is at Kala Amb, District Sirmur, in Himachal Pradesh. The managing director of the company is one
Kanwar Balbir Singh. His daughter is married to one of the sons of Ram Kishan
Malik. One Shri H.K.S. Malik was the brother of Ram Kishan. He was once a
District and Sessions Judge and after retirement enrolled himself as an
advocate. Shri Jagat Narain who was a school teacher retired from service on
February 15, 1981. He received some cash amount as
part of retiral benefits. Smt. Sumitra Devi is the wife of Shri Jagat
Narain.
On June 5,
1984, Company Petition No. 2 of 1984 was presented in
this court by Ram Kishan, Jagat Narain and Smt. Sumitra Devi. The petition
contained a prayer for the
winding up of Kanwar Papers P. Ltd. mainly on the ground that the company was
indebted to the three petitioners to a huge extent. The amount that was due to
the petitioners from the company
till April 20, 1984, was Rs. 1,44,000, Rs. 60,000 and Rs. 75,000. The case of
the petitioners is that the company stood in need of loan and its managing director, who was very closely related to one of
the petitioners, obtained loans of Rs. 1,44,000, Rs. 60,000 and Rs.
75,000 over which interest at the rate of 18% per annum, as orally agreed, was
due. The loans were given by the petitioners between February, 1981, and May,
1981. The first petitioner gave it since the managing
director of the company was closely related to him. Smt. Sumitra Devi
was treated as a dharam behan by the managing director. On the insistence of
the managing director and on being induced and
persuaded by him, Sumitra Devi borrowed money on the security of a plot
of land which she possessed at Delhi, and gave it by
way of loan to Kanwar Balbir Singh, who had given out that he was in great
financial difficulties as the loan granted to the company by the financial
institutions was not forthcoming, considering it to be her sacred duty as a
dharam behan.
The
case of the petitioners also is that Smt. Sumitra Devi had lent a sum of Rs. 75,000 to Kanwar Balbir Singh in the
month of May, 1981, after borrowing it from a bank on compound interest at 18%
per annum with quarterly rests. Jagat Narain says
that he was promised a job in the company by Balbir Singh. He lent a total sum
of Rs. 60,000 to Balbir Singh. Ram Kishan says that he lent a sum of Rs.
1,44,000 to Balbir Singh between January and May, 1981. For this amount,
he had borrowed a sum of Rs. 92,100 from a bank at compound interest of 18% per
annum with quarterly rests. He did so on account of his close relationship with
Balbir Singh who had, along with his wife, requested Ram Kishan to help them
financially and promised to repay the amount of loan with compound interest of 18% per annum and also to provide Ram Kishan
and one of his sons nice jobs in the company.
The
three petitioners served a notice dated April 20, 1984, under section 434 of the Companies Act on the
respondent-company at its registered office. In reply, what was said by the
respondent-company was that the amount had been brought by H.K.S. Malik, who
was an additional director of the company, between November 22, 1981, and May
2, 1983, on his behalf and on behalf of the three
petitioners for purchase of shares. Shares had, in fact, been allotted to the
petitioners, as requested by them through H.K.S. Malik. The petitioners were
thus, shareholders of the company and the story about the amount having been given on loan to the company by them was
incorrect.
Three applications under section 155 of the Companies
Act were then presented by the three petitioners in
this court on July 13, 1984. After reciting the facts relating to them including the serving
of a notice under section 434 of
the Companies Act on the respondent-company, the three petitioners
prayed that the register of the members of the respondent-company be rectified
so as to remove the names of the petitioners therefrom and damages be also
allowed to them against the respondent-company. These three applications, which
were made in Company Petition No. 2 of 1984, were registered as Company
Applications Nos. 9 (Sumitra Devi v. The Company'), 10 (Jagat Ram v. The
Company) and 11 (Ram Kishan v. The Company) of 1984. To each of these three
applications, a reply has been filed separately by the respondent-company,
which is supported by an affidavit of Balbir Singh. In Company Petition No. 2
of 1984 also, a written statement has been filed by the respondent-company. In addition, the parties have exchanged some affidavits as
well. They have also filed some documents. On September 13, 1988, counsel for
the parties made a statement before the court that evidence of the parties in
the form of documents and affidavits is to be found on the record of Company
Petition No. 2 of 1984 and that the said evidence may be taken into
consideration as evidence of the parties also for purposes of the disposal of
the three company applications. Counsel were heard on various dates before
orders were reserved in the case on October 5, 1988.
Section
155 of the Companies Act (for short "the Act") was omitted by the
Companies (Amendment) Act, 1988. Prior to its omission, this provision read as under :
"155.
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 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, or 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 (5 of 1908),—
(a) if the order be passed by a District
Court, to the High Court;
(b) if the orders 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".
In
the present cases, what has been urged on behalf of the three petitioners is
that their names have been entered in the register of members by the respondent-company without sufficient cause. They
are seeking the rectification of the register by exclusion of their names and
also praying for a direction to the respondent-company to pay damages to them.
A member of a
company is denned in section 41 of the Act in the following terms :
"41. Definition of 'member'. — (1) The
subscribers of the memorandum of a company shall be
deemed to have agreed to become members of a 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".
The
words "agrees in writing" mentioned in sub-section (2) were
substituted for the word "agrees" by Parliamentary Act 65 of 1960. The
Companies (Amendment) Bill, 1959, contained a note on clause (14) which says
that "the proposed amendment is intended to avoid the improper fastening
of liability as contributories on person who never applied for shares",
and refers to paragraph 38 of the report of the Companies Act Amendment
Committee. The report, in
paragraph 38, said that:
"It has
been brought to our notice that in some cases, on the
verge of liquidation, entries are made in the register of members of the names
of persons
who never applied for shares, in order to fasten liability on these persons as
contributories. To avoid this contingency, we suggest the addition of the words
'in writing' after the word 'agrees' in section 41(2)".
It is not in
dispute that the three applicants did not make any application in writing for purchase and allotment of shares to them. The
case of the respondent-company is that the three applicants had asked for the
allotment of shares orally through H.K.S. Malik and shares were, in fact,
allotted to them. The case of the three applicants, as put forward by their
counsel, Shri Dev Raj, is that, in the absence of an application in writing for
being allotted shares, the conduct of the applicants in giving money, which
was, admittedly, received by the respondent-company, was consistent with
the plea taken by them that they had given loans to
the respondent-company. The statement that counsel for the applicants
made during the hearing of the case was that there is no direct evidence or
circumstantial evidence to show that money had been
given either to H.K.S. Malik or to Balbir Singh by way of loan or for purchase
of shares. Also, that no demand, in writing, was ever made for payment of
interest or refund of the amount by the applicants to the respondent-company or
to Balbir Singh prior to the serving of the statutory notice under section
434 of the Act. It is said that the demand was orally made from time to time.
The
first question that may be examined is about the effect of there being no
request or agreement, in writing, by or on behalf of the three applicants for becoming members of the
respondent-company or, in other words, the absence of a request, in writing, by
them for allotment of shares in the
respondent-company.
The
principal submission which has been made on behalf of the respondent-company by Shri K. D. Sood, on this aspect of
the case, is that the requirement in section 41(2) that a person is to
"agree in writing" to become a member of
the company, was for the benefit of a shareholder and could, therefore,
be waived by him, as was done in the instant case. Absence of a request, in
writing, by the three applicants for being allotted
shares or their names being entered in the register of the respondent-company,
would not, as such, invalidate the action of the respondent-company in entering
their names on the register. It could not, therefore, be said that the names of
the three applicants had been entered in the register of members of the
respondent-company without sufficient cause so as to enable them to seek
rectification under section 155 as it stood at the relevant time. The amendment
was not brought about in section 41(2), according to the submission of Shri
Sood, as a matter of public policy so as to make its waiver by the person
concerned contrary to law and render the inclusion of the names of the three
applicants in the register of members, without a request by them, in writing,
per se illegal.
In Gherulal
Parakh v. Mahadeodas Maiya, AIR 1959 SC 781, the Supreme Court was called upon to answer the question whether in
India a definite principle of public policy has been evolved or recognized
invalidating wager. The question regarding public policy was considered by the Supreme
Court, which spoke through Subba Rao J., in some detail in paragraphs 21 to 23 of the report. After referring to a
number of text books on the Law of Contract Halsbury's Laws of England and
several decisions of the English and Indian courts, the doctrine of public
policy was summarised thus (at page 795) :
"...Public policy or the policy of the law is an
illusive concept; it has been described as
'untrustworthy guide', 'variable quality', 'uncertain one', 'unruly
horse', etc.; the primary duty of a court of law is to enforce a promise which the parties have made and to uphold the
sanctity of contracts which form the basis of society, but in certain cases,
the court may relieve them of their duty on a rule founded on what is called
the public policy ; for want of better words, Lord Atkin describes that
something done contrary to public policy is a harmful thing, but the doctrine
is extended not only to harmful cases but also to harmful tendencies ; this
doctrine of public policy is only a branch of common law, and, just like any
other branch of common law, it is governed by precedents ; the principles have
been crystallized under different heads and though it is permissible for courts
to expound and apply them to different situations, it should only be invoked in
clear and incontestable cases of harm to the public ; though the heads are not
closed and though theoretically it may be permissible to evolve a new head
under exceptional circumstances of a changing world, it is advisable in the
interest of stability of society not to make any attempt to discover new heads
in these days".
The
Supreme Court had occasion to consider the question of public policy again in
Murlidhar Agarwal v. State of Uttar Pradesh, AIR 1974 SC 1924. The court was
examining the question whether section 3(1) of the U.P. (Temporary) Control of
Rent and Eviction Act, 1947, was based on public policy. That section provided
for restrictions on eviction of
tenants from any accommodation and said that:
"Subject
to any order passed under sub-section (3) no suit shall, without the permission
of the District Magistrate, be filed in any civil court against a tenant for
his eviction from any accommodation except on one or more of the following
grounds :"
Mathew,
J., spoke for the court. After observing, in paragraph 27 of the report, that
there could be no doubt about the policy of the law, namely, the protection of
the weaker class of society from harassment by frivolous suits, the learned
judge proceeded to examine the question whether there was a public policy
behind it which precluded a tenant from waiving it. He referred to various
pronouncements, opinions of some authors like W.S.M. Knight, Percy H. Winfield, Dennis Lloyd
and Cardozo and said that (at page 1930) :
"Public
policy does not remain static in any given community. It may vary from
generation to generation and even in the same generation. Public policy would
be almost useless if it were to remain in fixed moulds for all time".
and that (at
page 1930) :
"If
it is variable, if it depends on the welfare of the community at any given
time, how are the courts to ascertain it ? The judges are more to be trusted as
interpreters of the law than as expounders of public policy. However, there is
no alternative under our system but to vest this power with judges .... The
judges must look beyond the narrow field of past precedents, though this still
leaves open the question, in which direction he must cast his gaze .... The
judges must consider the social consequences of the rule propounded, especially
in the light of the factual evidence available as to its probable results ....
Our law relies on the implied insight of the judges on such matters. It is the
judges themselves, assisted by the Bar, who here represent the highest common
factor of public sentiment and intelligence .... No doubt, there is no assurance
that judges will interpret the mores of their day more wisely and truly than
other men. But this is beside the point. The point is rather that this power
must be lodged somewhere and under our Constitution and laws, it has been
lodged in the judges and if they have to fulfill their function as judges, it
could hardly be lodged elsewhere".
The
court then held that section 3 was based on public policy as it was intended to
protect the weaker sections of the community with a view to ultimately
protecting the interest of the community in general by creating equality of
bargaining power. The court said that although the section was primarily
intended for the protection of tenants only, that protection was based on
public policy and could not have been waived by the tenant.
Recently,
in Central Inland Water
Transport Corporation Ltd. v. Brojo Nath Ganguly [1986]
60 Comp Cas 797, the Supreme Court dealt with the question of public policy
again. In paragraph 93 of the report, it observed, inter alia, that (at page
859 of 60 Comp Cas) :
"The
Indian Contract Act does not define the expression 'public policy' or 'opposed
to public policy'. From the very nature of things, the expressions 'public
policy', 'opposed to public policy' or 'contrary to public policy' are incapable
of precise definition. Public policy, however, is not the policy of a
particular Government. It connotes some matter which concerns the public good
and public interest. The concept of what is for the public good or in the public interest or what would be
injurious or harmful to the public good or public interest has varied from time
to time. As new concepts take the place of old, transactions which were once considered against public policy are now
being upheld by the courts and, similarly, where there has been a
well-recognized head of public policy, the courts have not shirked from
extending it to new transactions and changed
circumstances and have at times not even flinched from inventing a new
head of public policy .... the principles governing public policy must be and
are capable, on a proper occasion, of expansion or modification. Practices which were considered perfectly normal at
one time have today become obnoxious and oppressive to public conscience. If
there is no head of public policy which covers a case, then the court must in
consonance with public conscience and in keeping with public good and public
interest declare such practice to be opposed to public policy...".
It
is clear from these ponouncements that the question whether a statutory
provision lays down a rule of public policy or not is to be determined having
regard to the considerations with which the provision, in the opinion of the
court, came to be enacted. The intention with which the Legislature enacted it
has to be discovered by the court. There is no scope for saying that in doing
so, the court should confine
itself to some pre-recognized heads of public policy.
The
object with which the words "in writing" were introduced in section
41(2) of the Act, after the word "agrees" is more than clear from
paragraph 38 of the Report of the Companies Act Amendment Committee. It was
found that in some cases entries were made in the register of members, of the
names of persons who had never applied for a share, when the companies were on
the verge of liquidation, with a view to fasten liability on these persons as
contributories. The object of
the introduction of these words was to avoid improper fastening of liability on
such persons. It is clear that Parliament recognized
the inequity of the situation, resulting from the unscrupulous acts on the part
of some of the companies, on the verge of liquidation, of trying to fasten
liability, as contributories, upon persons who never were its members
and whose names were entered in the register of members without any desire on
the part of such persons to be made members of the company.
The surreptitious inclusion of the names of such persons in the register of
members of a company, only with a view to fasten upon them liability as
contributories, where the company was on the verge of liquidation, was,
undoubtedly, injurious or harmful to public good and public interest. The
intention of the Legislature in incorporating the requirement that before the
name of a person is entered in the register of members of the company, he
should agree "in writing" for it to be done clearly was to ensure
fairness in the matter with a view to avoid detrimental effect upon the interest of those who
were sought to be made liable as contributories in a company facing
liquidation, where their names were brought on the roll of the members even in
the absence of their desire to become members of the company at any time. It
was manifestly done by the Legislature with a view to protect the interest of
unsuspecting persons by protecting them from the ulterior designs of those who
were in charge of the affairs of the company. The element of protection of the
public good is predominant in the enactment of the provision. The only
reasonable conclusion at which one can arrive about the requirement of there
being an agreement "in writing", on the part of a person for
inclusion of his name in the register of members, is that the provision was
based on considerations of public policy.
It
cannot be doubted that if a provision lays down a rule of public policy, there
can be no waiver thereof. The principle of waiver does not apply to the
statutory provision based on public policy. The legal position in this regard
is not in doubt. However, reference may be made to some decisions.
In
M. and S.M. Rly v. Rupchand
Jitaji, AIR 1950 Bom 155, the question was whether it was open to a servant of a railway company to waive the
benefit conferred upon him under section 60(1), Civil Procedure Code, under
which his salary was exempt from attachment to the extent of Rs. 100. A
Division Bench, after noticing the decision of another Division Bench in an
earlier case, ruled that a public servant whose salary was exempt from
attachment under section 60(1), Civil Procedure Code, could not contract
himself out of the statutory provision because such a contract was opposed to
public policy. Likewise, in Associated Cement Companies Ltd. v. State of
Rajasthan, AIR 1981 Raj 133, it was observed by a Division Bench of that court
that where a statutory provision laid down a rule of public policy, neither
party to an agreement can contract out of it. It relied upon the dictum of
their lordships of the Privy Council in Equitable Life Assurance Society of the
United States v. Reed [1914] AC 587. In fact, the rule in this regard was
stated by the Supreme Court in Murlidhar Agarwal, AIR 1974 SC 1924, in
unmistakable terms when it said (at page 1930) :
"Although
the section is primarily intended for the protection of tenants only, that
protection is based on public policy. The respondent could not have waived the
benefit of the provision".
If,
as I have held, the requirement of there being an agreement, "in
writing" in section 41(2) of the Act is founded upon the principles of public
policy, the applicants could not have waived it. The argument of Shri K. D. Sood, on behalf of
the respondent-company, that they could have done so
as the provision was primarily intended for the benefit of investors like them
cannot be countenanced in law.
Section
155 of the Act provided that the court could rectify the register of members of
the company if it found that the name of any person had been entered without
sufficient cause. It was urged with some emphasis by Shri Sood that in the
instant case, it could not be said, having regard to the circumstances appearing on the record, that
the names of Smt. Sumitra Devi, Shri Jagat Narain and
Shri Ram Kishan were entered in the register of members of the
respondent-company without sufficient cause. As such, rectification by deletion
of their names from the register was not called for. It is unnecessary to
examine the question on facts. The incorporation of
the names of these persons in the register of members of the company,
without there being any agreement on their part "in writing",
was" contrary to the statutory requirements of section 41(2). These
requirements could not be waived by the three
applicants. Quite clearly, therefore, their names cannot be permitted to remain
included in the register of members of the respondent-company. They are
directed to be removed therefrom.
The next
question which arises is about the prayer made by these three applicants for
being awarded damages on account of the wrong inclusion
of their names in the register of members. It has been urged, with reference to
the provision contained in section 155(2) of the Act, that the
respondent-company be directed to pay damages to the three applicants. When one
looks at section 155(2), one finds that the court may direct the company to pay damages, if any, sustained by any party
aggrieved, where it directs rectification of the register of members of the
company. The language is suggestive of the fact that there should be a claim of
sustenance of some damages by the party, in whose favour an order of
rectification has been made, and actual proof of sustenance of such damages. In
the present case, the three applicants have made a claim for award of damages
in general terms. They have neither specified nor quantified the extent of damages,
said to have been suffered by them, on account of the inclusion of their names
in the register of members of the respondent-company. They have not brought any
evidence about it on the record either. The claim for award of damages has,
therefore,, to be rejected.
The
conclusion is that the three Company Applications Nos. 9 of 1984, 10 of 1984 and 11 of 1984, merit success in part.
They are allowed to the extent that the register of members of the
respondent-company shall be rectified by excluding
the names of Smt. Sumitra Devi, Shri Jagat Narain and Shri Ram Kishan from it.
The claim for damages made by the three applicants, in these applications, is,
however, rejected. The applicants shall be entitled to their costs in these
proceedings which is fixed at Rs. 500 in each of the three applications. The
amount of costs shall be payable by the respondent- company.
Coming now to
Company Petition No. 2 of 1984, which seeks an order for the winding up of the company.
The
pleadings of the parties, as also the evidence brought on the record by them,
clearly show that there is serious dispute between the parties on each
essential fact. The case set up by the applicant in Company Petition No. 2 of
1984 is founded upon the fact that they had advanced various sums of money as
loan to the company on the request made by Balbir Singh. It also is stated that
they had done so on account of the assurances held out by Balbir Singh and on
account of the close relationship which the applicant, Ram Kishan, had with
him. It is unnecessary to recount the facts in detail. The basic facts have
been mentioned in the opening part of this order.
The
case set up by the respondent-company, in essence, is that R.K.S. Malik, a
brother of Ram Kishan, wanted to acquire 40 per cent. of the equity capital of
the company in order to provide himself with work after his retirement which
was to take place on October 31, 1981. He began to take active interest in the
affairs of the company although he was still in service. Since he had no money
to purchase the equity shares to the extent that he desired, he brought in his
brother, Ram Kishan, his friend Jagat Narain and the wife of Jagat Narain, Smt.
Sumitra Devi, as shareholders by persuading them to invest money in the shares
of the company. The company did not borrow any amount by way of loan nor did it
invite from the three applicants any amount by way of deposit. The three
petitioners never demanded any interest on the amount said to have been advanced by them by way of loan to the
respondent-company nor asked for its refund The
affairs of the company were being conducted in a proper manner. There was no
occasion, in the circumstances, of directing its winding up, either on the
ground that it was indebted to the applicants and had failed to discharge its
debts to them, after being required to do so through a notice, or on the ground
that it was just and equitable to pass an order of winding up in respect
of the respondent-company.
The
proceedings for the winding up of the company, under section 439 of the Act
read with sections 433 and 434, are summary in nature. The order of winding up is normally not to be passed under these
provisions where the court finds that there is serious dispute on questions of
fact, which can better be resolved by relegating the parties to the normal remedy of a civil suit or that there is bona fide dispute
between the parties about the so called indebtedness of the company.
As
observed by the Supreme Court in Amalgamated Commercial Traders (P.) Ltd. v.
A.C.K. Krishnaswami [1965] 35
Comp Cas 456 (at pages 463, 464):
"It is well-settled that a
winding up petition is not a legitimate means of seeking to enforce payment of
a debt which is bona fide disputed by the company. A petition presented
ostensibly for a winding-up order but really to exercise pressure will be
dismissed, and under circumstances may be stigmatized as a scandalous abuse of
the process of the court.... The modern practice has been to dismiss such
petitions. But, of course, if the debt is not disputed on some substantial
ground, the court may decide it on the petition and make the order (vide
Buckley on the Companies Acts, 13th edition, page 451). ... If the debt was
bona fide disputed, as we hold it was, there cannot be 'neglect to pay' within
section 434(1)(a) of the Companies Act. If there is no neglect, the deeming
provision does not come into play and the ground of winding up, namely, that
the company is unable to pay its debts, is not substantiated".
The
rival versions which the three applicants and the respondent-company have given
in respect of the amounts said to
have been given by way of loan by the applicants to the respondent-company and
the failure of the company to discharge the debt, when asked to do so, necessitate that parties should go to trial
about it in appropriate civil proceedings. The version of the
respondent-company, summarized earlier, makes it clear that the dispute raised
by it about its so called liability to refund the amount with interest claimed
by the applicants, is of a bona fide nature. It would not be a sound exercise
of discretion, in this situation, to pass an order for the winding up of the
respondent-company. I may add that I have refrained from expressing any
opinion about the correctness or otherwise of the
version of the contesting parties, on the basis of the evidence produced in
these proceedings, lest those observations may prejudice the case of either
party when the matter is agitated before the appropriate forum.
In
conclusion, Company Petition No. 2 of 1984 deserves to fail. I direct,
accordingly, though parties are left to bear their own costs themselves. Company Applications Nos. 9, 10 and 11 of
1984 shall stand partly allowed with costs as said earlier.
[1936]
6 COMP. CAS. 32 (BOM.)
Peninsular Life Assurance Co., In re.
WADIA,
J.
AUGUST
23, 1935
C.K. Daphtary for the
Applicant
M.C. Setalvad for the
Official Liquidator
Wadia, J.—This is an application by Balubhai Khimchand, contributory
No. 27, for rectification of the share register of the company by deleting 200
out of the 250 shares standing against his name, and for an order that in the
list of contributories settled by the Court he may be shown as the owner of 50
shares only. The company was compulsorily wound up by an order of this Court
dated 12th November, 1934, and the Official Liquidator was appointed liquidator
of the company. The application is made under Section 184 of the Companies Act
of 1913, which provides that notwithstanding the winding-up order the Court
shall settle a list of contributories, with power to rectify the register of
members in all cases where rectification is required in pursuance of the Act.
Section 184 thus incorporates Section 38, under which, inter alia, if the name
of a person is fraudulently or without sufficient cause entered in the register
of members of a company, the person aggrieved, or any member of the company,
may apply to the Court for rectification of the register. On an application
under that section the Court has power to decide any question relating to the
title of the aggrieved person to have his name omitted from the register, and
generally to decide any question necessary or expedient to be decided for
rectification of the register. The exercise of the jurisdiction given by this
section is discretionary, having regard to the person who is the applicant
before the Court, and to all the facts and circumstances of the case.
The list of contributories
of this company was filed on 28th February, 1935. No other contributory except
Balubhai Khimchand appeared on the settling of the list, and the list was
settled by the order of the Court dated 28th June, 1935, except with regard to
the 200 shares standing in his name. In this affidavit dated June 28, made in
reference to the notice taken out by the liquidator on 1st April, 1935, to
settle the list, Balubhai Khimchand contended that he was the owner of fifty
shares only of the company since 1930, and that in respect of the remaining two
hundred shares being Nos. 3081 to 3280 he was the nominee of one Jivanchand
Dharamchand who was the real owner thereof, and that he had not paid any
consideration for the same. Jivanchand Dharamchand was one of the directors of
the company. Balubhai stated that he was approached by Jivanchand with a
request to sign a transfer form as purchaser of two hundred shares, and that he
agreed to do so merely to oblige Jivanchand, and the shares were transferred to
his name but on account of Jivanchand. He also alleged that the company was
duly informed about this transfer. He accordingly prays for a rectification of
the share register on the ground of his being such nominee. An affidavit was
made in reply by one Narayanrao Babacharya Kale, the Chief Superintendent of
the Office of the Court Liquidator on 24th July, 1935, stating that this
contributory, namely Balubhai, never informed the company or the liquidator
that he held the two hundred out of the two hundred and fifty shares as the
nominee of Jivanchand Dharamchand, and that he never applied previously for the
rectification of the share register until he made this application. Thereafter
inspection was taken by him of the records of the company, and he put in a
further affidavit dated July 15, which was not filed till August 2, stating
that Mavji Govindji Sheth, who was a director and the chairman of the company,
and continued to act on the strength of the two hundred shares as belonging to
him, and that these shares were wrongly transferred to his name. According to
him, therefore, the transfer of the two hundred shares to his name in the
register was invalid and void and of no effect. An affidavit in rejoinder was
put in by Mr. Kale on August 2, stating that the shares were transferred to the
name of the contributory in pursuance of letters received from his former
attorneys by the company, that the transfer was not invalid and void, and that
in any event it was not open to the contributory to raise any dispute at this
stage that he was not liable in respect of those two hundred shares.
There are thus two grounds
on which rectification of the register is applied for: (a) that this
contributory is only a nominee in respect of the two hundred shares, and (b)
that the transfer of the shares to his name is invalid and void.
The ground of his being
only a nominee was put forward by him first, but it was abandoned by his
counsel at the hearing. The company, and now the liquidator, is not concerned
with the person paying the consideration but with the person who has signed the
transfer form as purchaser and whose name is entered as owner of the shares in
the share register. Even if Balubhai Khimchand was the nominee of Jivanchand
Dharamchand in respect of the two hundred shares, the company was not informed
about it. Moreover, the shares were entered in his name with his knowledge and
consent, and prima facie he is the contributory who is liable in respect
thereof.
The second ground, namely,
that the transfer is invalid, is the only one which is now relied upon. The
form of transfer is provided for in Article 34 of the articles of association
of the company. Such a form was executed by the parties concerned on 13th
November, 1933. The upper portion has been torn off. But it is clear from what
remains that 200 shares bearing Nos. 3081 to 3280 of the company were
transferred by Mavji Govindji Sheth to Balubhai Khimchand, the contributory in
question, on 13th November, 1933. The signature of the transferor has been
attested by Jivanchand Dharamchand and that of the transferee by Ratanchand
Jivanchand, presumably the son of Jivanchand, as the address of the two is the
same. A specimen of Balubhai's signature as purchaser also appears on the
transfer form. So far as the contract between the transferor and the transferee
is concerned, it was made and executed on that date. But in the books of the
company the transfer is completed on payment of the transfer fee and making the
necessary entries in the share register. Under Article 33 of the articles of
association of the company the transferor shall be deemed to remain the holder
of the shares which he has transferred under the instrument of transfer until
the name of the transferee is entered in the register in respect thereof. A man
who executes a transfer of shares remains liable unless and until there is on
the list a transferee who is legally liable to the company. Until the
transferee's name is entered in the register, the dividends on the shares are
also payable to the transferor, for he is deemed to be the holder of the shares
until the entry is made. The entry in the register in this case was not made
till 14th April, 1934, when the transfer fee was received by the company, but
there were several letters between November 1933 and April 1934, written to the
company on behalf of the contributory by his former attorneys, insisting on the
transfer of the two hundred shares to his name. Why the entry in the share
register was delayed till then is not clear, but on the 13th April 1934, there
was a resolution issued by circular by the managing agents of the company as
follows:—
"Resolved that the 200
shares numbering from 3081 to 3280, standing in the name of Mr. Mavji Govindji
Sheth, be and are hereby transferred to the name of Mr. Balubhai
Khimchand."
Underneath the word
"passed," appear the names of the five directors, and three of them
have put their initials against their names.
It was contended on behalf
of Balubhai that the transfer was made by this resolution, and that the
transfer is invalid, as the resolution is signed by three of the directors only
and not the other two. Mavji Govindji Sheth has not signed the resolution. With
regard to Dr. Damany, one of the directors, there is an endorsement on the
resolution that the circular was presented to him, but he declined to sign it.
Under Article 111 a resolution passed without a meeting of the board of
directors is valid if it is signed by all the directors, and as this was not
signed by all the five, the resolution was invalid. On that very day, however,
viz., 13th April, 1934, a letter was written on behalf of the contributory to
the company that a considerable time had elapsed and that he was surprised at
the delay in the transferring of the shares to his name, and that if the shares
were not transferred within 24 hours from the receipt of the letter, they
should be returned to the attorneys on his behalf. The shares were transferred
in the register of shares on 14th April, on which date the transfer fee was
received by the company according to the endorsement on the transfer form.
Thereafter there was a meeting of the directors on 19th April when the circular
resolution of 13th April was confirmed, and a resolution was passed that the
two hundred shares standing in the name of Mr. Mavji Govindji Sheth be and are
hereby transferred to the name of Mr. Balubhai Khimchand. It is also stated in
the minutes of that date, in parenthesis, "transferred on 14th April,
1934." Counsel for the liquidator contended that the transfer was not
effected by any of these resolutions, and that even if there was any irregularity
in the circular resolution of 13th April, the irregularity was cured when the
resolution was ratified by the directors at their meeting of 19th April. It was
held in In re Portuguese Consolidated Copper Mines, Limited: Ex parte Badman,
Ex parie Bosanquet that an irregular allotment of shares can be afterwards
ratified by the directors. On the same principle it was argued that the
irregularity in the circular resolution of 13th April was cured when the
transfer was ratified and confirmed by the directors at their meeting of 19th
April. To that the answer of counsel for the contributory was that even the
meeting of the directors of 19th April was irregular on the ground that notice
of that meeting was not given to all the directors of the company. The minutes
of the proceedings of 19th April show that only three of the directors were
present. Under Article 104 even two directors can form a quorum, and under
Article 107 a meeting at which a quorum is present can exercise all or any of
the powers of the directors generally. It was however argued that no notice of
the meeting was or could have been given to the other two directors, that an
irregular resolution by circular could not be ratified by a resolution passed
at an irregular meeting, and that the transfer was also void on that ground.
The question therefore which arises for consideration is, was the transfer made
by the resolution of 13th April which was confirmed at the meeting of 19th
April, 1934, or was it really made on 13th November, 1933, and completed by
reason of the registration on 14th April, 1934? It has been held in the
well-known case of Oakes v. Turquand and Harding, that (p. 350 of 2 H.L.):
"It is not the mere
fact of the name appearing upon the register which makes a person liable as a
member of the company. If he has not agreed to become a member he cannot be
made a contributory."
Balubhai Kimchand agreed to
become a member of the company on 13th November, 1933, and carried on
correspondence through his attorneys to have the transfer completed. It is true
that under Article 35 the directors may at any time in their absolute and
uncontrolled discretion and without assigning any reason decline to register a
proposed transfer of shares, but there is nothing on the record to show why the
registration was delayed till 14th April. It appears that the company received
a threatening letter from Balubhai's attorneys on 13th April, asking the
company to return the shares if they were not transferred in the register
within 24 hours, and the transfer was completed by the 14th. The agreement of
transfer was made in November 1933, and no action of the directors was
necessary to validate it, though, as I have stated before, they could in their
discretion refuse to accept the transfer. The mere delay in registration does
not justify an assumption that there was a refusal to register the transfer
before 14th April. In my opinion the irregularity, if any, of the meeting of
19th April for want of notice to all the directors does not invalidate a transfer
duly made. The transfer was registered on 14th April, and at the date of the
winding up there was upon the register a transferee who was legally liable to
the company in respect of the shares; cf. Symon's case.
I may mention here that
this point about the alleged irregularity of the meeting was taken in a letter
written on behalf of the contributory only on 9th August last when the
application was part heard. It was not taken even in the second affidavit made
by him after he had inspection of all the records of the company. But I will
deal with it since it has been raised. It has been held that prima facie due
notice must be given convening a meeting of the directors, and in default the
meeting is irregular: see In re Portuguese Consolidated Copper Mines, Limited.
But there is nothing on the record to show that such notice was not given, and
the Court cannot assume that notice was not given to Mavji Govindji Sheth
merely because there is an entry in the register of directors under date 14th
April, 1934, that he had ceased to be a director as he had sold his
qualifications shares. There is nothing to show that notice was not given to
the other director also who was not present at the meeting. It is provided by
Article 105 that it shall not be necessary to give notice of a meeting of the
directors to a director who is not in Bombay. There is nothing also to show
whether the directors who were absent at the time were or were not in Bombay at
or about the time of the meeting. It may also be mentioned that there is no
provision in the articles as to how notice is to be given. No notice may be
necessary if the absent director had knowledge of the meeting otherwise. It was
for the contributory in question to have proved to the satisfaction of the
Court that notice was in fact not given to the absent directors, and in my
opinion it is too late for him to apply that their evidence should now be
taken, when the point was not raised by him in the first instance, and there is
not even an affidavit made in these proceedings by any of them. Generally the
Court is entitled to assume that everything has been done regularly and in due
course, and there is nothing in this case against such an assumption.
It was argued on behalf of the liquidator that even
assuming for the sake of argument that there was an irregularity in the
transfer of the shares as alleged, the contributory is estopped from going
against the register. He not only assented to his name being on the register,
but insisted on its being put there, and he has acted like a shareholder. At
the meeting held before the
Commissioner on 6th October, 1934, to consider whether the company should be
wound up or not, he voted as the owner of two hundred and fifty shares,
including the two hundred in dispute. He knew that Mavji Govindji Seth also
voted as the owner of the same two hundred shares, and yet he took no
proceedings till long after the winding up to have this position cleared up.
The register is not absolutely conclusive, but it is, in my opinion, necessary
not only from the point of view of the law but as a matter of policy to see
that it is as conclusive as it can be made consistently with a proper
interpretation of the Act. In Ex parie Barret; Mosley Green Coal and Coke Co.,
In re, certain shares of a company were taken in the name of B at the instance
of C who was the real owner of the shares. Then there was a certain arrangement
made between C and the directors, not within their powers, nor confirmed by the
company, under which the shares were to be transferred into C's name. In the
subsequent winding up proceedings, however, B's name was put up as the
contributory. An objection was taken on his behalf, but without success. At p.
618, the Lord Chancellor observes as follows:
"It is perfectly immaterial to the shareholders of the
company what secret agreement may be made between the persons who are so
registered and any other person, with regard to liability. The future
subscriber has a right to look to the register. All the other shareholders have
a right to depend upon the register, and to take the register as evidence of liability, unless
that liability has been determined in a conclusive and binding manner by
transactions on the part of the directors which are legally valid and good to
bind the company."
In my opinion, Balubhai Khimchand is as much estopped from going against the register and disowning liability, as the company would be estopped from questioning his title when once he was put upon the register. There may have been dealings between him and Jivanchand Dharamchand or between Jivanchand Dharamchand and Mavji Govindji Seth which may give him an equity to call for an indemnity, but such dealings cannot be available to him as a shield to protect himself from his liability. He has been treated as a shareholder and has acted as such, and he cannot go back and deny his position. A man cannot be allowed to lie by while all appears to go on well, and repudiate his acts when the day for meeting his liability arrives. Counsel for the contributory argued that there could be no estoppel unless the party who is estopped had full knowledge of his real position. I am not satisfied that Balubhai had not the knowledge which he now says he only obtained on looking at the records. He has been shifting his position from time to time in order to avoid liability, but that liability is a statutory liability under which the creditors of the company have a right to compel the shareholders on the register to contribute to the extent of thier shares towards the payment of the debts of the company, and it is too late for him now to raise the dispute that he is not responsible in respect of the two hundred shares. The contributory has failed to show that his name was entered in the register fraudulently or without sufficient cause under Section 38(1), Companies Act. Under these circumstances the order for rectification of the share register ought not to be made as asked and the application must be rejected. The contributory No. 27 is a shareholder and is liable to the liquidator in respect of all the 250 shares of which he is the owner according to the register. It has been held that the costs of a contest by a person disputing his liability as a contributory and failing, must, except under very special circumstances, be paid by such contributory: see Gower's case. There is no reason why the ordinary rule that a party failing must pay the costs, should not apply in this class of cases. I have heard counsel for the liquidator and the attorney for the contributory on the question of costs. No special circumstances have been pointed out to warrant a departure from the ordinary rule. The contributory must pay the costs of the liquidator when taxed as between party and party. Costs to include costs of instructions. Counsel certified. The cost of the liquidator as between attorney and client to come out of the assets of the company in his hands. In the event of the liquidator being unable to recover the party and party costs from the contributory, the same also to come out of the assets in his hands.