[1948] 18 COMP. CAS. 215 (BOM.)
HIGH COURT OF
v.
Kumar
Shree Narendrasinghji
BHAGWATI, J.
MARCH 22, 1948
Parpia, for the Plaintiffs.
S.
T. Desai, for the Defendant.
The
plaintiffs have filed this suit against the defendant who had been a director
of the plaintiffs from the date of their incorporation up to 30th October,
1942, to recover from him the sum of Rs. 5,000, being the amount payable by him
to them for 500 qualification shares together with interest thereon at the rate
of 9 per cent. per annum from 28th October, 1943.
On
or about 11th July, 1941, the defendant consented to act as a director of the
plaintiffs and also agreed to take from the plaintiffs and pay for 500 shares
of Rs. 10 each, being the number of qualification shares prescribed for the
purpose of holding the office of the director of the plaintiffs. A statement in
lieu of prospectus was signed by the defendant on nth September, 1941. This
agreement by the defendant to take 500 shares from the plaintiffs was treated
by the plaintiffs as an application for the shares and was given a number,
being No. 4, shown in their book containing application for and allotment of
shares. The defendant acted as a director of the. plaintiffs and attended
several meetings in July 1941, and he was paid Rs. 50 each on two occasions,
11th July, 1941, and 17th July, 1941. There were other meetings which he
attended both in 1941 and in 1942, but owing to the adverse financial
circumstances of the plaintiff's no fees were charged by or paid to any of the
directors who attended the several meetings. On 15th June, 1942, the Board of
Directors of the plaintiffs passed a resolution saying that "the
director's 500 ordinary qualification shares applied for by the defendant be
and are hereby allotted to him" and intimation of the said allotment was
given by the plaintiffs to the defendant by their letter dated 22nd June, 1942.
The resolution of allotment was in the ordinary course entered into the minute
book of the proceedings of the meetings of the Board of Directors. On receiving
this letter dated 22nd June, 1942, from the plaintiff, the defendant wrote a
personal letter to Borkar a partner of the managing agents firm of the
plaintiffs and also wrote another letter on the same day to Borkar and Co., the
managing agents of the plaintiffs, enclosing a copy of the letter which he had
personally addressed to Borkar and intimating to them that he was prepared to
resign his directorship if they so desired and asking them to cancel the
resolution of 15th June, 1942, whereby the shares had been allotted to him and
put the matter right. The contents of the letter which he addressed to Borkar
personally are not before me but presumably they put on record what has been
urged by him in para. 2 of his written statement herein contending that he had
merely given his formal consent to act as a director and also agreed to take up
the qualification shares on the strength of certain representations made by
Borkar to him. These representations do not matter. They were made by Borkar
personally and they do not affect the plaintiffs. Even though these allegations
were set out in para. 2 of the written statement, no issue was raised in
respect of the same and the only importance of this being adverted to by me is
that on 16th July, 1942, he raised a protest for whatever it was worth against the
plaintiffs having allotted to him the 500 qualification shares in the manner
they did on 1.5th June, 1942, and asked them to cancel the said resolution and
put: the matter right. Evidently in consequence of this communication which the
defendant addressed to Borkar and Co., the managing agents of the
plaintiffs, the Board of Directors of the plaintiffs cancelled the said
resolution dated 15th June, 1942, as appears from the scoring in the part of
the minutes of the proceedings of the Board of Directors dated 15th June, 1942,
appertaining to this resolution and the initials of the Chairman of the Board
of Directors, Jamnadas Madhavji Mehta, as against the same. The position,
therefore, which obtained towards the end of July, 1942, was that an allotment
of these 500 shares had been made by the plaintiffs to the defendant and that
allotment was cancelled, for whatever reasons there may have been, by scoring
through the minutes of that resolution in the minute book of the proceeding' of
the Board of Directors. In the return of allotment of shares submitted by the
plaintiffs to the Registrar of Companies as of 30th October, 1943, the
defendant was therefore not shown as a holder of any shares of the plaintiffs.
It was only when we come to 16th January, 1943, that we find another resolution
passed by the Board of Directors of the plaintiffs that "500 ordinary
shares of the face value of Rs. 5,000 are hereby allotted to the defendant and
that allotment notice should be given to him." This was the allotment
which was followed by a letter of allotment bearing No. 10 dated 19th January,
1943, whereby intimation of the allotment was given by the plaintiffs to the
defendant. In the summary of share capital as of 19th January, 1943, which was
filed by the plaintiffs with the Registrar of Companies the defendant was shown
as a holder of 500 shares though, he having retired with effect from 30th
October, 1942, as a director his name was not mentioned as one of the
directors. After this letter of 19th January, 1943, was received by the
defendant he carried on correspondence beginning with the letter dated 2nd
February, 1943, in the course of which his attorneys asked for and were given
inspection of the relevant documents in the custody of the plaintiffs. Nothing
further transpired until we come again to 13th September, 1943, when the
defendant not having paid the sum of Rs. 5,000 being the price of the 500
shares, a notice was addressed by the plaintiffs to the defendant stating that
although the said shares had been allotted to him and the letter of allotment
No, 10 had been forwarded to him on 19th January, 1943, he had not paid Rs.
5,000 and that in default of the defendant paying the said sum of Rs. 5,000 to
the plaintiffs within 15 days from the receipt thereof the shares allotted to
him would be forfeited without any further reference. The defendant failed to
pay the said sum of Rs. 5,000, with the result that the Board of Directors of
the plaintiffs passed on 28th October, 1943, a resolution that "the shares
allotted to the defendant be and are hereby forfeited." On 23rd November,
1943, the plaintiffs gave intimation to
the defendant that they had forfeited the shares which had been allotted to him
and claimed a sum of Rs. 5,000 with interest thereon at 9 per cent. per annum
from the defendant. The defendant did not pay the sum as demanded and in the
result the plaintiffs filed this suit against him.
Though the defences as regards the misrepresentations by Borkar and as regards the allotment of the said shares to the defendant on date 16th January, 1943, contravening the provisions of Section 101 of the Companies Act were taken up in the written statement, no issue was raised as regards the first of these defences and even though an issue was raised in regard to the second of these defences, that issue was not pressed at the trial before me. The whole argument before me has proceeded on the basis that the forfeiture dated 28th October, 1943, was invalid and that therefore no liability arose under Article 34 of the Articles of Association of the plaintiffs which would give the plaintiffs a cause of action against the defendant, that the allotment dated the 15th June, 1942, was bad in so far as it was not within a reasonable time of the application or offer in respect of these 500 qualification shares, that the allotment dated 15th June, 1942, having been once made it was not open to the plaintiffs to cancel the same, that in any event the allotment dated 16th January, 1943, even though it might have been competent to the plaintiffs to resort to, was again bad on the same grounds as before, that in giving the notice of forfeiture the plaintiffs had relied upon the allotment dated the 16th June, 1943, and the non-payment of the monies by the defendant as a result thereof as the ground for forfeiture of the shares which had been allotted to the defendant and that the allotment being bad, it could not avail the plaintiffs as a handle for the forfeiture, with the result that the forfeiture dated 28th October, 1943, was in any event invalid and could not give rise to a fresh cause of action against the defendant by attracting the operation of Article 43 of the Articles of Association of the plaintiffs. These were the grounds which were urged by counsel for the defendant as discharging the defendant from liability in respect of the price of the shares. It was further urged that in any event by cancelling the allotment dated 15th June, 1942, the plaintiffs had accepted the position which had been taken up by the defendant in his letter dated 16th July, 1942, addressed by him to Messrs. Borkar and Co., the managing agents of the plaintiffs and apart from anything else the defendant was discharged from any liability by reason of that action of the plaintiffs.
Counsel for the plaintiffs possibly realising the force of some of the contentions which were urged by counsel for the defendant adopted quite another line of attack. Even though in the plaint it had been categorically stated that after the agreement to take up the shares had been signed by the defendant and he had acted as a director of the plaintiffs, the plaintiffs had allotted the shares to the defendant and due notice thereof had been given to him and that the plaintiffs had forfeited the said shares as they were entitled to do under the provisions of the Articles and the defendant had become liable to pay the value of the said shares with interest, viz., Rs. 5,000 with interest at 9 per cent. per annum from 28th October, 1943, being the date of forfeiture, he contended that all the averments in regard to the allotment of the shares and the forfeiture thereof were to be treated as having been absolutely unnecessary or superfluous and the only cause of action which could be spelt out of it was the agreement to act as a director and to take up the 500 qualification shares of the plaintiffs. He therefore contended that all the arguments as regards the allotment of 15th June, 1942, not being valid, about the cancellation of the allotment of 15th June, 1942, not being competent to the plaintiffs, about the allotment dated 16th January, 1943, also being invalid, about the notice of forfeiture not being valid by reason of its referring only to the allotment dated 16th January, 1943, and about no cause of action having accrued to the plaintiffs by reason of the said forfeiture, were beside the mark.
These are the rival contentions of the parties which have been agitated before me with considerable force on both the sides. The plaintiffs have been, if not actually on the rocks, almost on the brink of liquidation. They have done no business worth the name and the only asset which they appear to have got is one decree which they have obtained and in respect of which they have not been able to recover anything so far, and the prospects of getting a decree against the defendant, if they succeed in getting one here from me. As a matter of fact after the directors had been paid their fees in respect of the attendances at the two meetings dated nth July, 1941, and 17th July, 1941, the directors either did not claim or were not paid any fees for their attendances at the meetings of the Board of Directors which took place on several occasions both in the year 1941 and the year 1942. These Rs. 5,000 which they expect to recover from the defendant would certainly stand them in good stead and that is why the matter has been very strenuously and exhaustively dealt with by counsel for the plaintiffs.
Counsel for the defendant has equally strenuously fought the matter and pressed the contentions on behalf of his client even though the defence of misrepresentations was not available to him (the defendant) in law. The defendant seems to have been all along nursing a grievance by reason of what Borker is alleged to have represented to him. He actually offered on 16th July, 1942, to cease acting as a director if the plaintiffs so wanted, and pressed for the cancellation of the allotment of the 500 shares to him which the plaintiffs had made on 15th June, 1942, and for the time being it appears that the plaintiffs acquiesced in that position and cancelled that allotment. The circumstances appear, however, to have been beyond the control of the plaintiffs and they seem to have thought better after the disappearance of Borkar from the scene. One Mangaram came into charge and active management of the plaintiffs after the disappearance of Borkar and he seems to have been advised to allot the shares once again to the defendant on 16th January, 1943, and to press forward the claim of the plaintiffs against the defendant for the price of these 500 shares. The defendant naturally resisted this claim owing to what had happened before and that is the reason of the strenuous fight which has been put up on his behalf.
The position in law on forfeiture is quite clear. As is stated in Palmer's Company Law, 17th Edn., page 138, forfeiture of shares prevents prima facie any action by the company for past calls. Once there is forfeiture the only liability which the shareholder would have to pay the monies would arise by reason of the Articles of Association and the articles commonly provide that where a share has been forfeited the member shall be liable for payment of the call with interest, and this creates a new obligation which can be enforced by action at law. A similar article is also to be found in the Articles of Association of the plaintiffs, and it is Article 34. If there was a valid forfeiture of these 500 shares by the plaintiffs a new cause of action would accrue to them by reason of Article 34 which they would be entitled to sustain by filing a suit as they have done here. In order, therefore, to understand whether there was valid forfeiture, we have got to see what was the position as it obtained in this case. It is also clear that forfeiture is treated very strictly by the Courts, and the directors seeking to enforce it must exactly pursue the course of procedure marked out by the articles. A slight irregularity is as fatal as the greatest. Thus if the call, in respect of which the forfeiture is made, was not validly made or if the notice on which the forfeiture is founded is inaccurate in requiring payment of interest from a wrong date, e.g., the date of the call instead of the date appointed for payment, the forfeiture may be held invalid (See Palmer's Company Law, page 136). It is contended before me by counsel for the defendant that the forfeiture in this case was based on the non-payment by the defendant of the monies due in respect of the allotment of the shares pursuant to the resolution dated 16th January, 1943, a resolution which was both invalid as having been passed by the plaintiffs after the lapse of a reasonable time from the date of the offer by the defendant and also by reason of what had previously happened, viz., the allotment dated 15th June, 1942, and the cancellation thereof. The authorities lay down that an allotment of shares should be made within a reasonable time and the applicant is not bound to accept the allotment after the lapse of a reasonable time: vide Indian Co-operative Navigation and Trading Company, Ltd. v. Padamsey Premji, where it is stated that it is an implied term in an application for shares that the offer must be accepted within a reasonable time, and, if it is not the applicant is entitled to repudiate the allotment. In this case the application, if it can be so called, was made on nth July, 1941, and the allotment was made, according to the case of the plaintiffs, on 16th January, 1943, almost 18 months after the date of the application. It cannot be argued that this lapse of time was not unreasonable and does not bring the allotment within the mischief of these authorities. The further ground which was urged by counsel for the defendant was that once an allotment was made it was not competent to the company to cancel it by any means whatever and that the plaintiffs had first made the allotment on 15th June, 1942, and having made that allotment, it was not within their power to cancel such allotment. The authorities again support this contention of counsel for the defendant: vide Halsbury's Laws of England, Vol. 5, page 256, para. 443 :—
"When an allotment has been made on a binding
contract to take shares, it cannot be cancelled by the company."
and Sircar and Sen on Indian Companies Act, page 288:—
"Once an allotment is made an communicated, the directors have no power to release the shareholder by cancelling the allotment not even on the ground that the shares have been taken under a mistake."
There is, therefore, considerable force in the argument which has been advanced by counsel for the defendant that the allotment dated 15th June, 1942, having been made and communicated to the defendant, it was not competent to the plaintiffs to cancel that allotment. If it was not competent to them to do so, it was much less competent to them to pass a second resolution on 16th June, 1943, allotting the 500 shares to the defendant. If it was not competent to the plaintiffs to do so, that allotment and the non-payment of the monies due thereunder could certainly not be made the foundation of any notice for forfeiture which could be validly addressed by them to the defendant and such invalid notice of forfeiture could certainly not be made the basis of a valid resolution of forfeiture which they purported to pass on 28th October, 1943. These being the steps in the argument it does follow that no fresh cause of action arose to the plaintiffs under Article 34 of the Articles of Association which could be made the basis of the present suit. Even the allotment of 15th June, 1942, was within the mischief of the authorities which I have cited above as being not made within a reasonable time of the application or offer made by the defendant. That also was made on 15th June, 1942, which was almost a year after the date, of the application or offer. That also was not, in my opinion, within a reasonable time and the allotment, if any, made on 15th June, 1942, was, therefore, not competent to the plaintiffs to make. It may be noted in this connection that the defendant immediately repudiated the allotment on the intimation being given to him thereof by his letter dated 16th July, 1942, which he addressed to Messrs. Borkar and Co., the managing agents of the plaintiffs.
The allotment as also the forfeiture being bad, in the manner I have indicated above, the only thing which remains to consider in this connection is what is the effect of the agreement to take up the shares signed by the defendant on nth July, 1941. Does that agreement by itself entitle the plaintiffs to sustain this claim against the defendant ? As I have already stated the cause of action as it has been set out in the plaint is not based merely on this agreement by the defendant to take up the qualification shares. The cause of action is the agreement to take up these shares, the allotment of these shares and the forfeiture thereof on non-payment of the monies due in respect of the shares. It is only as a last resort that counsel for the plaintiffs has been driven to this line of attack as I have already stated. Let us, therefore, consider how far this contention of the plaintiffs can be substantiated.
In connection with this argument of his, counsel for the plaintiffs relied upon several authorities consisting of decisions of the Courts in England. The first three authorities which he cited were Anglo-Austrian Printing and Publishing Union, In re; Isaac's case, R. Bolton & Co., In re and Portuguese Consolidated Copper Mines Ltd., In re; ex parte Inchiquin (Lord). All these were, however, cases in winding-up and apart from anything else these cases turned on the construction of Section 23 of the English Companies Act whereby merely on an agreement the director was held liable to be put on the list of contributories. These authorities, therefore, do not furnish any guide to me. The two other authorities which he cited were, however, more to the point. They were Salton v. New Beeston Cycle Company and Molineaux v. London Birmingham and Manchester Insurance Co. Ltd. In Salton v. New Beeston Cycle Company the question which arose was the right of the assignee from the director to recover the amount of remuneration due to him under the Agreement with the company and the company's right of set-off against that remuneration in respect of the monies payable by the director in respect of certain qualification shares which he had agreed to purchase. Cozens-Hardy, J., applied his mind mainly to the question of the assignee's right to remuneration on stepping into the shoes of the director who had a right to receive the remuneration. It was only at the end of the judgment that the learned Judge stated that he thought that the company was entitled to the set-off as against the plaintiff in respect of £250 due from the director to the company for the shares which he had been liable to take and pay for since the relevant date. This judgment, therefore, even though it does express an opinion of a Judge of the eminence of Cozens-Hardy, J., does not help me in the decision of the question before me. When one goes, however, to Molineaux v. London Birmingham and Manchester Insurance Co. Ltd. the position is more in favour of the plaintiffs. In that case after the plaintiff had acted a as director he had purported to resign his office as a director and had contended that he not having acquired the qualification shares within a reasonable time of his having signed the letter of consent and agreement he was free from liability for payment. Cozens-Hardy, L. J., discounted that contention of his and observed that the plaintiff was bound to have acquired his qualification shares before signing the prospectus, that that was a statutory duty imposed upon him as a director and that his name having been duly placed on the register of shareholder in respect of the said shares he was bound to pay for the same. The judgment of Cozens-Hardy, L. J., 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 the 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."
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 Edition, at page 87. So every person who comes under the category of members under Section 25 (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 on 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 page 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."
I have therefore got to consider what is the position of the defendant having regard to the provisions of Section 30(2), Companies Act. The position in England and India is, as I have observed, the same, viz., an entry in the register of members is made a condition precedent to membership. In the present case before me there is no doubt that by subscribing the letter of consent and also the agreement to take up these qualification shares on nth July, 1941, an agreement had come into existence as contemplated by Section 30(2). The defendant had agreed to become a member of the company. It does not avail the defendant to say that the plaintiffs had not accepted his offer for application for the shares. If it had been the case of an ordinary shareholder, that defence would have availed him because as I have already observed the allotment was not within a reasonable time of the application. Here, however, the case is not that of an application of the defendant to take up the shares of the plaintiffs. It is an agreement which he signed to become a member of the plaintiffs. Even though the plaintiffs in their wisdom passed the resolutions, one on 15th June, 1942, and the other on 16th January, 1948, allotting these 500 shares to the defendant that allotment was not a necessary condition precedent to the defendant being held liable in respect of the price of these qualification shares. He was bound to pay for them, he having agreed to become a member, provided all the conditions laid down in Section 30(2) were satisfied. He was not absolved from liability merely by saying that he was not willing to become a member and had sent a letter requesting the plaintiffs to cancel the resolution of allotment of shares to him. What, however, is in favour of the defendant is that he had not been entered in the register of members in accordance with the provisions of law in that behalf. Even discounting the fact that the plaintiffs treated his agreement to take qualification shares of the plaintiffs as an application for shares by him, and proceeded to allot the shares as on an application for shares by him, the fact remains that in the two documents which have been principally relied upon by the counsel for the plaintiffs and have been exhibited before me no specific shares have been noted against the name of the defendant as having been held by or allotted to him. If one sees the relevant provisions of the Indian Companies Act which are mandatory, they provide as under:—
Section 28 which lays down the nature of shares enacts in subsection (2) that:—
"Each share in a company having a share capital
shall be distinguished by its appropriate number."
Section 29 which talks of the certificate of shares or stock lays down that:—
"A certificate, under the common seal of the company, specifying any shares or stock held by any member, shall be prima facie evidence of the title of the member to the shares or stock therein specified."
One could not issue a certificate of shares in respect of a share merely in general. It must be a share distinguished by its appropriate number as provided in Section 28 (2). A person cannot be a member under Section 30 (2) unless and until, even though he has agreed to become a member of a company, his name is entered in the register of members. How the name is to be entered in the register of members is laid down in Section 31 which says:—
"(1) Every company shall keep in one or more books a register of its members, and enter therein the following particulars:—
(i) the names and addresses, and occupations, if any, of the members and, in the case of a company having a share capital, a statement of the shares held by each member, distinguishing each share by its number,"
and the number cannot be merely 1 share or 500 shares but the specific number which is an appropriate and a distinguishing number as laid down in Section 28(2). It was, therefore, having regard to these provisions of the Indian Companies Act, incumbent on the plaintiffs both in what they called the application for and allotment of shares and also what they called the register of members and the share ledger to give distinctive numbers of shares allotted by them to the defendant. If one sees Ex. D-1 which is the application for and allotment of shares the application of the defendant is numbered as No. 4, the number of allotment of shares is No. 10, the number of shares applied for is 500 and I wonder how those in charge of the management of the plaintiffs got this brain wave to treat the agreement to take the qualification shares as meaning that he had applied for the shares to be issued to him and the distinctive numbers of shares allotted from blank to blank are again blank. The entries in the further columns do not help the plaintiffs at all. When one goes to Ex. D-2 which is the register of members and the share-ledger there also the position is similar. The number of allotment is mentioned as No. 10, number of shares allotted is 500 and when one sees the distinctive numbers, again, they are blank and as vague as vague can be. I cannot understand the argument that merely because the plaintiffs stated that they had allotted 500 shares, 500 specific shares came to be allotted to the defendant. No doubt it is unnecessary in the resolution allotting these shares and also in the letter of allotment to say that particular shares bearing numbers so and so are allotted to the defendant. But when it comes to the making of an entry in the register of members in order that liability may attach as on a compliance with the mandatory provisions of Section 30(2), one does expect that the distinctive numbers of these shares purporting to have been allotted by the plaintiffs to the defendant should have been mentioned there. If one has regard to the other entries which are made in the book containing these exhibits, Exs. D-1 and D-2, viz., the application for and the allotment of shares and the register of shareholders and share-ledger, one finds distinctive numbers as against each and every one except the defendant in whose case no such distinctive numbers of shares have ever been given by the plaintiffs.
Under these circumstances, I have come to the conclusion that the defendant did not become a member of the company in respect of these 500 shares. Even though he had agreed to take up these shares by reason of the agreement which he had signed on nth July, 1941, the condition precedent to membership which is laid down in Section 30 (2), viz., that his name was to be registered in the register of members, was not satisfied as required by Section 31(1), clause (i). That being the position, there was no liability on the defendant, as the matter stood at all relevant and material times, to pay any monies alleged to be due in respect of these 500 qualification shares.
Even though that is not the frame of the suit, I may consider one further aspect of the question, viz., that there having been merely an agreement to take these qualification shares it would have been open to the plaintiffs to file a suit for specific performance of that agreement as against the defendant, and thus to claim Rs. 5,000 being the price of these qualification shares which had been agreed to be purchased by the defendant. Unfortunately for the plaintiffs that is not the action before me. But even though I might consider this aspect of the question by stretching the point in favour of the plaintiffs, there are two objections against this. The first is that the plaintiffs have forfeited these shares by their resolution dated 28th October, 1943, and that forfeiture stands till this date. It would not be open to the Court to consider therefore this aspect of the question in favour of the plaintiffs. The second objection is the delay which also is a factor to be considered by the Court. (Vide Palmer's Company Law, 17th Edn.; page 99, "Specific Performance").
"The Court has jurisdiction to decree specific
performance of a contract by a person to take, or by a company to allot,
shares; but the matter is one of judicial discretion."
If this question ever came to be considered by me I would certainly hold against the plaintiffs on the ground of delay. The agreement to take shares was dated nth July, 1941, and even though having regard to the provisions of the Indian Limitation Act an action for specific performance of such an agreement could not be barred at the date of the suit which was filed here on nth May, 1944, I would certainly in the exercise of my discretion, having regard to all the circumstances of this case, refuse to grant any specific performance in favour of the plaintiffs.
On all the grounds above-mentioned, therefore, I have come to the conclusion that the plaintiffs' claim against the defendant fails and that the suit should therefore be dismissed with costs. I accordingly dismiss the suit with costs. Costs fixed at Rs. 1,500.
[1996] 96 COMP.
CAS. 597 (SC)
v.
A.K. Menon
G.P. PATTANAIK AND
S. RAJENDRA BABU, JJ.
APRIL 6,1999
M.D. Adhar and Ejaz for the Appellant.
A. Subba Rao, Y.P. Mahajan and P. Parameshwaran for the Respondent.
The judgment of the court was delivered by
S.
Rajendra Babu, J.—The second
respondent was notified under section 5(2) of the
It was brought out in the proceedings before the
Thus, on the basis of these circumstances and certain other attendant circumstances, the Special Court came to the conclusion that there was no allotment of shares and it is not now open to the appellant to make such an allotment of shares and, therefore, it directed the repayment of the sum of Rs. 20 lakhs with interest. Alternatively, the Special Court held that the sale/purchase of shares was on a "buy-back basis" and it was only an arrangement for financing and even on that basis the price must be the original price plus some amount for interest at a reasonable rate and that must be repaid. In conclusion, the Special Court directed the appellant to pay the Custodian for and on behalf of the second respondent a sum of Rs. 20 lakhs together with interest thereon at 18 per cent. per annum from November 13, 1991, till payment.
Challenging this order several grounds have been raised in the appeal but at the time of hearing only two contentions are put forth before us by learned counsel for the appellant. In the first place, he contended that the Special Court had no jurisdiction to entertain the application of respondent No. 1, the Custodian, since the matter did not relate to any offence contemplated under section 3 of the Act. Learned counsel drew our attention to the scheme of the Act to impress upon us that the Special Court does not have any jurisdiction to entertain an application for a declaration to the effect that a sum of Rs. 20 lakhs in question belongs to the second respondent. Section 7 of the Act provides for the jurisdiction of the Special Court in respect of transactions for any offence referred to in section 5(2) of the Act and bars the jurisdiction of any other court. If the matter had stood thus, the contention put forth on behalf of the appellant perhaps needed further examination. Now after the insertion of section 9A with effect from January 25, 1994, the Special Court exercises the jurisdiction of a civil court in relation to any matter or claim "(a) relating to any property standing attached under section 3(3) of the Act, and (b) arising out of transactions in securities entered into after the first day of April, 1991, and on or before the June 6, 1992, in which a person is notified under section 3(2) is involved as a party, broker, intermediary or in other manner". Sub-section (3) of section 9A bars the jurisdiction of other courts in respect of these matters. Therefore, the Special Court is the only court which can inquire into and deal with the matters of this nature where the transaction covered by section 9A or property standing attached under section 3(3) is involved and, therefore, we think the first contention urged on behalf of the appellant is plainly misconceived and stands rejected.
The second contention put forth on behalf of the appellant is that the shares are granted and, therefore, on the allotment of shares the money does not belong to respondent No. 2 but to the appellant. In the narration of facts made earlier while referring to the proceedings in the Special Court out of which this appeal arises we have stated the various circum-stances taken note of by the Special Court in not accepting that there had been any allotment of shares. A few of these circumstances are firstly, there can be no allotment of shares to unknown persons ; secondly, allotment can be made to a person who becomes a member of the company when an application is made to that effect, and thirdly, no application made to the company by the second respondent in that regard was forthcoming. Cloud of doubts was cast upon the entries in the register of members and the distinctive numbers of the shares and, therefore, the finding of fact recorded by the Special Court that there had been no allotment at all and it was sought to be made only after the second respondent was notified under the Act to avoid payment of money of a sum of Rs. 20 lakhs cannot be seriously disputed. We find no good reason to interfere with the said finding and the second contention urged also stands rejected.
The Special Court was also justified in noticing that the transaction between the parties was really a financial arrangement with the "buy-back agreement" and even on that basis a sum of Rs. 20 lakhs with interest can be ordered to be paid to the Custodian. We cannot take any exception to this view either.
In as much as the appellant has failed in both these contentions, there is no merit in the appeal and the same shall stand dismissed.
[1977] 47 COMP. CAS. 151 (GUJ)
HIGH COURT OF
v.
Laxmidas Lallubhai Patel
D.A.
DESAI J.
COMPANY PETITION NO. 36 OF 1975 WITH COMPANY APPLICATION
NO. 28 OF 1975
JUNE
26, 1975
B.R. Shah for the Petitioners.
R.H.
Mehta and R.M. Christie for the Respondent.
G.N.
Shah for the Company.
D.A.
Desai J.—Petitioners,
four in number, through their constituted attorney, have filed this composite
petition for reliefs under section 155 and sections 397 and 398 of the
Companies Act, 1956. Petitioner No. 2 is the wife of petitioner No. 1 and
petitioner No. 4 is the wife of petitioner No. 3. Petitioners Nos. 1 and 2
jointly hold 75 shares in Vihar Cine Private Ltd. (hereinafter referred to as
the "company"). Petitioners Nos. 3 and 4 jointly hold 100 shares in
the same company. One Mr. Niranjan Nageshwar Vyas and his wife, Mrs. Kusumban
N. Vyas, jointly hold 53 shares in the same company. One Mr. Ashokbhai Ramanlal
Patel holds 99 shares of the said company.
The company was
incorporated as a private company on 29th March, 1967. The company was formed
for the principal object of constructing a cinema theatre and to carry on
business of cinematograph, film producers, exhibitors, distributors, etc. The
initial authorised capital of the company was Rs. 5 lakhs divided into 500
equity shares of Rs. 1,000 each. But, subsequently, by a resolution dated June
23, 1970, the authorised capital of the company was increased from Rs. 5 lakhs
to Rs. 10 lakhs divided into 1,000 equity shares of Rs. 1,000 each. The issued,
subscribed and paid up capital was Rs. 9,88,000 consisting of 988 shares of Rs.
1,000 each fully paid up. The company erected a cinema theatre named as Vihar
Cinema on
At all material times,
respondent No. 4, Ravjibhai Varadhbhai Patel, was the managing director and
respondents Nos. 1, 3, 5 and 6 were the directors. Petitioner No. 1 and one Mr.
N.N. Vyas also became directors of the company from January 1, 1971. It is alleged
that respondents Nos. 4 and 5 were in active management of the affairs of the
company. It appears that the business of the company was running in a loss. The
company had borrowed loans from the Gujarat Industries Investment Corporation,
as well as deposits from the friends and relations of the directors and from
the public. There were miscellaneous loans and advances to the tune of Rs. 8
lakhs. The company was thus faced with heavy weather on the financial front. It
is alleged that as the company needed substantial finances to come out of the
financial crisis, the company approached Messrs. Manubhai and Brothers, the
lessee of the theatre at the relevant time, and who were also incidentally
carrying on business of shroffs and money-lenders, for financial assistance.
Messrs. Manubhai and Brothers showed their willingness to provide finance, if
the control of the company should substantially remain in the hands of
respondent No. 4, in whom Messrs. Manubhai and Brothers had immense confidence.
Pursuant to this arrangement, it was alleged that it was agreed between the
constituted attorney of the petitioners and respondents Nos. 4, 5 and 6 that
petitioners Nos. 1 and 3, respondents Nos. 5 and 6, Mr. N.N. Vyas and Mr. A.R.
Patel, should execute blank transfer forms in respect of their respective
shares and they should hand them over to respondent No. 4, and, if necessary,
the shares respectively held by the aforementioned persons should be nominally
entered in the name of respondent No. 4 to assure Messrs. Manubhai and Brothers
that respondent No. 4 holds the controlling block of shares in the company. And
that pursuant to this arrangement, the constituted attorney of the petitioners
Nos. 1 and 3, and respondents Nos. 5 and 6 and Mr. N.N. Vyas and Mr. A.R. Patel
executed blank transfer forms in respect of the shares respectively held by
them and handed them over to respondent No. 4. The petitioners allege that on
the strength of the blank transfer forms handed over to respondent No. 4, 424
shares standing in the name of the petitioners, respondent No. 6 and his wife,
Mrs. Shardaben P. Panchal, Mr. A.R. Patel, Mr. N.N. Vyas and his wife, Mrs.
Kusumben N. Vyas, have been entered in the name of respondent No. 4.
Petitioners further alleged
that respondent No. 1 initially held 91 shares of the company and respondent
No. 3 who is the daughter of respondent No. 1 held 73 shares and that they were
pressuring respondent No. 4 to return their share capital. Ultimately,
respondent No. 2 who is the son of respondent No. 1, acting as constituted
attorney of respondent No. 1, filed a winding-up petition in the High Court of
Gujarat on 4th March, 1974. It so happened, according to the petitioners, that
respondent No. 4 suffered a stroke of hemiplegia in March, 1974, involving the
right half of his body and he was admitted to Sonal Hospital near Sharda Mandir
Railway Crossing. Subsequently, he was transferred to Harivallabh Nursing Home,
and he was under the treatment of respondent No. 2, son of respondent No. 1.
After some time, respondent No. 4 was transferred to Thakorlal Polio Clinic at
Pritamnagar. It is the allegation of the petitioners that respondent No. 4 is a
relation of respondents Nos. 1 and 2 in that the wife of respondent No. 4 is
the cousin-sister, being maternal uncle's daughter of respondents Nos. 2 and 3,
who in turn are brother and sister, and that taking advantage of the impaired
mental and physical condition of respondent No. 4 and using the family relation
as lever, respondents Nos. 1, 2, 3 and 9 got an irrevocable power-of-attorney
executed by respondent No. 4 in favour of respondent No. 2 and one Mr.
Naranbhai Raghunathdas Patel, brother of respondent No. 8. and that this
power-of-attorney conferred such power on the constituted attorneys as would
enable them to get transferred the shares of respondent No. 4, which at the
relevant time also included the shares of the petitioners, Mr. N.N. Vyas and
Mr. A.R. Patel. Not only this, but it is further alleged by the petitioners
that respondents Nos. 1, 2 and 3 procured the resignation of respondent No. 4
as also they got transferred the shares held by respondent No. 4 to respondents
Nos. 3 and 8. The petitioners further allege that pursuant to this transfer,
the name of the petitioners, Mr. A.R. Patel and Mr. N.N. Vyas, were removed
from the company's register of members and it is in this background that the
petitioners seek the relief under section 155 for rectification of the register
of members alleging that the name of the petitioners as well as Mr. N.N. Vyas
and Mr. A.R. Patel have been wrongly removed from the register of members.
The petitioners also make
an allegation, complaining of mismanagement, misapplication of the funds of the
company and acts causing oppression to the petitioners and those who consent to
the petition as they are minority shareholders and seek relief under sections
397 and 398 of the Companies Act. It is not necessary to set out those
allegations at this stage.
Simultaneously, the
petitioners also took out judge's summons in Company Application No. 28 of 1975
for interim reliefs.
When Company Petition No.
36 of 1975 came up for admission before J.B. Mehta J., a notice was ordered to
be served upon the company, the respondents and the Central Government. This
was a notice prior to admission calling upon the parties to show cause why the
petition should not be admitted. Simultaneously, in Company Application No. 28
of 1975, notice was ordered to be issued to the respondents and the company and
a very limited ex parte ad interim relief was granted.
Thereafter, the petition
came up for admission before me. Now, I must confess that even though the
petitioners have filed a composite petition seeking relief under section 155
and sections 397 and 398 of the Companies Act, it is surprising that the
company was not initially joined as a party. Subsequently, however, a judge's
summons was taken out seeking permission to join not only the company but four
others and that has been granted. However, respondent No. 8 appeared on behalf of the
company and filed affidavit opposing the admission and granting of any interim
relief.
Mr.
G.N. Shah, learned advocate who appeared on behalf of the company, seriously
contended that a composite petition under section 155 and sections 397 and 398
would not lie because relief under sections 397 and 398 is available to a
member of the company whose membership is not in dispute. It was alleged that
the petitioners themselves admit for the present that their names are removed,
albeit wrongly, from the register of members and that till the register is
rectified, the petitioners are not the members and they could not maintain the
petition for relief under sections 397 and 398 in view of the provisions
contained in section 399(1).
Section
41(2) provides that every person other than the subscriber of the memorandum of
a company, 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.
Section 399(1) provides that the members shown in sub-clauses (a) and (b) of a
company shall have a right to apply under sections 397 and 398. Section 155
relevant for the purpose reads as under:
"155.
(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 there from, or
(b) default is made, or unnecessary delay
takes place, in entering on the register the fact of any person having become,
or ceased to be a member;
the person aggrieved,
or any member of the company, or the company, may apply to the court for
rectification of the register.
(2) The court
may either reject the application or order rectification of the register ; and,
in the latter case, may direct the company to pay the damages, if any,
sustained by any party aggrieved.
In either case, the court in its discretion may make such
order as to costs as it thinks fit.
(3)
On an application under this
section, the court—
(a) may decide any question relating to
the title of any person who is a party to the application to have his name
entered in or omitted from the register, whether the question arises between
members or alleged members, 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...".
Prima facie, reading these
sections together, it becomes clear that in order to acquire the status of a
member of a company, name of the person seeking to be a member must be entered
in the register of members, and only then he acquires the status of a member of
a company. It is obligatory upon the company to maintain a register of its
members. Now, if a person claims to be a member of the company, and either his
name is not entered in the register, or having been once entered in the
register, is, without sufficient cause, omitted therefrom, then the person
aggrieved or any member of the company or the company may apply to the court
for rectification of the register. Such an application can be made, either by a
person aggrieved, or by any other member of the company, or company itself for
rectification of the register under section 155. In such an application, the
court will have the power to 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 the members or
alleged members or between members or alleged members on the one hand and the
company on the other hand. And the court will generally have power to decide
any question, which it is necessary or expedient to decide, in connection with the
application for rectification. Section 155 thus provides a summary remedy to a
person who complains that his name has not been entered or has been wrongly
omitted. It also enables the member to complain and seek rectification in
respect of the name either wrongly entered or wrongly omitted in respect of
some other person. It is true that when complicated question of title arises,
it would be open to the company court to direct the parties to a civil suit to
establish their title. But it would equally be open to the court having
jurisdiction under the Companies Act to decide the question of title to a
share, in order to ascertain, whether the person claiming to be a member is in
fact a member or not and whether his name has been rightly entered or wrongly
omitted. But till the name is entered, it could not be said that he can enjoy
the powers of a member conferred by the Companies Act on the members of a
company.
Now, section 399(1)
provides that members, set out in clauses (a) and (b) of sub-section (1) thereof,
alone have a right to apply under sections 397 and 398. Apart from the
qualifying number for eligibility to maintain a petition, those who invoke
court's jurisdiction, must indisputably be the members of the company and this
is very natural because section 397(1) provides that any member of a company
who complains that the affairs of a company are being conducted in a manner
prejudicial to public interest or in any manner oppressive to any member or
members, may apply to the court. One can thus complain of oppression or conduct
prejudicial to public interest, if he is a member of the company. Similarly,
section 398(1) provides that a member of a company, complaining of things set
out in the section, may apply for relief to the court, and it is absolutely
well-settled that for relief under sections 397 and 398, the oppression
complained of must be in the capacity of members. The language of sections 397
and 398 leaves no room for doubt that the oppression complained of must not
only be complained of by a member of the company, but oppression must be of
some part of the members (including himself) in their capacity or his capacity
as members or member of a company as such (vide In re H.R. Harmer Ltd. [1958] 3
All ER 689; [1959] 29 Comp Cas 305 (CA). Therefore, it is crystal clear that
complaint must come forth from a member and it must be a complaint to be made
to the court by a member. The prerequisite for invoking jurisdiction under
sections 397 and 398, which has been statutorily provided for in section
399(1), is that the complaint must come forth from a member. One has to be a
member before he can complain of oppression as a member of the company.
Now, if the petitioner's
title to the membership is in dispute, and he has to seek relief under section
155 for getting his name placed on the register of members to clothe himself
with the rights of a member, it would be improper, till that dispute is
decided, to permit such a person to maintain a petition under sections 397 and
398. If the petitioners' petition under section 155 fails, obviously, they
cannot maintain a petition under sections 397 and 398, because they are not
members. Now, it may be that, in a given case, the petitioners invoking court's
jurisdiction under sections 397 and 398 are in a position to show that even
though their names are not to be found in the register of members of the
company, yet they have such an indisputable and unchallengeable title to the
membership of the company that court may entertain a petition at their
instance. But, in the facts of this case, the petitioners themselves admit that
they themselves signed blank transfer forms pursuant to a certain understanding
with the respondent No. 4 and that respondent Nos. 1, 2, 3 and 8 by a
subterfuge have taken their shares from respondent No. 4. It is true that the
share certificates are with the petitioners and their associates. But the fact
remains that as the record stands today the shares of the petitioners and their
associates were transferred from their names to the name of respondent No. 4
and respondent No. 4, in turn, transferred the shares through his constituted
attorneys to respondent Nos. 3 and 8. Now, the petitioners will have to satisfy
the court that they have not lost their membership, despite the fact that their
shares have been transferred to the name of respondent No. 4 in the first
instance, and then to the names of respondents Nos. 3 and 8. That question is
yet to be decided. It would be, therefore, premature at this stage to admit the
petition under sections 397 and 398 at the instance of such petitioners.
But
there are other handicaps in the way of the petitioners. Peti-titioners Nos. 1
and 3 are non-resident Indians and petitioners Nos. 2 and 4 are-respectively
the wives of petitioners Nos. 1 and 3. It is not in dispute that they are
non-resident Indians. Section 29(4)(a) for the Foreign Exchange Regulation Act,
1973, reads as under :
"29.(4)(a) Where
at the commencement of this Act any person or company (including its branch)
referred to in sub-section (1) holds any shares in India of any company
referred to in clause (b) of that sub-section, then, such person or company
(including its branch) shall not be entitled to continue to hold such shares
unless before the expiry of a period of six months from such commencement or
such further period as the Reserve Bank may allow in this behalf such person or
company (including its branch) has made an application to the Reserve Bank in
such form and containing such particulars as may be specified by the Reserve
Bank for permission to continue to hold such shares".
Now,
apart from anything else, these petitioners who are non-resident Indians, have
been holding the shares in India of a company which is specifically covered by
clause (a) of sub-section (1)of section 29, and, therefore, they would not be
entitled to continue to hold such shares unless before expiry of a period of
six months from the commencement of the Act or such further period as the
Reserve Bank may allow in this behalf to continue to hold such shares. The
Foreign Exchange Regulation Act, 1973, came into force on January 1, 1974.
Admittedly, the period of six months has long since expired. It is true that
the petitioners can ask for extension of time for making an application under
section 29(4)(c). That has still not been done. Now, if they are non-resident
Indians, and if they have not been permitted to continue to hold the shares,
they would not be entitled to continue to hold such shares and if they are not
entitled to hold those shares, sub-clause (c) provides the consequence thereof,
namely, the shares will have to be sold off as directed by the Reserve Bank.
Incidentally, in this connection, section 47(1) of the Foreign Exchange
Regulation Act may be referred to, which provides that no person shall enter
into any contract or agreement which would directly or indirectly evade or
avoid in any way the operation of any provision of the Act or of any rule,
direction or order made thereunder. Therefore, sale of shares by the
petitioners to respondent No. 4 may, prima facie, appear to be of doubtful
validity and accordingly respondents Nos. 3 and 8 who claim to have purchased
the same from respondent No. 4 may not acquire any title over those shares. In
any event, the petitioners, for the time being, would not be entitled to
enforce their rights qua the shares unless they obtain permission of the
Reserve Bank because sub-section (2) of section 47 provides that it shall be an
implied term of every contract that anything agreed to be done by any term of that contract which is prohibited to be done by or
under any of the provisions of the Act, except with the permission of the
Central Government or the Reserve Bank, shall not be done unless such
permission is granted. And the permission is still not forthcoming. Undoubtedly,
Mr. B.R. Shah said that the effect of the provisions of the Foreign Exchange
Regulation Act, 1973, would be that the blank transfer forms executed by the
petitioners in favour of the respondent No. 4 would not clothe him with any
title to the shares and, therefore, he would not be able to transfer valid
title to respondents Nos. 1, 3 and 8 in respect of the shares of the
petitioners and that, therefore, according to Mr. B.R. Shah, the petitioners
would continue to hold these shares. It may be so, but let it not be forgotten
that the petitioners themselves being non-resident Indians, they cannot
continue to hold the shares without obtaining the permission of the Reserve
Bank of India, which they have till now not obtained as required by section 29(4)(a)
and that it would be a serious question to be decided whether they can enforce
any right conferred by the shares, their title to which is impaired because
they have not obtained the permission.
In this connection Mr. G.N.
Shah referred to Mahendra Kumar Jain v. Federal Chemical Works Ltd. [1965] 35
Comp Cas 651 (All). A petition under section 155 for rectification of register
was not entertained on the ground that there were several disputed questions of
fact, requiring determination, and that the remedy under section 155 being of a
summary nature, it could not be invoked and the petitioner should pursue his
remedy in a civil court. The contention is premature because after the
admission of the petition in the case before the Allahabad High Court, the
respondents appeared and raised serious questions and the issues were framed
and then the court came to the conclusion that the disputed questions of fact
cannot be tried in a summary procedure in an application for rectification of
the membership register under section 155. The contesting respondents in the
case before me have still not filed their affidavit and we do not know what
contentions they propose to raise. Therefore, this contention cannot be
entertained at this stage. Another case relied upon was Ved Prakush v. Iron
Traders (Private) Ltd. [1961] 31 Com,p Cas 122 (Punj). In this case, the right
of the petitioners to file a petition under sections 397 and 398 was questioned
on the ground that the petitioners or some of them were not members of the
company. Petition was dismissed because it was found as a fact that the
petitioners' application for rectification of register was already dismissed by
the learned district judge and the petitioners had not filed a suit to
establish their title to the shares in question. Obviously, if the petition for
rectification of register was rejected, those whose names were not to be found
in the register could not be said to be members of the company and, therefore,
they could not maintain a petition under sections 397 and 398 of the Companies
Act. But it does not mean that a composite petition would not lie.
Incidentally, reference was
also made to Stadmed Private Ltd. v. Kshetra Mohan Saha [1969] 39 Comp Cas 741
(Cal), wherein a composite petition under sections 397, 398 and 403 was filed
and the contention raised was that as the petitioners were not members of the
company, they cannot maintain a petition under section 397 and section 398. Two
petitioners, Kshetra Mohan Saha and Satchidananda Sikdar, approached the court
for reliefs under sections 397, 398 and 403. The respondents contested the
petition alleging that as the petitioners were not the members of the company,
they were not entitled to maintain the petition. It was found as a fact that
Satchidanauda Sikdar had established his title to the shares in a civil suit
filed by him, though, pursuant to the decree in the suit, the register of
members was not rectified by the company and that, as the decree had become
absolute, it was held that Satchidananda could maintain the petition. In the
case of Kshetra Mohan, it was found that he had not paid the call on shares
and, therefore, in view of the provision contained in section 399(1)(a) he was
not entitled to maintain the petition. The petition was dismissed on the ground
that the number of shares held by the other eligible petitioners were not
sullicient in number and value for maintaining the petition. At any rate, it
becomes further clear from this decision that in order to maintain a petition
under sections 397 and 393, the petitioner has to be a member and if there is a
serious dispute over the title of the petitioners to the shares on the strength
of which he claims membership and if he filed a petition under section 155 for
rectification of the register of members, where his title to the shares can be
adjudicated upon, it would be premature to permit him to maintain a petition
under sections 397 and 398. But this decision is not an authority for the
proposition that a composite petition is not maintainable.
Now, one can conceivably
envisage a case where there may not be a serious dispute as to the title of the
petitioners to the shares of which he claims ownership and yet his name may not
be found in the register of members and incidentally he is required to seek
rectification of the register, he would be perfectly justified in filing a
composite petition under sections 155, 397 and 398. It is not that in all cases
such a composite petition is not maintainable but it would be for the court to
decide whether the petition should be rejected on the ground that it is a
composite petition unworthy of examination, or to admit the petition in part
leaving open the question of admission of the remainder of the petition to a
later date.
In Company Petition No. 6
of 1970 decided on 28th April, 1971 [Navnitlal M. Shah v. Atul Drug House Ltd. [1977] 47 Comp
Cas 136 (Guj)] a question arose whether a
composite petition for winding up or in the alter-native for appropriate relief
under sections 397 and 398 can be filed and whether it would be open to the
court to admit the petition in part. It was held that relief under sections 397
and 398 is alternative to an order for winding up. In that case, reference was
also made to the court practice set up by Chagla C.J. (as he than was) which
reads as under (See Bilasra Joharmal v. Akola Electric Supply Co. P. Ltd.
[1958] 28 Comp Cas 549, 553 Bom)):
"...if a petition is
presented to the court—let us say a petition which is a composite petition, as
in this case—it would be open to the court or to the company judge to dismiss
it summarily and not to admit at all. That would apply both with regard to the
prayer for winding up and with regard to the directions under section 397 and
section 398 Bat the court, may not want to dismiss it summarily and the court
may want it to be admitted at least for the purpose of giving notice to the
company so that the company should be heard. If the company judge takes that
view, at that stage, then we will direct that not only a notice should be given
to the company but also to the Central Government, so that all difficulties
with regard to section 400 would be obviated. It would also lead to this useful
result, that, when the petition conies up before the company judge after it has
been accepted, not only the company will be before the company judge, but also
the Central Government. At that stage, the learned judge will give such
directions as he thinks proper. With regard to winding up, if he wishes to go
further into the matter, he would have the petition advertised as required
under the High Court Rules. If, on the other hand, he thinks that there is no
case for winding up, he may dispose of that part of the petition, and with
regard to sections 397 and 398 he would give such directions as the Companies
Act. provides, as we have just pointed out, after hearing both the company and
the Central Government".
I propose to follow this
practice here too.
Considering all the aspects
of the matter, at this stage, the petition so far as it seeks reliefs under
section 155 should be admitted and the consideration of the petition for the
purpose of admission for reliefs under sections 397 and 398 should be deferred
to a later date and the petition to that extent need not be dismissed. The
allegations made are grave and serious and if the petitioners are qualified to
maintain the petition, it would be necessary for the court to examine these
allegations
Accordingly, I direct that
the petition should be admitted for the relief under section 155 and notice be
issued to the respondents. Parties would be at liberty to move at a later stage
for consideration whether the circumstances have come into existence which
necessitate examining the question of admission or otherwise of petition for
the reliefs under sections 397 and 398. Order accordingly.
Directions on summons in
Company Application No. 28 of 1975.
This company application is
for interim reliefs.
Re : Relief (i).
The petitioners seek inventory of the records of the company
in possession and custody of respondents Nos. 1, 2, 3, 5 and 9 and its
chartered accountants, the officers, servants and agents of the company and
request the court to seize the record and take them into custody. But I think
at this stage it is only necessary to make the complete inventory of the record
of the company in the possession of any of the respondents as well as in the
possession of the company and for this purpose Mr. G.B. Mirani, chartered
accountant, is appointed as officer of the court to make the inventory.
Re : Relief (ii), Alternative relief as well as Relief (iii).
They are not necessary at
this stage and prayer in respect of each of them is rejected.
Re: Relief (iv).
Prayer for restraining respondents
Nos. 7 and 8 to act as directors of the company is rejected, but in order to
keep supervision of the court, Mr. Mirani, chartered accountant, is appointed
as a court officer to attend all meetings of the board of directors and to take
notes and to produce them before the court.
Re: Relief (v).
Respondents Nos. 3 and 8
are restrained from transferring 424 shares which they have acquired from
respondent No. 4 and belonging to the petitioners, respondent No. 6, Mr. N. N.
Vyas, and Mr. A. R. Patel, without obtaining the prior permission of the court.
Re : Relief (vi).
Respondents are restrained
from transferring the immovable property of the company, namely, Vihar Cinema
theatre, and the land on which it stands without obtaining the prior permission
of the court.
Re: Relief (vii).
The petitioners may move at
proper time after inventory is exhibited in the record, for inspection of the
records.
Re : Relief (viii).
Respondents are restrained
from returning the deposits standing in their own names or in the names of the
wife of each of the respondent, son of each of the respondent and any deposit
over Rs. 5,000, without prior permission of the court.
Re : Relief (ix).
The
company, before appointing new directors, must seek orders of the court.
No order as to costs.
Order accordingly.
[1988] 64 Comp. Cas.
93 (Kar.)
High
Court of Karnataka
v.
Bangalore Turf Club Ltd.
K.
A. Swami, J.
January 8, 1988
R.N.
Narasimha Murthy for the Petitioner.
N.
Santhosh and Hegde Naganand Sundaraswamy for the Respondent.
K.A.
Swami J.—In this
petition under article 226 of the Constitution, the petitioner has sought for
the following reliefs:
"The
petitioner, therefore, prays that this
(a) declaring the Order No. FD 50 CRC 86,
Bangalore, dated November 25, 1986 (annexure M), passed by the first respondent
as illegal, unconstitutional and ultra vires the provisions of section 4 of the
Mysore Race Course Licensing Act, 1952;
(b) directing the first respondent not to
enforce the conditions stipulated in order dated November 25, 1986;
(c) declaring that the provisions of
section 8 of the Mysore Race Course Licensing Act, 1952, are void,
unconstitutional and violative of article 14 of the Constitution; and
(c) grant any other reliefs that this
hon'ble Court may deem fit in the circumstances of the case including an order
as to costs in the interests of justice and equity". Annexure-M, as it
stood at the time of filing of the writ petition, was as follows:
"Order
In
exercise of the powers conferred by section 4 of the Mysore Race Course Licensing
Act, 1952 (Karnataka Act 8 of 1952), the Government of Karnataka are pleased to
stipulate the following additional condition to the licences granted to the
Bangalore Turf Club in Forms II and III under the Mysore Race Course Licensing
Rules, 1952, namely:"
"The
licensee shall obtain prior approval of the Government for the appointment or
removal of the Racing Consultant-cum-Senior Stipendiary Steward-cum-Adviser,
Kunigal Stud Farm/cum-Chief Executive Officer and Secretary, Bangalore
Races".
The
order, annexure M, has been subsequently modified by the order bearing No. FD
16 CRC 87, dated August 18, 1987. The modified order reads thus:
"The
licensee shall obtain prior approval of the Government for the appointment or removal
of the Racing Consultant-cum-Senior Stipendiary-cum-Adviser, Kunigal Stud Farm
and Secretary, Bangalore Races".
Consequently,
the following words "cum-Chief Executive Officer" are deleted from
the order. As a result thereof, the main grievance of the petitioner as to the
appointment of Sri M. Arshad Ali Khan as Chief Executive Officer does not
survive.
Several
contentions are raised in the petition and are also urged at the time of
arguments. However, in view of the preliminary objection raised by the learned Advocate-General, it appears that it
is not necessary to refer to the various contentions urged on behalf of the
petitioner.
The preliminary objection
raised on behalf of the State by the learned Advocate-General is that the
petitioner is a member of the club known as "Bangalore Turf Club
Ltd". The club is a company registered under the Companies Act though it
is not having any share capital.
The contention of the
learned Advocate-General is that the impugned order, at the most, can affect
the managerial right of the club about which when the club itself is not
aggrieved, it cannot be held to affect the right of the petitioner as a member
of the club nor can it be held to affect his personal interest involved in the
club.
Sri R. N. Narasimhamurthy,
learned senior counsel appearing for the petitioner, submits that the
petitioner, being a member of the club, is also entitled to elect the managing
committee of the club and as such he is also entitled to see that the powers of
the club are not affected in any manner; that even if the club does not come
forward to challenge the same, as a member of the club, he is entitled to see
that the managerial powers of the club are not affected.
The matter does not appear
to be res integra. The learned Advocate-General has placed reliance in support
of his contention on a decision of the Supreme Court in Daman Singh v. State of
Punjab, AIR 1985 SC 973. In Daman Singh's case, a member of a co-operative
society challenged the amalgamation of the co-operative society. While
considering the same, the Supreme Court observed thus (at page 979):
"The next submission
of learned counsel was that section 13(8), (9) and (10) did not make express
provision for the issue of notice to the members of the concerned co-operative
societies and were, therefore, violative of the principles of natural justice.
He argued that in the absence of any provision, the rules of natural justice
may be read into the provisions and notice to the members of the affected
societies was imperative. Otherwise, he argued, members of one society would be
forced against their will and without being heard to associate themselves with
members of another society. We have no hesitation in rejecting this submission also. Once a person
becomes a member of a co-operative society, he loses his individuality qua the
society and he has no independent rights except those given to him by the
statute and the bye-laws. He must act and speak through the society or rather,
the society alone can act and speak for him qua rights or duties of the society
as a body. So if the statute which authorises
compulsory amalgamation of co-operative societies provides for notice to the
societies concerned, the requirement of natural justice is fully satisfied. The
notice to the society will be deemed as notice to all its members. That is why
section 13(9)(a) provides for the issue of notice to the society and not to
individual members. Section 13(9)(b), however, provides the members also with
an opportunity to be heard if they desire to be heard. Notice to individual
members of a co-operative society, in our opinion, is opposed to the very
status of a co-operative society as a body corporate and is, therefore,
unnecessary. We do not consider it necessary to further elaborate on the matter
except to point out that a member who objects to the proposed amalgamation
within the prescribed time is given, by section 31(11), the option to walk out,
as it were, by withdrawing his share, deposits or loans as the case may
be". (emphasis supplied)
That being the position, a member of the club loses
his individuality qua the club and has no independent rights except those given
to him by the statutes and bye-laws of the club and he must speak through the
club only.
In the instant case, it is not the case of
the petitioner that the impugned order affects his personal interest in the
club nor is the right of the petitioner as a member of the club affected. Only
the authority of the committee of management to appoint the secretary of the
club is affected inasmuch as such an appointment has to take place with the
prior approval of the State Government. The club is not aggrieved by the
impugned order. Therefore, it is not possible to hold that the petitioner is
entitled to maintain this writ petition.
Since the petitoner has no locus standi to
maintain this petition, the other contentions raised in the writ petition need
not be gone into and the same are left open.
For the reasons stated above, the preliminary
objection raised on behalf of the State is upheld and the writ petition is
dismissed.
[1948] 18 Comp Cas 177 (CAL.)
Das, J.
February 20, 1948
A.K. Sarkar for the Applicant.
M.M.
Banerjee and H.N. Sanyal for the Company.
Das, J. — This is an application on the part of Chunilal Murarka who claims to be a member of Murarka Paint and Varnish Works, Limited, (hereinafter called the company) for an order directing the company at the cost of the applicant to supply certified true copies of balance sheets and other document; specified in the summons and to give inspection thereof. The relevant facts are as follows :—
The company was incorporated on the 2nd September, 1921, as a private limited company with an authorised capital of Rs. 5,00,000 divided into 5,00,000 shares of Rs. 10 each, all of which were issued, subscribed and paid up in full. The applicant, who was one of the promoters of the company, was the registered holder of 6,250 fully paid-up ordinary shares and was one of the directors of the company from 1922 up to 1945. Murarka & Sons, Ltd., was and is the Managing Agent of the company.
By an agreement in writing made on the 5th April, 1945, the applicant sold his shares to one Choteylal Murarka upon terms and conditions contained in that agreement. On the allegation that Choteylal Murarka had failed to pay for and take delivery of the said shares in terms of the said agreement the applicant tiled a suit in this Court against Choteylal Murarka for the recovery of the price thereof. That suit, which is being contested by Choteylal Murarka is still pending.
On the 4th July. 1947, the applicant by his attorney asked the company to supply him copies of balance sheets, profit and loss accounts and certain other documents for several years as specified in that letter and offered to pay the usual charges therefor. The company's attorneys referred to the absence of any person in the company's office competent to give them instructions due to the disturbances then prevailing in the city and promised to deal with the letter as soon as the situation would improve. On the 8th August, 1947, a reminder was sent to the company's attorneys. On the 14th August, 1947, the company's attorneys replied stating, inter alia, that they had asked the company to let them have copies of the papers required and that they would forward the same to the applicant's attorney as soon as they would be received. On the 21st August, 1947, the applicant's attorney wrote again stating that the applicant had waited enough for the copies and that if the copies were not given on Monday then next the applicant would take steps in Court. On the 25th August, 1947, the company's attorneys wrote enquiring as to whether the applicant was demanding the copies as a shareholder of the company or otherwise. The applicant's attorney replied the very next day remarking that the enquiry had been obviously made at the instigation of Choteylal Murarka, the defendant in the applicant's suit, and refused to be cross-examined and again threatened to take steps. The company's attorneys on the 12th September, 1947, wrote back repudiating the insinuation as baseless and stating that unless the applicant disclosed the capacity in which he demanded the copies they could not make up their mind as to which of the copies the applicant was entitled to.
The annual vacation of the Court intervened and after the reopening the applicant on the 21st November, 1947, took out the present summons. The affidavit in opposition was affirmed by Sohonlal Murarka, a director of Murarka & Sons, Ltd., the Managing Agent of the company, on the 9th December, 1947. The affidavit in reply was affirmed by the applicant on the 19th December, 1947. A point was taken in the affidavit in reply that Sohanlal Murarka's affidavit had not been verified as required by law and should not be received in evidence. The affidavit of Sohonlal Murarka appears to have been verified and re-affirmed on the 22nd December, 1947. It seems likely that advantage, was taken of the fact that in chamber applications the papers are not filed until it is actually moved before the Judge and the defect is in that affidavit was sought to be rectified apparently without the leave of the Court. This should not have been done without such leave.
In Sohanlal's affidavit it has been denied that the applicant is now a member of the company. It is alleged in that affidavit that the applicant became liable to the company for a large sum of money for which the company claimed a lien on his shares and that it forfeited the shares of the applicant and re-allotted the same to Mohonlal Murarka, in exercise of its rights under regulations 31, 32 and 33 of the articles of association and that the applicant's name was thereupon removed from the register of members and Mohanlal's name was entered therein. A copy of a letter dated the 20th October, 1947, said to have been written by the company to the applicant and Radheylal Murarka setting out the details and particulars of the company's claim against them and calling upon them to pay up the same on or before the 6th November, 1947, and threatening to proceed under regulations 32 and 33 of the articles and a copy of a resolution said to have been passed at a Board meeting alleged to have been held on the nth November, 1947, forfeiting the shares of the applicant and those of Radheylal Murarka and directing their names to be expunged from the register and allotting those shares to Mohonlal Murarka at Rs. 10 per share payable by specified instalments have been annexed to the affidavit of Sohonlal.
In the affidavit in reply the applicant denies that he ever received the letter dated the 20th October, 1947, or that the allegations contained therein are correct at all or that any of the persons (other than those who lived with Sohonlal Murarka) to whom copies of that letter are said to have been sent ever got such copies. He denies that he was or is indebted or liable to the company or that the company had any lien or could properly or at all forfeit the shares or remove his name from the register or that the alleged Board meeting was properly or at all convened or that any resolution was passed validly or at all and he maintains that he is still a member of the company.
This application was adjourned by consent of parties from time to time. In the meantime the company, it. is said, has filed a suit against the applicant and Radheylal Murarka for recovery of its dues, for return of various books and documents said to have been wrongfully removed by them and for other reliefs. I am also told that the applicant on or about the 22nd December, 1947, has filed a suit against the company claiming, in the event of his name having been removed from the register, rectification of the register and, in the event of his name being still on the register, injunction on the company from removing his name, declaration that the alleged claim of lien on his shares is illegal, ultra vires and void, declaration that the alleged resolution dated the nth November, 1947, forfeiting his shares and selling or allotting the same to Mohonlal were and are ultra vires, illegal, fraudulent and void and other incidental reliefs.
Mr. M.N. Banerjee appearing for the company has taken a preliminary objection to the jurisdiction of this Court to entertain this application. In the course of an elaborate and able argument Mr. Banerjee has taken me through a number of sections of the Indian Companies Act imposing fines for offences for non-compliance with the requirements thereof and also authorising the Court to compel compliance therewith and his contention is that on a true construction of the relevant sections the Court having jurisdiction under the Act to try the offences and impose the penalties under those sections is the only Court which is also authorised to enforce compliance with the requirements of those sections. It is necessary, therefore, to examine the provisions of those sections in order to determine the correctness of Mr. Banerjee's contention.
The sections to which Mr. Banerjee has drawn my attention are Sections 31, 31A, 32, 36, 76, 82, 83, 87, 91A, 91C, 117, 123, 124, 125, 131A, 134, 135 and 137. Mr. Banerjee has attempted to classify the sections into several categories. Thus section 117 requires that a company must keep a certain record but does not, by its own terms, make a non-compliance with such requirement an offence or provide for giving inspection or copy of such record to anybody and provision is made in some other section for compelling the giving of inspection or copy and imposing a fine for non-compliance (e.g., Section 124). The common features of Sections 31, 31A and 123 are that each of them requires a company to keep certain records setting forth certain particulars and makes a non-compliance with such requirement an offence punishable with a fine and stops there and make no provisions for compelling the giving of inspection or copy thereof or for imposing a penalty for not giving inspection or copy which provisions are, however, made by some other section (e.g., Sections 36 and 124). Sections 36, 83 and 125 provide for giving both inspection and copy of certain records and for punishment for failure to do so while in Sections 82 and 87 provision is made for giving inspection only and for punishment for not doing so but nothing is said about the giving of copies. Sections 91A and 91C may be grouped together because each of them provides for giving inspection but no penalty is imposed for non-compliance with such provision and nothing is said about compelling such inspection. Sections 83, 91A and 91C have the common feature that in each of them provision is made for giving inspection or copy to the members only while Sections 36, 87 and 124 form another class providing for giving inspection or copy to the members as well as to any other person and Section 125 forms a third class providing for giving inspection to the members and creditors only. This classification of the sections made by Mr. Banerjee with a good deal of industry and care is interesting but leads us nowhere. Such classification shows, if anything, that it is not possible to place the sections in well-defined, self-contained and mutually exclusive categories, for some of the sections fall within more than one of those categories. It is, therefore, not possible to deduce any general principle from such classification and in any event it does not in any way help us in determining the particular Court which has jurisdiction under a particular section to entertain an application for enforcing compliance with the requirements thereof.
Mr. Banerjee next adopts another method or basis and proceeds to classify the section into seven categories :—
(i) Section which provides for furnishing copy hut imposes no penalty for failure and does not provide for compelling compliance, e.g., 135 ;
(ii) Sections which require the company to keep certain records and impose a penalty for contravention, e.g., Sections 91A, 91C and 134;
(iii) Sections which by one and the same sub-section impose a penalty for failure to give inspection or copy as well as authorise the Court to compel the giving of inspection or copy, e.g., Section 36, 124 and 125;
(iv) Sections which by one and the same sub-section impose a penalty for non-compliance with their requirements as well as authorise the Court on an application to compel the company to comply with the same or to relieve the company from the consequences of non-compliance, e.g., Sections 137 and 154;
(v) Sections which by one sub-section impose a penalty for non-compliance with certain requirements but by another sub-section of the same section authorise the Court on an application to enforce compliance therewith, e.g., Sections 76 and 87;
(vi) Sections which by one sub-section imposes a penalty for not giving inspection or copy but by another sub-section of the same section authorizes the Court to compel compliance, e.g., Section 83;
(vii) Sections
which in express terms indicate the particular Court. in which authority to
make certain orders is vested thereby, e.g., Sections 281 &.282 A.
Section 135 may be left out of consideration for that section does not refer to any Court. Sections 91A, 91C and 134 may also be passed over because the relevant sub-sections of those sections which impose the penalty do not in terms refer to any court and it is not possible to determine the Court which is to try those offences by means of construction of those sub-sections alone. It is by regarding those sub-sections with Section278 that we arrive at the conclusion that those offences are to be tried in the manner by the court specified in Section 278. We are thus left with Mr. Banerjee's categories Nos. (iii) to (vii). Can any general principle be deduced from Mr. Banerjee’s classification of the several sections placed in those categories? Is there any special feature in any of the several categories which gives us; an indication as to the Court which is intended to be referred to by the sections grouped in that category? At one stage of his argument Mr. Banerjee propounds the proposition that the expression “the Court” in those sections which authorise the Court to make an order for giving inspection or copy only on an application being made to the Court means, by reason of the provisions of Section 2(3) read with Section 3, the High Court having jurisdiction under the Act, and that the expresstion "the Court" in those sections which do not require any application in order to enable the Court to make an order refer; to the Court which tries the offence, that is to say, the Criminal Court. If this proposition were to be accepted then this Court will have jurisdiction to entertain this application in respect of such of the orders prayed for in the present summons as fall within the sections grouped in categories (iv) and (v), namely, Sections 137, 154, 76 and 87. This obviously does not support Mr. Banerjee's extreme contention that this Court has no jurisdiction at all to entertain any part of this application and, therefore, he drops his first proposition, and propounds the second proposition, namely, that where a section by one and the same sub-section imposes a penalty and also authorises the Court to compel compliance with its requirement there the expression “the Court” means the Criminal Court which tries the offence, but where a section by one sub-section imposes a penalty and by another sub-section empowers the Court to direct the fulfilment of the requirements of the section there the expression "the Court" means the High Court. If this proposition were to be accepted then this Court will have jurisdiction to entertain this application in so far as it prays for orders which come within the sections grouped under categories (v) and (vi), namely, Sections 76, 87 and 83. This also does not help Mr. Banerjee's case. In the end Mr. Banerjee bus to fallback on the ordinary general rule of interpretation, namely, that each section should first be considered by itself and construed according to its own terms. In this I entirely agree with Mr. Banerjee.
The true principle of interpretation of a statute is to give to the words used in it their ordinary natural meaning unless the statute itself gives them any particular or special meaning. In the latter case that particular or special meaning must be given to those words unless there be something repugnant in the subject or context. In this case the Indian Companies Act has by Section 2(3) defined the expression "the Court" as meaning "the. Court having jurisdiction under this Act." Then Section 3 of the Act goes on to say that the Court having jurisdiction under this Act shall be the High Court having jurisdiction in the place at which the registered office of the company is situate or in a case to which the proviso applies the notified District Court. Therefore in ascertaining the meaning of any particular section in which the expression "the Court" is used we have to apply Section 2(3) read with Section 3 and substitute for that compressed expression the words "the High Court having jurisdiction in the place at. which the registered office of the company is situate," unless there be anything repugnant in the subject or context. Is there any difficulty or objection in applying this principle to the section we are considering and reading for the words "the Court" the words I have mentioned? So read the sections first impose a penalty for an offence for contravention of their respective requirements without expressly indicating which Court will try that offence and then authorise the High Court, or the District Court if the proviso applies, to enforce compliance with those requirements. If the offence complained of takes place within the Ordinary Original Civil Jurisdiction of the High Court of any Presidency town the offence is under Section 278, punishable on summary conviction by a Presidency Magistrate of the particular Presidency and if it is committed outside the three Presidency towns the offence is punishable by the appropriate Criminal Court under the Code of Criminal Procedure. In the light of this procedure and reading the words "the Court" in the sense attached to them by Sections 2(3) and 3 the meaning and effect of each of these penal sections are that first it creates an offence and makes it punishable on summary conviction by a Presidency Magistrate if it is committed in a Presidency town or by the appropriate Criminal Court if committed elsewhere and then authorises the High Court having jurisdiction in the place where the registered office of the company is situate, or the notified District Court, as the case may be, to compel compliance with its requirements. Can there by any objection to this interpretation?
Mr. Banerjee contends that "the Court" has been defined by Section 2(3) as meaning the Court having jurisdiction under this Act. Section 3 is not a definition section but only indicates one Court having jurisdiction under the Act. There may be and indeed there is another Court having jurisdiction under the Act, namely, the Criminal Court under Section 278. The Indian Legislature, argues Mr. Banerjee, has borrowed the language of Sections 2(3) and 3 from the corresponding sections of the English Act and at the same time has inserted a new section, being section 278, in our Act which has no place in the English Act. If Section 3 is literally taken to mean that the High Court or the notified District Court is the only Court having jurisdiction under the Act in all matters then it will be in conflict with Section 278, for the Criminal Court exercising jurisdiction under that section must also be a Court having jurisdiction under the Act and, therefore, within the expression "the Court" as defined by Section 2(3) of the Act. Mr. Banerjee argues that Section 3 cannot, therefore, be construed in its literal sense so as to exclude the Criminal Court acting under Section 278 from the category of the Court having jurisdiction under the Act. Mr. Banerjee's contention is that the expression "the Court" in the Litter part of these sections means by reason of the definition in Section 2(3) the Court having jurisdiction under the Act and in the light of this definition there can be no difficulty in reading Use expression "the Court" in those sections as meaning the Criminal Court trying the offence created and made punishable by the earlier part of those sections, for the Criminal Court is also a Court having jurisdiction under the Act. Mr. Banerjee further maintains that if the definition of "the Court" in Section 2(3) must be read with Section 3 then that definition should not be applied to the expression "the Court" in the penal section : because the definition is applicable only if there be nothing repugnant in the subject or context and the subject or the context of the penal sections clearly indicates, and the public convenience requires, that the Court which punishes the offences should also be the Court which is to prevent the repetition of the default which will result in a further offence, for otherwise the aggrieved person will have to prosecute in one Court for the offence actually committed and rush to another Court for preventing future offence of the same kind.
Mr. Banerjee's contention summarised above is based on the major assumption that section 278 of the Act confers jurisdiction on the Criminal Court so as to make it a Court having jurisdiction under the Act. This assumption does not appear to me to be well founded. The first sub-section of Section 278 is negative in form and says that no Court inferior to that of a Presidency Magistrate or a Magistrate of the first class shall try any offence against the Act. This sub-section does not affirmatively purport to confer jurisdiction on any Court. The second sub-section refers to offences declared by the Act to be punishable by fine only and prescribes the manner in which such offences if committed in any of the Presidency towns are to be tried. I do not: read the Bombay Full Bench decision in P.D. Shamdasani v. Sir H.P. Mody as laying down the proposition that Section 278(2) creates or confers jurisdiction in or upon the Presidency Magistrate as contended by Mr. Banerjee. On the other hand, that decision clearly implies that the Presidency Magistrate derives his jurisdiction and powers from the Code of Criminal Procedure but the section has the effect of allowing the Presidency Magistrate to try in a summary manner any offence declared by the Act to be punishable with fine only irrespective of the restrictions of that Code as to the amount of fine. If I were to accede to the contention of Mr. Banerjee that this section gives exclusive jurisdiction to the Presidency Magistrate in respect of offences against the Act which are committed in the Presidency towns and are punishable by fine only then I shall also have to hold that the Act does not give any jurisdiction or power to any Court to punish such offences when committed outside the Presidency towns or to punish offences against the Act wherever committed which are punishable with imprisonment, e.g., under Section 282. How will such offences be tried and by which Court and under what authority? We have, for an answer to the questions, to fall back on the Code of Criminal Procedure. Section 5 of that Code provides that all offences under the Penal Code shall be tried according to the provisions of the Code of Criminal Procedure and all offences under any other law shall be tried according to the same provisions subject to any enactment regulating the manner of trial of such offences. Therefore the Court trying an offence under the Penal Code or under any other law, e.g., the Companies Act, derives its jurisdiction and powers from this section of the Code of Criminal Procedure, The penal sections of the Companies Act do not expressly mention any particular Court which is to try the offences created by them and, therefore, Section 29 of the Code of Criminal Procedure comes into play and such offences are to be tried by the Courts by which such offences are shown in the 8th column of the second schedule to be triable. Section 278(2) of the Companies Act only lays down a special manner of trial of offences against the Act committed within the Presidency towns which are punishable by fine only. The provisions of the Code of Criminal Procedure regulating the manner of trial are, by Section 5 of that Code, expressly made subject to the special manner of trial prescribed by Section 278(2). The Presidency Magistrate is a Court having jurisdiction under the Code of Criminal Procedure and in trying an offence declared by the Companies Act to be punishable by fine only the Magistrate, by reason of Section 5 of that Code, has to adopt the special procedure indicated by Section 278(2) of the Companies Act. The truth is that the penal sections of the Companies Act create offences but do not create or confer jurisdiction in or upon any Court and leaves it to the Code of Criminal Procedure to determine which Court has jurisdiction to try those offences and by Section 278(1) takes away the jurisdiction of Courts inferior to the Presidency Magistrate or Magistrate of the first class in respect of offences under the Companies Act committed in any of the Presidency towns and by sub-section (2) enlarges the powers of the Presidency Magistrate as to the manner of trial for offences which are committed in the Presidency towns and which are declared by that Act to be punishable with fine only. In this view of the matter the Presidency Magistrate adopting the procedure laid down in Section 278(2) cannot properly be said to be the Court having jurisdiction under the Companies Act so as to come within the term "the Court" as defined in Section 2(3) and further explained and elaborated by Section 3 of the Companies Act. This being the true position, as I apprehend it to be, the whole of the assumption on which Mr. Banerjee's argument is founded falls to the ground and his argument cannot be sustained. I see no public inconvenience or mischief in the legislature indicating one Court as the Court to try an offence already committed and another Court to compel compliance with a particular statutory requirement so that a further offence may not be committed. Indeed where the legislature has intended that the same Court which tries a particular offence and passess a sentence should also have the additional power to make any other order it has said so expressly, e. g., in Section 282. In any event the Court can only ascertain the intention of the legislature as expressed in the statute by construing the language used therein and giving the particular words the special meaning assigned to them by the definition section. I see nothing repugnant in the subject or context of any of the penal sections which would exclude the application of the definition of "the Court" to that expression in those sections. In my opinion the words "the Court" in the penal sections we are concerned with in this case mean the High Court having jurisdiction in the place at which the registered office of the company is situate or the notified District Court under the proviso to Section 3 of the Act and consequently this Court has jurisdiction to entertain this application.
Coining to the merits I find that by clause 1 of the summons the applicant prays for certified true copies of various documents, registers and entries set forth in the several sub-clauses (a) to (g) and by clause 2 he claims inspection of those documents, registers and entries. There is no provision in any of the relevant sections of the Act entitling any person to have certified true copies and Mr. Sarkar appearing in support of this application frankly concedes that his client is not entitled to certified copies but will be content with ordinary copies.
In sub-clause (a) the applicant wants copies of balance sheets, profit and loss account, auditor's reports as well as of directors' reports for several years. The directors' report is required to be made out by Section 131A, The other documents mentioned in that clause are dealt with by Section 135 and under that section it is only a member who is entitled to copies thereof. As the directors' report is to be attached to the balance sheet it seems it is available to the members only. Copies of the records referred to in sub-clause (b) is dealt with by Section 83 and those referred to in sub-clause (f) by Section 91C, both of which sections confer rights only on members and not to anybody else. Mr. Banerjee's contention founded on the allegations in the affidavit in opposition is that the applicant is no longer a member of the company, for his shares have been forfeited and sold in exercise of the company's lien and his name has been removed from the register of members and the name of Mohonlal has been put upon the register in respect of those shares. Mr. Sarkar, on the other hand, maintains that on a true construction of the relevant articles, namely, 31, 32 and 33 the company had and has no lien as claimed or at all and in. any case the alleged right of lien was not validly exercised and the alleged forfeiture or sale of those shares was not in purported exercise of power but was in purported assumption of power which did not exist and that in the promises the applicant still continues to be holder of those shares in the eye of the law. The contention is that the story of the alleged lien and the alleged forfeiture or sale has been put up only to defeat the suit filed by the applicant against Choteylal and the claim of lien and the forfeiture and sale are ultra vires, illegal and void. Notwithstanding the persuasive appeal of Mr. Sarkar and the lure of the very interesting arguments bearing on the question of construction of the relevant regulations in the articles which he has advanced so ably I have come to the conclusion that on an application such as this it would not be right for me, in the facts and circumstances of this case and particularly in view of the pendency of the suit filed by the applicant himself against the company and others wherein the self-same questions have been put in issue, to express any opinion thereon which may in any way prejudice, either party in suit. A satisfactory decision of the whole dispute involves a decision on questions of fact, e.g., service of notice of lien and the holding of the meeting and the passing of the resolution and the charge of fraud, besides a decision on the question of construction. As a suit is actually pending in which all these matters will be properly and satisfactorily gone into and decided it is only reasonable that I should not, on a summary application, embark on the same enuity. Rightly or wrongly the company has purported to forfeit and sell or re-allot the shares originally held by the applicant and his name has been removed from the register of members. It may be that the applicant will succeed in his suit and get his name reinstated in the register and it will then be time enough for him to seek to enforce his rights as a member. For the moment his name is not on the register and, therefore, prima facie he is not a member and cannot for the moment claim the rights of a. member. I, therefore, decline to make any order in respect of clauses (a), (b) and (f) and confine myself to those documents in which an outsider is interested under Sections 87, 124, 36 and 32 that is to say, to the documents referred to respectively in clauses (c), (d), (e) and (g) of the summons.
Learned counsel for the company contends that the petitioner was a director of the company from 1922 to 1945 and is familiar with all the records. He may get copies of some of the documents from the Registrar of joint Stock Companies. Even if the petitioner as a member of the public has an abstract right the Court has a discretion implied by the use of the word "may" in the relevant sections and there is no reason why the Court should assist such an unreasonable demand. The relevant sections in their earlier parts give an absolute and unqualified right by using words such as “shall be entitled to a copy" and then impose a penalty for default and then proceed to direct that the Court may compel the company to comply with the particular requirements. This last provision is clearly intended to effectuate the legal right given in the earlier parts of the sections and I agree with Mr. Sarkar that in the permises the enabling word “may” should be read as a compulsory directive as held it Julius v. Bishop of Oxford. I further agree with Mr. Sarkar’s contention based on the authority of the observstions in Buckley’s Company Law, 11th Edn., P. 215, and the decision in Reg. v. Wills and Berks Canal Navigation that if the petitioner has any right under the Act to get copies or inspection, his motive for having it is irrelevant. The crucial question is : has the petitioner any right to get copies of the documents referred to in sub-clauses (c), (d), (e) and (g) of clause 1 of the summons.
Section 87(3) permits certain documents being those mentioned in sub-clause (c) of the summons to be inspected by a member free of charge and by any other person on payment of a fee and by Section 87(5) the Court may direct an immediate inspection thereof. There is no provision for supplying copies. Under Section 124 an outsider can only ask for inspection of the register of mortgages being the document specified in sub-clause (d) and is not entitled to any copy. Section 36 permits a stranger not only to inspect the register of members but also to get a copy as asked for in sub-clause (e). annual list and summary is required by Section 32 to be prepared and kept and under Section 36 and outsider is entitled to inspection on payment of the requisite fee and also to a copy. Thus I find that the prayers of the applicant as an outsider for copies of the document specified in sub-clauses (c) and (d) are not maintainable and must be rejected. I make an order as prayed in sub-clauses (e) and (g) subject to the payment of requisite fees before copies are supplied.
The applicant, however, has asked for
inspection in clause 2 of the summons to which he is, even as a stranger,
entitled under each of the sections. I, therefore, make an order directing the
company to give immediate inspection of the documents and entries referred to
in sub-clauses (c), (d), (e) and (g) on payment of requisite fees if any. For reasons stated in Vakharia v. The Supreme
Genera! Film Exchange Co., Ltd. and the
cases cited therein and particularly in view of the fact that these documents
are open to the inspection of a stranger. I allow the applicant to take
inspection himself or by an agent. As a stranger the agent will be entitled to
inspection in his own right ant, therefore, there can be no objection to an
agent under these sections.
It
is true that the applicant asked for copies to which he is not entitled but he
also asked for inspection and it is fairly clear on the correspondence to which
I have referred that the applicant has been forced to come to Court. No extra
costs have been incurred by reason of the applicant including a claim for
copies. In these circumstances I think it will be right to allow him costs of
this application as of a motion.
Certified
for counsel.
[1985] 58 COMP. CAS. 543 (KER.)
HIGH COURT OF KERALA
v.
P.K. Mohammed P. Ltd.
K. SUKUMARAN, J.
OCTOBER
1, 1982
T.L.
Viswanatha Iyer, P.S. Narayanan, K.S. Menon, S.R. Dayananda Prabhu and N.
Subramanian for the Appellant.
T.S.
Venkiteswara Iyer, P.K. Balasubramanyan, M. Pathrose Mathai, Joseph Vellappally,
M. Kumaran and N.V. Ramachandran for the Respondent.
K.
Sukumaran, J.—Plaintiffs
in O.S. No. 71 of 1971, before the Sub-Court,
The
facts relevant for the two questions pressed before this court in the second
appeal may briefly be stated as follows : The first defendant is a private
limited company incorporated in the year 1953. Its share capital as in 1957,
consisted of 183 fully paid-up shares of Rs. 180 each, 33 shares held by
Kamaludin, 90 shares by P.K. Mohammed and 60 shares by A.S. Sankunny. The
shares of P.K. Mohammed were sold in auction on September 13, 1956. They were
purchased by the second defendant and duly transferred in his name. That the
second defendant is his nephew is an admitted fact. That he was a dependant of
P.K. Mohammed and without any means of his own is the allegation of the
plaintiffs. The transfer of shares, according to them, was, therefore, a sham
transaction. P.K. Mohammed was the real owner of the shares and continued to
receive dividends and other benefits till his death on August 24, 1970,
according to the plaintiffs. The first plaintiff is the adopted daughter of
P.K. Mohammed. On May 15, 1963, P.K. Mohammed wrote a letter Ext. A-1, wherein
he expressed his view that the first plaintiff is to utilise in her individual
capacity the dividend at the rate of 9 annas 4 pies in a rupee, on all the
shares in P.K. Mohammed (P.) Ltd., kept by him in the name of the second
defendant, P.C. Mohammed. The letter was to be retained by Khadija Umma, the
first plaintiff, till the death of P.K. Mohammed and was to be shown to the
second defendant, P.C. Mohammed, if felt necessary. After the death of P.K.
Mohammed, the letter was shown to the second defendant and Ext. A-2 agreement was
executed on October 2, 1970, whereunder the directions of Ext. A-3 are claimed
to have been incorporated. Kanialudin had married the first plaintiff and to
them was born the second plaintiff. Till his death on February 16, 1957,
Kamaludin was living with P.K. Mohammed along with the plaintiffs. It was
averred that neither P.K. Mohammed nor Kamaludin had any necessity to borrow
any amount from the company. In the wake of the death of Kamaludin and the
later demise of Kamaludin's mother, the plaintiffs claimed to have become the
full owners of the shares held by Kamaludin. The demand made by the plaintiffs
after the death of P. K. Mohammed for rectification of the share register of
the company by showing the first plaintiff as the shareholder in respect of 52
1/5 shares out of the 90 shares dealt with under Exts. A-1 and A-2 and of the
33 shares held by Kamaludin, was declined by the company pointing out the sale
in auction of those shares. The plaintiffs alleged that the second plaintiff
was not given notice in relation to the sale proceedings of Kamaludin's 33
shares. Ultimately, the plaintiffs sought a declaration that the first
plaintiff is the owner of 52 1/5 shares and the two plaintiffs together to 33
shares, the former claim grounded on Exts. A-1 and A-2 and the latter on the
contention about the invalidity of sale in auction by the company on September
13, 1958, in purported enforcement of the lien of the company on the shares,
for the debts due to the company from Kamaludin.
The
suit was resisted by the defendants. The contentions are more or less similar.
It was stated that. P.K. Mohammed owed a liability-amounting to Rs. 4,100-12-4
to the company for which his 90 shares had been hypothecated. The company by
resolution dated July 23, 1956, desired to recover the amount by the sale of
the shares. Notice was issued to P.K. Mohammed on July 13, 1956, demanding the
amount. The demand not having been complied with, despite issue of even
subsequent notices on August 22, 1956, and September 10, 1956, the shares were
sold in auction and were consequently transferred in the name of the
auction-purchaser, the second defendant. Similarly, an amount of Rs. 3,559.28
was due from Kamaludin when he died on February 16, 1957. This amount was
resolved to be realised from the legal heirs. Registered notice was issued to
the first plaintiff, she being the widow of the late Kamaludin and the guardian of the second plaintiff. Notice was also
issued to another heir, Ummacha, the mother of Kamaludin. Despite the clear
intimation about the proposal to auction the shares in default of payment of
the dues in respect of which the company had a paramount lien, the amount was
defaulted. The shares were accordingly sold in auction. In the light of these
events, of which, it is contended by the defendants, the plaintiffs had
adequate and due notice, the plaintiffs had no cause of action in relation to
the two sets of shares.
The second defendant raised
an additional contention that it was out of pity for the plaintiff and heeding the
advice of some well-wishers, and taking into consideration the last wish of
P.K. Mohammed that the agreement, Ext. A-2, was executed providing for payment
to the plaintiff of a portion of the income accrued from the shares which were
originally held by P.K. Mohammed. The claim relating to adoption of the
plaintiff as a daughter of P.K. Mohammed was refuted on the ground that such
adoption was unknown to Mohammedan law. It was also contended that the first
plaintiff had not acquired any ownership of the shares under the agreement.
Though the civil court's
jurisdiction to try the suit was contested, the trial court upheld its
jurisdiction to try the same. A plea of limitation raised in the case was also
negatived by the trial court. The plea of misjoinder of cause of action was
also repelled. The trial court also entered the finding in favour of the
plaintiff on issue No. 5 by holding that there were no laches or acquiescence
on the part of the plaintiffs as alleged by the defendants. Inasmuch as these
findings are no longer under challenge, it is not necessary to deal with those
matters in detail in this judgment.
The matters covered by the
two questions raised in the second appeal have been discussed while considering
issues Nos. 4, 6 and 7. It was held that the sale in relation to the shares of
P.K. Mohammed was not sham. On the question whether the transfer of the shares
in the name of P.C. Mohammed even during the lifetime of P.K. Mohammed was
benami, the trial court referred to the ingredients of a benami and the heavy
burden on the plaintiffs to establish the same, and observed :
"From the evidence adduced, I am not
satisfied that any of the above grounds except the relationship between the
parties has been established."
The reference in Ex. A-1
about the shares having been kept in the name of the second defendant was found
to be of no avail to the plaintiffs in establishing their contention, after a
detailed examination of the circumstances under which Ex. A-1 was written and
an evaluation of the claim of the second defendant in the written statement
about the circumstances under which Ext. A-2 agreement was executed, The
letter, Ext. B-2, dated
April 2, 1956, found to be
a genuine letter, despite the contention to the contrary by the plaintiff, was
found to be. one which cuts at the root of the plaintiffs' case of benami in so
far as it "discloses the existing debt". The indebtedness of P.K.
Mohammed had been established by Ext. B-13 and Ext. B-14 as also the account
books, Ext. B-18 series. The books of the company containing resolutions, Ext.
B-21 and B-21(a), were also relied on to support the finding of the trial
court, The trial court could not find anything in the letters, Exts. A-7 to
A-14, covering the period, June 3, 1963, to November 1, 1963, relied on by the
plaintiffs, to show that P.K. Mohammed played a prominent role in the affairs
of the company or to indicate that he continued to be a shareholder of the
company or that the transfer was benami. The explanation of the second
defendant as D.W. 1 that such letters were written by defendants Nos. 2 and 3
out of respect for P.K. Mohammed and taking into account his past services,
appealed to the trial court. It observed :
"The mere fact that even after the
assignment of the shares, certain letters written by the directors of the
company to P.K. Mohammed touched on certain affairs of the company is not
sufficient to hold that the assignment of the shares was benami."
The trial court further
held that the first plaintiff could not claim transfer of shares in her name
even on the hypothesis that the assignment in favour of P.K. Mohammed was not
supported by consideration for the reason that she is not a legal heir of the
deceased, P.K. Mohammed. As Mohammedan law did not recognise adoption, the
first plaintiff could not base her claim on the adoption pleaded by her. It was
found that the second defendant had scrupulously adhered to his obligations
under the agreement, Ext. A-2, entered into with the first plaintiff. It
concluded the discussion in relation to the 90 shares with the following words
:
".............. apart from claiming the
share of the dividend as provided for in Ext. A-2, the first plaintiff cannot
successfully sustain a claim over any portion of the 90 shares held by P.K.
Mohammed and purchased by the second defendant."
The question relating to
the validity of the 33 shares belonging to Kamaludin was thereafter considered.
The right of the first defendant-company of resorting to a private sale of the
shares as contained in Ext. B-8, memorandum and articles of association, was
referred to. Notices had been issued to the mother and widow of Kamaludin
intimating them about the amount due to the company by Kamaludin, demanding
payment of the same and intimating them that the shares would be sold for
realisation of the debt in the event of their not liquidating the liability.
The mother acknowledged Ext. A-5 by Ext. B-22 dated December 21, 1957. The
first plaintiff widow to whom a similar letter, Ext., A-6 had been sent on
September 9, 1957, acknowledged it by Ext. B-1 dated September 18, 1957.
According to the first plaintiff, those letters were received by P.K. Mohammed
himself and that she came across those letters only when a search was made on
the table of P.K. Mohammed, when the reply notice, Ext. A-4, was received by
her from the first defendant-company's lawyers in reply to the notice sent on
behalf of the plaintiffs. The trial court felt that notice to the first
plaintiff should be deemed to be sufficient notice even as against the second
plaintiff, relying on the observations of the Supreme Court in Kanji Manji v.
Trustees of the Port of Bombay, AIR 1963 SC 468. It further held that the right
of the second plaintiff was restricted to a claim for damages even in case it
is found that there was no notice for the sale of the shares. According to the
trial court, that circumstance would not render the sale void. In the light of
the above findings, the trial court held that the plaintiffs could not impeach
the sale of Kamaludin's shares either. The suit was accordingly dismissed but
without any order as to costs.
The plaintiffs preferred an
appeal. Each of the defendants filed separate memorandum of cross-objections as
regards the adverse findings recorded against them. However, before the court
below, arguments were confined to matters covered by issues Nos. 4, 6 and 7.
The claim of the first plaintiff as an heir of late P.K. Mohammed was not
pressed before that court. In relation to the 90 shares, arguments were
confined to the legal effect of Exts. A-1 and A-2. In relation to the 33
shares, the contention related to the non-issue of notice and the sale being
void on that account. The nature of the contentions raised by the
respondents-defendants as regards those 33 shares is indicated in the following
observations of the court below :
"As regards the 33 shares, the learned
counsel appearing for the respondents objected to the finding of the court
below that the sale was without proper notice to the legal representatives of
Kamaludin and contended that the theory of substantial representation adopted
by courts throughout is applicable to the facts of the present case and
submitted that the suit without offering to redeem the debt even if the sale
was attended with illegality or irregularity is not maintainable and further
contended that if at all the plaintiffs have any remedy, it can only be of
damages."
It is obvious that the
contention relating to 90 shares in the appellate court took a different form.
The claim was based on the provisions of Ext. A-2. It was essentially centering
round a provision in Ext. A-2 about the agreement to pay a portion of the
dividend to the first plaintiff as also to her successors. This provision was equated to a bequest
in perpetuity. It was then transmuted to the position of a gift of income in
perpetuity and, consequently, a gift of the corpus itself to all intents and
purposes. Judicial decisions interpreting gifts and bequests unlimited in point
of time and unimpeded by restrictions and limitations were referred to in
support of the contention. The court below, however, extracted the entire text
of Ext. A-1 and Ext. A-2, analysed their provisions and came to the categoric
conclusion that Exts. A-1 and A-2 did not justify a claim to the income
generating corpus, namely, the shares in the company.
As
regards the sale of 33 shares, the court below also rejected the plaintiffs'
contention questioning the reality of the indebtedness of Kamaludin. It
accepted the books of account as genuine and found that such books of account,
Exts. B-18, B-19 and B-20, did establish the indebtedness of Kamaludin. It,
however, felt that the defence contention relating to substantial
representation in relation to the sale proceedings of the shares was not
acceptable. The decisions urged by the defendants, according to the court
below, were all decisions in relation to court sales and not private sales by a
company in the exercise of its right to lien. The distinction, which, according
to the court below, existed between the two types of sales, was pointed out in
the following sentence :
"Ample
safeguards are provided in the CPC and the rules regarding court sales and a
private right of sale exercised by a company cannot be equated to court
sale."
In
that view of the matter, it took the view that the sale must be deemed to be
one without proper notice. It, however, entered a finding that it would have
been sufficient if the notice had been issued to the mother as a next friend of
the minor, even if the mother was not a legal guardian of the minor under the
Mohamedan law. The contention that the notices, Exts. A-6 and A-5, were bad to
the extent they did not specify the particulars of sale as regards the time,
place and amount due, was also rejected by the lower appellate court. The
shares having been found to be sold without proper notice, the court below
further held that the provision in Ext. B-8, the memorandum and articles of
association, particularly cls. 11 to 13, thereof, and the provision which
expressly stipulates that shares sold and purchased in the exercise of lien,
will not be affected by any irregularity or invalidity in the proceedings, did
not avail the defendants, inasmuch as the heirs of Kamaludin did not find a
place in Ext. B-26 share register. According to the court below, due to that
circumstance, the plaintiffs could not be treated as parties to the contract
and to the provisions of the Companies Act or the articles in Ext. B-8.
Even
on the hypothesis that the sale was, therefore, defective on the ground that no
notice was issued to the second plaintiff, it took the view that in the case of
a sale without proper notice, the pledgor was only entitled to damages. In
particular, it referred to and relied on the second proposition laid down by
Chagla J., as he then was, in the decision in Official Assignee, Bombay v.
Madholal Sindhu, AIR 1947 Bom 217, reading "that without a proper tender
of the amount due on the pledge, the only right of the pledgor in respect of an
unlawful or unauthorised sale is in tort for damages actually sustained by
him", and ultimately held that in view of the plaintiffs not offering to
redeem the pledge, and the suit not being one for damages, the plaintiffs were
not entitled to any relief. The appeal was accordingly dismissed along with the
cross-objections.
As
stated earlier, arguments were addressed on the two questions referred to
above. I shall consider them seriatim.
It
is perhaps unnecessary to go behind the general proposition that "a gift
unlimited in point of time of the income of a fund is a gift of the fund
itself". The reason for the rule is that "it would be absurd to say
that the income arising from a fund was for all time to be paid to one person
while the corpus of the fund was to belong to some one else". This is,
however, subject to a qualification pointed out in Theobald on The Law of
Wills, 14th edition, page 472, which occurs after the passage indicating the
general proposition referred to above based on Mannox v. Greener [1872] LR 14
Eq Cas 456.
"But a devise of
a specific annual sum out of land, though it happens to be the whole amount of
the rents and profits, will not carry the land."
However,
this principle was correctly described by Warrington J., as "rather
perhaps one of construction". See the observations in Lawes-Wittewronge, In
re : Maurice v. Bennett [1915] 1 Ch 408. Perhaps this decision is the one which
would be nearest to the facts of the case and, therefore, of greatest relevance
and assistance to the plaintiffs. The notion generally applicable to bequests
and gifts of land were applied in that case to the shares in a limited company.
The learned judge observed (at p. 412 of [1915] 1 Ch):
"What I have to
consider is whether the rule is applicable to the case of dividends derived by
a shareholder from shares in a limited company. I can see no reason why it
should not be. Dividends arising from a share in a limited company are the
fruit of the share, and, therefore, a gift unlimited in time of the dividends
on a share in a company is as much a gift of the share as a gift of the income
of a sum of Consols is a gift of the sum itself."
It must, however, be
remembered that the rule is one of construction. The words which the court had
to consider in the above case were to the following effect (at p. 408 of [1915]
1 Ch):
"I ........... leave one-fifth share of
the net profits in all my commercial undertakings........to Charles
Maurice,........"
As would be revealed from
the summary occurring at page 411 of the report, the contention was :
"The true meaning of the testator, judged
by the surrounding circumstances, was that the plaintiff should do his best to
get back all moneys sunk by the testator in these companies, whether in the
form of shares, debentures or loans, and that he should be entitled to receive
one-fifth of the whole amount which he succeeded in so recovering."
The term 'net profits'
occurring in the codicil referred to above were considered by the learned judge
and he observed (at p. 413 of [1915] 1 Ch):
"What can a gift of ' net profits ' in a
limited company mean except a gift of that which the testator was entitled to
receive on his shares in the company ? A shareholder is entitled to the
dividends which are duly declared according to the articles of association of
the company, and, therefore, a gift of the profits of shares amounts to a gift
of the dividends on them, and that amounts to a gift of the corpus of the
shares."
The point, however, to be
noted is that the rule is one of construction and getting at the intention of
the parties, as disclosed from the document to be construed. It is possible to
displace the general rule in given circumstances. That appears to be the effect
of the decision in Blann v. Bell [1852] 5 De G & Sm 658, 663.
If, therefore, the crux of
the matter is the construction of the agreement Ext. A-2, the rule referred to
may be a good guide in the construction of the document but not conclusive
thereon. The document would have to be construed on its terms and the real
intention ascertained by a careful consideration of the terms thereof.
The court below has, as
noted earlier, emphasised all important aspects revealed in Ext. A-2, which
would completely rule out a gift of the corpus in the shares of the company.
The consideration of the
document must be with necessary advertence to the fact that it is an agreement
between the second defendant and the first plaintiff. It refers to Ext. A-1
letter of P.K. Mohammed. Thereafter, it states "that the first party to
the agreement thereby agreed to pay over to the second party eight paise in the
amount derived on the dividend warrants for every one of the years, starting
with the year ending October 1, 1970, in relation to Rs. 9,000 worth shares
which party No. 1. has in the company, P. K. Mohammed P. Ltd." In other
words, the ownership of the shares as inhering in party No. 1 is reiterated in
the very same agreement under which the second party, namely, the 1 st
plaintiff obtains rights as pleaded in the appeal. Detailed provisions have
also been made for the weekly payments towards the total amounts due to the
second party. A sum of Rs. 25 is to be paid every week. If at the end of the
year, it is found to be short of the amount due to her, the balance has to be
made good. If, on the other hand, party No. 2 has been in receipt of excess
amount, that has to be refunded to the first party. These provisions normally
could not have any place in a document by which the corpus of the shares is,
for once and all,' parted in favour of party No. 2. If the least doubt be
lurking in the mind, that is completely removed by a crucial and categoric
provision which follows thereafter. It reads :
"Is is also mutually agreed that apart
from the amount referred to above, there is no further claim or right whatever either between
themselves or over the company...".
That the first party does
not have any semblance of rights over the shares or in the company is thus made
explicit. An agreement where-under a specified share in the annual dividend is
parted with, cannot with justification, be equated to the assignment of the shares
themselves. It is not as though the simple process of a transfer of shares, and
the concomitant procedure under the Companies Act and under the articles of
association in relation to such transfer of shares, were not known either to
P.K. Mohammed or to the second defendant who is party No. 1 in Ext. A-2. A
deliberate departure from a commonly known and a simplified procedure relating
to transfer of shares must be given due importance when a party parts with a
share of the dividend received by him in respect of a block of shares. As a
matter of construction therefor, it could be stated that an assignment of the
corpus of the shares was farthest from the intention of the parties. The
conclusion of the court below on the interpretation of this document is perfectly
correct on a proper reading of the document. The stipulation that the agreement
is applicable to the successors of parties Nos. 1 and 2 does not affect at all
the intention of the parties expressed so clearly, which rules out an
assignment of the corpus in the shares. In that view of the matter, there is no
merit in the submissions of counsel for the appellants on this aspect of the
case.
In the above circumstances,
it is unnecessary to refer to the other decisions relied on by counsel for the
appellants which include the following:
Vaithinatha
Aiyar v. S. Thyagaraja Aiyar, AIR 1921 Mad 563, C. Venkatachariar v. Bontham
Pachayappa Chetti, AIR 1926 Mad 250, Madhavrao v. Balabhai, AIR 1928 PC 33. The
decisions in Southampton (Mayor, etc. of) v. A.G., (10 English Reports 796) and
Mannox v. Greener [1872] LR 14 Eq Cas 456, have been referred to in the
decision in C. Venkatachariar v. Bontham Pachayappa Chetti, AIR 1926 Mad 250.
This decision construed an agreement dated September 4, 1845, which was not available
in that case, though its recital in an earlier case could be got at for the
interpretation. The agreement was interpreted in the light of the admission of
parties about its effect in earlier judgments and documents and court
proceedings. Ultimately, the court observed (at p. 251 of AIR 1926 Mad):
"This seems to
me to be sufficient to show that what was really granted was not only one-third
share in the income but one-third of the village itself and that was what both parties
in the past have thought was the meaning of the agreement." (emphasis supplied)
Then
came the observations of the court (at p. 251 of AIR 1926 Mad) :
"The law that a
gift of the income may under circumstances amount to a gift of the corpus may
be seen for example in..." (emphasis supplied)
All
the decisions, as stated earlier, only emphasise that the intention of the
parties has to be gathered from the document and other attendant circumstances
having a bearing on the interpretation of the document.
The
decision in Mannox's case [1872] LR 14 Eq Cas 456 has placed some reliance on the
provisions of s. 28 of the Wills Act and the impact of such a provision on a
devise of rents and profits. We are not concerned with such a situation in the
present case.
The
general principles, as noted by the court below, is one which was not taken exception
to even by counsel for the respondents. The question is one of application. The
basic fact, however, is that in all such cases, the question was one of
construction of a will or gift, as the case may be. The construction placed on
Ext. A-2 by the court below, according to me, is a correct one. Even if another
view is possible, that does not justify interference in second appeal. The
provisions are so clear and clinching that it is difficult to conceive of a
different construction,
In
the view that I have taken it has become unnecessary to consider whether
Warrington, J., was justified in taking the view that an unlimited gift of the
dividend would tantamount to the gift of the shares in a company. Though the
right to receive dividend is a very valuable right of a shareholder, that does
not exhaust his rights as the holder of shares. Very many rights, perquisites
and amenities are enjoyed by a shareholder, and by a person who occupies other
positions in the company by virtue of his being a shareholder, such as a
director or managing director. Even as an ordinary shareholder, he has such
valuable rights as to participate in a meeting of the shareholders. A right to
have inspection of the documents relating to the company, a right to ensure
that the affairs of the company are ordained in a. proper and just manner and a
right to invoke the protective provisions for a proper functioning of the
company by approaching various statutory functionaries like the Inspectorate,
the Registry or the Company Law Board, are also conferred on him.
The
view that the right to dividend is not the only right pertaining to the shares
in a company, appears to be substantially supported by the views expressed by
Palmer's Company Law, Volume I, Twenty-second edition, page 332, Chapter 34,
paragraphs 34-01 and 34-02. The rights a share carries are grouped as : (a)
principal rights, (b) rights of an ancillary character, and (c) corporate and
individual membership rights. It is observed :
"The principal
rights which a share may carry are—
(1) The right to dividend if, while the
company is a going concern, a dividend is duly declared ;
(2) the
right to vote at the meetings of members ; and
(3) right, in the winding up of the
company, after the payment of the debts to receive a proportionate part of the
capital or otherwise to participate in the distribution of assets of the
company.
The principal duty of
a shareholder, as far as the company is concerned, is to pay what is due on the
share, i.e., disregarding any premium or discount, the nominal amount of the
shares.
The moneys payable on
the share have to be paid by the shareholder when a call for the payment is
made upon him by the company, or at the dates fixed for payment by the terms of
issue."
Then again about the ancillary rights, the following
passage occurs :
"Apart from
these principal rights and duties, others of ancillary character are carried by
a share, e.g., the following rights of the shareholder :
(a) to
receive notice of general meetings unless the articles other wise provide ;
(b) to receive a copy of every
balance-sheet (and of the documents annexed thereto) which is to be laid before
the general meeting ;
(c) to
receive a copy of the memorandum and the articles ;
(d) to
inspect and obtain copies of the minutes of general meetings ;
(e) inspect
copies of directors' service contracts ;
(f) to inspect the various registers to
be maintained by the company without charge."
The author continued:
"Apart from
those principal and ancillary rights which a share carries, the shareholder is
further entitled to the numerous corporate and individual membership rights
which the constitution of the company or the Acts themselves give him ;
examples of these rights are:
(a) to
petition the court for the winding up of the company ;
(b) to
petition for the alternative remedy."
And the matter is summed up in the following words :
"To sum up: The
holding of a share in a company limited by shares generally carries the right
to receive a proportion of the profits of the company and of its assets in the
winding up, and all other benefits of membership, combined with an obligation
to contribute to its liabilities, all measured by a certain sum of money which
is the nominal value of the share, and all subject to the memorandum and
articles of the company."
The
rights, privileges and advantages traceable to the position as a shareholder in
a corporate entity have been emphasised by the Supreme Court in Rustom Cavasjee
Cooper v. Union of India [1970] 40 Comp Cas 325; AIR 1970 SC 564. Textbooks on
Company Law deal at length with such rights of shareholders also. These aspects
had not been placed before Warrington, J., when he made the observations
referred to above. With great respect to the learned judge, I venture to think
that the equation made between a gift of income of indefinite duration in
respect of a property on the one hand and a dividend in respect of shares on
the other is not fully justified having regard to the peculiar features of a
shareholding and the rights, perquisites and advantages accruing to a
shareholder in a corporate entity. As I stated earlier, in the light of the
conclusion already referred to, even on the basis of the observations of
Warrington J., that it is rather a matter of construction", it is perhaps
unnecessary to pursue this topic of discussion.
I
shall now consider the contentions regarding the 33 shares. The utmost that
could be said in respect of the 33 shares which originally belonged to Kamaludin
is that there was no notice as regards the second plaintiff for the reason that
the notice, Ext. A-6, did not mention that it was addressed to the 1st
plaintiff in her capacity as the next friend of the minor second plaintiff,
and, consequently, the sale is void. Even in such a contingency, it is not as
though the plaintiffs could recover the shares, ignoring the sale, and the
liability due to the company in respect of which it had a lien on such shares. It is well recognised even under common
law that a pawnee has a right to sell the pledge when there has been a default
on the part of the pawner. The right of redemption is lost by a judicial
process against the pawner for foreclosure and sale. It is open to the pawnee
to proceed to sell the goods pledged after giving notice of his intention to
the pawner. The option rests with the pawnee to resort to one of the two
courses. The right to redeem remains until there is a lawful sale. As far as
India is concerned, the Indian Contract Act, 1872, contains specific provisions
in this behalf. Section 176 of the Indian Contract Act provides for the rights
of a pawnee when the pawner makes default in the payment of debt. Under that
section, a notice is a condition precedent for a lawful sale. The right of the
pawner to redeem the goods may be available even against a third person to whom
the goods pledged have been transferred under an unlawful or unauthorised sale.
It is in this context that the proper tender of the amount due on the pledge
becomes relevant. The first of the propositions laid down by Chagla, J., in Official Assignee,
Bombay v. Madholal Sindhu, AIR 1947 Bom 217
(on which reliance had been placed by the lower appellate court also) reads :
"(i) that although the pledgee may sell the
goods unauthorisedly or unlawfully, the contract of pledge is not put an end to
and the pledgor does not become entitled to the possession of the goods pledged
without tendering the amount due on the pledge ; or, in other words, without
seeking to redeem the pledge." (emphasis supplied)
If there is no proper
tender of the amount due on the pledge, the only right of the pledgor in
respect of an unlawful or unauthorised sale is in tort or for damages actually
sustained by him. Admittedly there has not been any tender of the amount due on
the pledge. If that be so, the appellants-plaintiffs cannot seek to redeem the
shares in these proceedings. The lower appellate court in particular was
perfectly correct in declining the relief to the plaintiffs on the ground that
there has not been any satisfaction of the conditions postulated in the
aforesaid decision of the Bombay High Court. Counsel made an oral offer before
me for the tender of the amount in order to redeem the shares. According to
him, he had made a larger prayer for recovery of the shares, and, as such, a
lesser relief by offering to redeem the shares can be granted by this court,
notwithstanding the fact that hitherto there has not been any such offer to
redeem the shares. I am not inclined to accept this submission. In the second
appeal, this court is concerned with the question whether the judgment of the
court below is vitiated by any error or by a substantial question of law. The
court below observed :
"In the present
case, the plaintiffs have not offered to redeem the pledge and their suit is
not one for damages either."
This
view, taken on a proper and correct understanding of the legal principles and application
thereof to the facts of the case, cannot at all be characterised as in any way
erroneous. On that short ground, the contention of the appellants on this
aspect is liable to be rejected.
There
is absolutely no justice or grace in making an oral offer for redemption of the
shares by tendering the amount for the first time in this court. The conduct of
the plaintiffs will have a bearing while considering this request. The notices
had been issued to the first plaintiff as also to the paternal grandmother of
the second plaintiff. They did not take any action whatever in liquidating the
liability. Even according to the first plaintiff, the notice was handed over to
P.K. Mohammed. A person who was well experienced in business and connected with
the company from its inception also did not think it fit to take any action for
the discharge of the liability to the company. After the second plaintiff
attained majority, a letter, Ext. B-23, dated November 11, 1970, was sent to
the company pointing out that for the years prior to 1957, Kamaludin was
receiving dividend, and requesting for copies of the share register in the name
of late Kamaludin. In reply thereto, Ext. B-24 was issued by the company. The
sale of the shares which stood in the name of Kamaludin was specifically
referred to. It was stated :
"Since the
amount due to the company was not paid by the legal heirs of late Sri
Kamaludin, the company was constrained to sell the said shares in exercise of
the rights of lien in accordance with the articles of association after giving
notice to the legal heirs.
Thus, you will note
that the legal heirs have no claim whatsoever in any of the shares of the
company or against the company in any manner."
The company offered to give copies of the share
register on receipt of the requisite charge. A lawyer's notice was issued on
behalf of the second plaintiff on December 9, 1970. What was alleged therein
was a fraudulent relationship relating to the sale of shares held by Kamaludin.
After referring to the stand of the company as disclosed in the letter, Ex.
B-24, dated November 21, 1970, the lawyer's notice only stated :
"The stand taken
by the company is untenable and the transfer of the shares of late P.O.
Kamaluddin has not been done legally..........."
It
is significant that no contention was taken about the absence of a notice to
the second plaintiff as a legal heir. The demand made in the lawyer's notice,
Ex. A-3, was for restoration of the 33 shares together with dividends and for rendition of accounts. There was no
offer for the payment of the amount due to the company and the liquidation of
the liability of the company for which it had a lien on the shares. The company
reiterated its earlier stand by its reply, Ex. A-4, dated January 2, 1971. The
plaint was filed on September 23, 1971. In the suit, the second plaintiff was,
however, described as a minor and represented by his next friend, the first
plaintiff. (Exs. B-23 and A-3 proceeded on the basis that the second plaintiff
was a major on November 11, 1970, and December 9, 1970). There was no
allegation in the plaint that the sale in respect of the 33 shares was without
any due notice to the second plaintiff. The allegations in this regard are
contained in paragraph 8 of the plaint. It is claimed thereunder that Ex. A-4
provoked the plaintiffs to enquire into the details relating to the sale of
shares and that such enquiry revealed the receipt of the notices, Exs. A-5 and
A-6. The explanation for the inaction is given thereafter in the following
words :
"First plaintiff is illiterate and was
able to understand their purport only after the death of P.K. Mohammed as
stated above."
A further allegation
contained therein was that the debts in the name of Kamaludin could only be
manipulations fraudulently inserted with exterior motives to defeat the
plaintiffs. Despite a vague plea about the absence of notice to the second
plaintiff even in the plaint, there was no tender of the amount outstanding as
liability as regards his share. No offer for redemption of the shares had been
made even at that stage. Nor was such an offer made even at the conclusion of
the evidence or at the time of arguments before the trial court. Even when the
appeal was being disposed of, such an offer was not forthcoming. It is not
shadowed even in the memorandum of the second appeal. When the plea of fraud
had failed miserably and when the allegation about the non-existence of the
debt on the part of Kamaludin had been disproved as thoroughly unjustified by
abundant documentary evidence, an offer to tender the amount at the culmination
of the arguments, in the second appeal, cannot be treated as a bona fide or
justified one. It must be remembered that a quarter of a century has lapsed
after the sale of the shares by the company in 1957. To accede to such a
request at this stage, to my mind, will result in a deflection of the course of
justice. What the second plaintiff relies on is a technical plea of the absence
of a notice to him, at a time when he was a minor, even when his own parent,
namely, the mother and his paternal grandmother, had been intimated about the
existence of the liability and the proposal of the company to sell the shares
in exercise of the right of lien the company had over such shares. Such a
technical plea is effectively met with a non-compliance with the condition
precedent in relation to the recovery of shares on an offer to tender the
amount due, in the light of the well-established principles of law. The result
is that justice works itself out by declining to interfere with the judgments
and decrees of the courts below.
A similar technical
contention was urged in F. Nanak Chand Ramkishan Das v. Lal Chand Ganeshi Lal,
AIR 1958 Punj 222. After observing that there was some force in the contention
based on s. 176 of the Indian Contract Act, 1872, the High Court observed (at
p. 227):
"..................but it is no use
pursuing the matter any further in the present case.
The defendants have not been able to prove the
loss they have suffered on account of want of notice."
The dismissal of the suit
by the courts below was in that view upheld.
In view of my aforesaid
conclusion, it is not necessary to consider the correctness of the propositions
laid down in Official Assignee's case, AIR 1947 Bom 217, referred to above.
Counsel for the respondents pointed out that the decision of the Bombay High
Court had been reversed by the Federal Court (vide Madholal Sindhu of Bombay v. Official Assignee
of Bombay, AIR 1950 FC 21). Their Lordships
observed as follows as regards the contention based on the sale of the shares
being ab initio void on the ground of no notice of sale having been given (at
p. 38):
"This contention overlooks the fact that
the pledgee before disposal of the shares had consulted the pledgor who was
agreeable to the transfer of these shares by the bank. His consent having been
obtained for the disposal of the shares, the question of notice under s. 176
does not arise. Moreover, he was subsequently informed about it and throughout
he ratified the transaction and acquiesced in it."
The facts in the present
case are different from those in the Bombay decision on material aspects.
Section 176 of the Indian Contract Act, 1872, is a general provision. It
applies to the generality of goods. The Companies Act, 1956, is a special
enactment. The shares of a company, though would answer the term
"goods" coming under the Indian Contract Act, 1872, are dealt with
specifically and specially under diverse provisions of the Companies Act. A
company has been conferred by Parliament certain specific rights in relation to
the shares. This is the effect of s. 28 of the Companies Act, 1956, and the
memorandum and articles of association of the company. The transaction between
a shareholder of a company and the company in respect of the dealings relating
to the shares are thus covered by a special enactment, which also appears to be
a later enactment vis-a-vis the Contract Act. It would, therefore, appear that
that in relation to the dealings in such shares, whether in respect of
transfers or transmissions or in respect of the sales to the exercise of the
lien, the provisions of the Companies Act, 1956, and those in the memorandum
and articles of association of the company framed under s. 28 thereof should
govern the matter. If that be so, it is clear from the provisions of Ex. B-8
(vide art. 12) that any irregularity in the sale will not vitiate the same. I
am inclined to take the view that the proceedings in relation to the exercise
of a lien of a company over its shares should be governed by the provisions of
the Companies Act and the memorandum and articles of association and should not
be controlled by the general provisions of the Indian Contract Act, 1872. In
that view of the matter also, s. 176 would be excluded from the present case.
If that be so, Ex. B-8 would hold the field and the sale of the shares would
not be open to challenge in view of the express provision contained in art. 12
reading :
"The purchaser shall be registered as the
holder of the shares thus sold and he shall not be bound to see to the
application of the purchase money nor shall his title to the shares so
purchased by him be affected by any irregularity or invalidity in the proceedings
in reference to the sale." (emphasis supplied)
For yet another reason, s. 176 of the Indian Contract
Act, 1872, may have no application to the facts of the case. Section 176 applies
to a pawn or pledge. That term is denned in the Indian Contract Act, 1872, in
the following terms :
"The bailment of goods as security for payment
of debt or performance of a promise is called 'pledge'." (vide s. 172)
In the present case, there has not been any delivery
of the goods, namely, the shares, and consequently there has not been any
bailment as regards the goods, and a fortiori, any pawn or pledge. That being
so, s. 176, on which reliance has been placed by the second plaintiff, cannot
be of any avail to him.
A cross-appeal has been
filed on behalf of respondent No. 1. The finding of the court below about the
invalidity of the sale on the ground of lack of notice is challenged therein.
The court below has sought to make a distinction between a private sale and a
court sale. As regards the latter, the decisions of the Supreme Court in N.K.
Mohd. Silaiman Sahib v. N.C. Mohd. Ismail Saheb, AIR 1966 SC 792, and Harihar Prasad Singh v.
Balmiki Prasad Singh, AIR 1975 SC 733, and other
decisions have taken the view that when there is a substantial representation
and when no prejudice is caused to the minor by the non-issue of separate
notice, the absence of such notice would not be fatal to the sale. This
contention was rejected by the court below with the following observation :
"...the decisions referred to are all in
respect of court sales and decrees and cannot have direct bearing to a private
sale by the company in the exercise of its right of lien."
This reasoning of the court
below may be open to serious doubt, for, a sale by a company of the shares in
exercise of its lien created under the articles of association framed under the
Companies Act, 1956, cannot, with justification, be equated to a private sale.
A sale by a company, by virtue of the statutory provisions, has many attributes
of a court sale. The sale is not done in a secret manner. The affairs of a
company could be effectively scrutinised by a shareholder or by
successors-in-interest of a deceased shareholder. The details relating to the
shareholding can be known by approach to the company or to the statutory
authorities. The action of the company is subject to various statutory
controls. In the background, a sale by a company in the exercise of its lien
and in accordance with the provisions contained in the articles of association
cannot be equated to a private sale. In that view of the matter, the doctrine
of substantial representation and the absence of prejudice applicable to court
sales may have application to the sale by a company also. It is, however,
unnecessary to express any final view on that aspect in this case in view of my
earlier conclusion that the second appeal is liable to be dismissed even
otherwise.
In the result, the second appeal fails and it is dismissed but without any order as to costs.
[1986] 60 Comp.Cas.132 (Kar)
High Court OF Karnataka
v.
Lakshmi Nivas Mittal
N. Venkatachala J.
August 20, 1985
H.B. Datar and A.Y.N. Gupta for
the petitioner.
N.
Venkatachala J.—By
consent of learned counsel, this revision petition was treated as having been
posted for hearing and heard.
The
petitioner, a company, was defendant No. 1 in a suit, O. S. No. 3288 of 1981,
on the file of the Court of XVI Additional City Civil Judge at
It was the contention of
Shri H. B. Datar, learned counsel for defendant No. 1 (petitioner), that I.A.I.,
in the suit, by which the plaintiff (respondent No. 1) had sought permission to
institute the suit against the defendants (petitioner and respondents Nos. 2 to
6) on behalf of, and for the benefit of, other shareholders of the
petitioner-company, could not have been allowed by the court without issuing
prior notice to such shareholders and defendants. According to him, clause (a)
of sub-rule (1) of rule 8 of Order 1 of the Code required issue of prior notice
and hence the order of the court made on I.A.I, without issuing such notice,
stands vitiated. He sought to seek support for his contention from the decision
of the Bombay High
Court in Municipal Council, Amaravati v. Govind Vishnu Sarnaik, AIR 1976 Bom
401.
On
the other hand, it was contended by Shri Padubidri Raghavendra Rao, learned
counsel, whose assistance was sought in this revision petition, that the
express language of clause (a) of sub-rule (1) of rule 8 of Order 1 of the Code
did not require the court to issue prior notice before grant of permission
thereunder, nor could such requirement be implied in the setting of the
provisions in which that clause finds its place. According to him, when clause
(a) did not contemplate issue of prior notice by the court before grant of
permission thereunder, the order of the court allowing I.A.I., without issue of
such notice, does not stand vitiated.
Sub-rule
(1) of rule 8 of Order 1 of the Code, in which clause (a) finds its place, and
sub-rules (2) and (3) of that rule 8, may be set out at the outset for a proper
'appreciation of the above rival contentions of the learned counsel. They read
:
"8(1) Where
there are numerous persons having the same interest in one suit,—
(a) one or more of such persons may, with
the permission of the Court, sue or be sued, or may defend such suit, on behalf
of or for the benefit of, all persons so interested ;
(b) the court may direct that one or more
of such persons may sue or be sued, or may defend such suit, on behalf of, or
for the benefit of, all persons so interested.
(2)
The court shall, in every case where
permission or direction is given under sub-rule (1), at the plaintiff's
expense, give notice of the institution of the suit to all persons so
interested, either by personal ser vice, or, where by reason of the number of
persons or any other cause, such service is not reasonably practicable, by
public advertisement, as the court in each case may direct.
(3) Any person on whose behalf, or for whose
benefit, a suit is instituted, or defended, under sub-rule (1), may apply to
the court to be made a party to such suit."
Clause
(a) of sub-rule (1) above, as seen therefrom, enables one or more of numerous
persons having the same interest in one suit, to sue or be sued or defend when
sued, on behalf of, or for the benefit of, all persons so interested, with the
permission of the court. Clause (b) thereof, as seen therefrom, however,
empowers the court to direct, on its own motion (suo motu), one or more of
numerous persons having the same interest in one suit, to sue or be sued or
defend when sued, on behalf of, or for the benefit of, all persons so
interested. From these clauses, it becomes clear that one or more of numerous
persons having the same interest in one suit, can represent the remaining
persons having the same interest in that suit either with the permission of the
court or as directed by the court.
Whether
or not prior notice under clause (a) above is required to be issued by the
court before grant of permission thereunder, is the controversy which calls to
be resolved now. The express language in clause (a) above, as is apparent
therefrom, does not require issue of prior notice before grant of permission
thereunder. Then, can such a requirement be implied in the setting of the
provisions in which clause (a) finds its place. Such requirement, in my view,
cannot be implied for the reasons which I shall presently state.
Clause
(b) above which finds its place next to clause (a) above, while empowers the
court, on its own motion, to direct one or more of numerous persons having the
same interest in one suit, to represent others having the same interest in that
suit, does not require issue of prior notice before giving a direction
therefor. When the purpose sought to be achieved by clause (b) above is the
same as the one sought to be achieved by clause (a) above, it would be
incongruous to hold that clause (a) requires issue of prior notice, while
clause (b) does not require issue of such notice. If issue of prior notice
under clause (a) or clause (b) before grant of permission or issue of
direction, as the case may be, was really intended by the Legislature, sub-rule
(2) of rule 8, which finds its place next to sub-rule (1) where clauses (a) and
(b) find their places, could not have made the requirement of issue of notice
subsequent to grant of permission under clause (a) or issue of direction under clause (b), of sub-rule (1),
mandatory. Sub-rule (2), it cannot be overlooked, requires that the court
shall, in every case where permission or direction is given under sub-rule (1),
at the plaintiff's expense, give notice of the institution of the suit to all
persons so interested, either by personal service, or, where, by reason of the
number of persons or any other cause, such service is not reasonably
practicable, by public advertisement, as the court in each case may direct. Why
issue of subsequent notice by the court under sub-rule (2) above is made
obligatory becomes obvious from sub-rule (3) above, in that, it enables any
person on whose behalf, or for whose benefit, a suit is instituted or defended
under sub-rule (1) to apply to the court to be made a party to such suit. When
sub-rule (3) above enables any person on whose behalf, or for whose benefit, a
suit is instituted or defended under sub-rule (1) to apply to the court to
become a party to such suit, either as plaintiff to support the suit or as
defendant to oppose the suit, it is difficult to think that any useful purpose
would be served by issue of prior notice to such person either before grant of
permission under clause (a) or issue of direction under clause (b), of sub-rule
(1) of rule 8 of Order 1 of the Code. Issue of prior notice before grant of
permission under clause (a) or issue of direction under clause (b), of sub-rule
(1), if anything, may give an undue handle to the opposite parties to delay or
defeat the suit or defence, as the case may be, at the very threshold. Besides,
non-issue of prior notice to the persons who may be interested in opposing the
grant of permission under clause (a) or issue of direction under clause (b), of
sub-rule (1), cannot adversely affect their interest inasmuch as a decree
passed in a suit under rule 8 would be binding under sub-rule (6) thereof, on
all persons on whose behalf, or for whose benefit, the suit is instituted or defended,
as the case may be, only when notice required under sub-rule (2) is issued and
not otherwise. Thus, from a conspectus of the above sub-rules of rule 8, I am
inclined to take the view that no prior notice under clause (a) of sub-rule (1)
of rule 8 is required to be issued by the court before grant of permission
thereunder.
Coming to the decision of
the Bombay High Court in Amaravati Municipal Council's case, AIR 1976 Bom 401,
it is, no doubt, held therein that' sub-rule (1) of rule 8 of Order 1 of the
Code requires prior notice before grant of permission contemplated therein, as
pointed out by Shri Datar. The Bombay High Court has held so on the
interpretation of sub-rule (1) of rule 8 of Order 1 of the Code, as it stood
before its substitution by the Code of Civil Procedure (Amendment) Act, 1976
(for short " the Amendment Act"), which came into force on February
1, 1977. The sub-rule, as it stood then, read thus :
"8(1). Where there are
numerous persons having the same interest in one suit, one or more of such
persons may, with the permission of the court, sue or be sued, or may defend,
in such suit on behalf of or for the benefit of all persons so interested. But,
the court shall in such case give, at the plaintiff's expense, notice of the
institution of the suit to all such persons either by personal service or,
where from the number of persons or any other cause such service is not
reasonably practicable, by public advertisement, as the court in each case may
direct."
The Bombay High Court, for
holding that prior notice was to be given by the court under sub-rule (1) above
before it granted permission thereunder, interpreted the word "But"
found in the sub-rule to mean "except", "unless"or "if
not". Such interpretation led it to conclude that it was incumbent upon
the court to give notice of the institution of suit to all persons interested
in such suit before it could accord permission to sue in a representative
capacity under that sub-rule. It is of significance to note that the word
"But" found in sub-rule (1) of rule 8 of Order 1 of the Code as it
stood before it was substituted by the Amendment Act, no longer finds a place
in the setting of sub-rules (1) and (2) of rule 8. The omission of the word
"But" in the substituted sub-rule (2) of rule 8 is sufficient to
indicate that the notice contemplated under sub-rule (2) need not precede grant
of permission under clause (a) or issue of direction under clause (b), of
sub-rule (1) of rule 8, as it stands substituted by the Amendment Act. Hence,
the decision of the Bombay High Court can lend no assistance in the
interpretation of sub-rules (1) and (2) of rule 8, as they stand substituted by
the Amendment Act.
In conclusion, I hold that
clause (a) of sub-rule (1) of rule 8 of Order 1 of the Code does not require a
court to issue prior notice before it grants permission thereunder. From this
it follows that the order under revision does not call for interference.
In the result, I dismiss
this revision petition, however, without costs.
The records of the court
below may be sent back forthwith.
Before parting with the
case, I place on record my appreciation to the assistance of Shri Padubidri
Raghavendra Rao, learned counsel, rendered at my request.
[1990] 69
COMP. CAS. 416 (DELHI)
HIGH COURT OF DELHI
National Steel and General Mills
v.
Official Liquidator
S.S. CHADHA AND P.N. NAG JJ.
MARCH 9, 1989
P.C. Khanna and Mrs. Reva Khetrapal
for the Petitioner.
Vinoo
Bhagat and S.P. Mittal for the Respondent.
P.N.
Nag, J.—This
reference raises an interesting question of law as to whether summons or an
application can be moved by the (1) company, (2) creditor, (3) member, with a
view to proposing a compromise or an arrangement between company and its
creditors and members under section 391 of the Companies Act, 1956 (hereinafter
referred to as "the Act"), in case the company is being wound up or
can it be filed in such a situation exclusively by the liquidator alone ?
In
the present case, the summons have been moved by National Steel and General
Mills (I.) Ltd. (hereinafter referred to "the company"), under
section 391 of the Act proposing a scheme of arrangement between the company
and its unsecured creditors, and in support of such summons, the affidavit of
Shri D.R. Sharda, erstwhile director of the company has been filed. The company
has been wound up under the orders of the court dated August 1,1988.
The
reference has been made to this Bench for the reason that two views have been
expressed by this court, in regard to the maintainability of the
application/summons filed by the company, creditor or member, in case the
company is being wound up under section 391 of the Act. At this stage, it will
be relevant to point out that the summons in this case have been moved by the
company, but, for the purpose of maintainability of the application/summons in
the case of the company being wound up, the company/creditor/member have been placed
in the same and equal footing in section 391 of the Act. There is no dispute,
however, that before the winding up process begins the company/creditor/member
has every right to commence proceedings under section 391 of the Act.
Mahinder
Narain J. in the present reference and in C.P. No. 42 of 1985 decided on
October 26, 1987 (Dr. Prithpal Singh Chhabra v. Eastern Linkers Pvt. Ltd.), has
held that in case the company is being wound up, it is only the liquidator who
can move for a compromise and arrangement under section 391 of the Act and the
company, creditor or member cannot maintain such application/summons. According
to the learned judge, after the company is ordered to be wound up, the company
members are termed contributories within the definition of section 428 of the
Act and the members of the company are termed as such during the lifetime of
the company only, i.e, before it is wound up and contributories have been given
no right to move a summons/application under section 391 of the Act. The relevant
portion dealing with the reasoning in support of this proposition which finds
place in the judgment of October 26, 1987, may be reproduced below:
"These
two words 'member' and 'contributory' are not synonymous. The word 'member' in the
Companies Act deals with the status of a particular individual or legal person
prior to the winding up of the company, and the word 'contributory' deals with
the status of an individual or a legal person after the order of winding up of
the company.
The
other provision under which this application has been filed is section 391 of
the Companies Act. Section 391 of the Companies Act is in the chapter which is
prior to the Chapter on winding up. Section 391 postulates the making of
compromises and arrangements between the company and its creditors, or any
class of them and between the company and its members, or any class of them.
Section 391 does not enable any 'contributory' to file a petition under section
391. What it permits to be done is that after a winding up order has been
passed or the liquidator has been appointed, the liquidator is permitted to
file an application for such compromise/arrangement. In other words, after an
order of winding up, a 'contributory' is not permitted by section 391 to file a
petition by way of a compromise or arrangement between creditors and the
company or the company and its members".
On
the other hand, B.N. Kirpal, J., of this court in Rajdhani Grains and Jaggery
Exchange Ltd., In re [1983] 54 Comp Cas 166 decided on March 31, 1981, while
dealing with the question of maintainability of the application of a member of
the company under section 391 of the Act, after the company is wound up,
examined the question whether the member of the company ceases to be a member
as such, or only becomes a contributory and expressed the view that a member of
a company does not cease to be a member merely because a winding up order has
been passed and, as such, he has every right to maintain such an application.
The relevant discussion is reproduced below (at p. 169) :
"In
order to decide the aforesaid question, it is necessary to refer to two other
provisions of the Act. Section 41 of the Act defines a member as being a person
who is entered in the register of members. A contributory is defined by section
428 of the Companies Act.
The
said section reads as under:
'428.
Definition of "contributory"—The term "contributory" means
every person liable to contribute to the assets of a company in the event of
its being wound up, and includes the holder of any shares which are fully
paid-up ; and for the purposes of all proceedings for determining, and all
proceedings prior to the final determination of, the persons who are to be
deemed contributories, includes any person alleged to be a contributory.'...
To
my mind, the terms 'contributory' and 'member' are not interchangeable. By
virtue of section 428 of the Act every member would become a contributory. The
converse, however, is not true. Though a member of a company, even of fully
paid-up shares, would become a contributory by virtue of section 428, on his
death, his legal representatives, by virtue of section 430, would be regarded
as contributories. The said legal representatives, however, would not be
regarded as members unless and until their names are put in the register of
members. No provision of the Act has been shown to me wherein it is provided
that a member shall cease to be a member after the winding up order has been
passed. After the passing of the winding up order, the register of members
would come into the custody of the official liquidator. The names entered in
the register of members are, however, not erased therefrom. In fact, under
section 467 of the Companies Act, the court has been given the power, while
settling the list of contributories, to rectify the register of members where
it is so required, in pursuance of the Act. This obviously means that even
after the winding up order has been passed the register of members continues to
exist. If this be so, any person whose name is entered in the register of
members shall, by virtue of section 41, be regarded as a member thereof.... As
already observed, a member would still be a member of the company,
notwithstanding the winding up order having been passed, and even under the different
provisions of the Companies Act, a reference is made to members even though a
winding up order has been passed (see sections 469(2) and 511)".
Shri
P.C. Khanna who appeared for the company vehemently argued that in the case of
a company being wound up, the liquidator is an additional and not exclusive
person who could make an application under section 391 of the Act for the
proposal of a scheme. The interest that entitled the company, member or
creditor to make an application in the case of a going concern subsists even
after an order for winding up is made to sustain a similar application even at
that stage. Further, it was submitted that in case the company is merely being
wound up or has been wound up, a member of the company does not cease to be a member,
and as such he has every right to invoke section 391 of the Act. He has cited
various authorities in support of his submissions with which we respectfully
agree and we endorse the views expressed therein, which would be discussed and
referred to hereinafter. However, before that, in order to appreciate the
submissions and the law on the subject, it would be appropriate to reproduce
the relevant portion of section 391 of the Act:
"391. (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.
(2) If a majority
in number representing three-fourths in value of the creditors, or class of
creditors, or members, or class of members, as the case may be, present and
voting either in person or, where proxies are allowed under the rules made
under section 643, by proxy, at the meeting, agree to any compromise or
arrangement, the compromise or arrangement shall, if sanctioned by the court,
be binding on all the creditors, all the creditors of the class, all the
members, or all the members of the class, as the case may be, and also on the
company, or, in the case of a company which is being wound up, on the
liquidator and contributories of the company :
Provided
that no order sanctioning any compromise or arrangement shall be made by the
court unless the court is satisfied that the company or any other person by
whom an application has been made under sub-section (1) has disclosed to the
court, by affidavit or otherwise, all material facts relating to the company,
such as the latest financial position of the company, the latest auditor's
report on the accounts of the company, the pendency of any investigation
proceedings in relation to the company under sections 235 to 251, and the
like".
In
Travancore National and Quilon Bank Ltd., In re [1939] 9 Comp Cas 14 ; AIR 1939
Mad 318, while interpreting section 153 of the Indian Companies Act, 1913,
which is in pari materia to section 391 of the present Act, the Madras High
Court held as under (at page 23 of 9 Comp Cas) :
"The
section was intended to confer rights both on the company and on the creditors and
members of the company. When it is a going concern, the object will be to avert
a winding up. Even after an order for winding up is made, an application can be
made to cancel a winding up by the sanction of a scheme and allow the company
to resume its normal business. The creditors and members are the persons
vitally interested in the life of a company and are the best judges of their
interests. It could not have been, therefore, the intention of the Legislature
to deprive the creditors of the right once an order for winding up is made and
place them at the mercy of the liquidator who may or may not choose to move in
the matter. All that is intended by the section is that the liquidators should
also have the right to make the application. At any rate, this is the view
taken by Palmer on the corresponding section of the English Act. In his book on
winding up, he observes thus at page 899 :
'A
proposal for an arrangement or compromise is not confined to the company or to
its liquidator, if any. It is open to any creditor or member to take the
initiative. The Act expressly provides that the court may, on the application,
in a summary way of the company, or of any creditor or member of the company,
or in the case of a company being wound up, of the liquidator, order a
meeting.'
I
think that the same view must be adopted in the interpretation of the Indian
Act and I have, therefore, no hesitation in holding that even after an order
for winding up, a creditor or member can move the court under section 153 of
the Act".
In
A.M. Muhammed Abdulla Tharaganar v. Official Liquidator, Cape Comorin General
Traffic Co. Ltd. [1953] 23 Comp Cas 161 (Trav-Coch), this question again was
considered by the Travancore-Cochin High Court where the aforesaid judgment of the
Madras High Court in Travancore National and Quilon Bank Ltd. [1939] 9 Comp Cas
14 ; AIR 1939 Mad 318 was followed and it was held (headnote) :
"In
the case of a company being wound up, the liquidator is an additional and not
an exclusive person who could make an application under section 153 of the
Indian Companies Act for the proposal of a scheme. The interest that entitled
the company, member or creditor to make the application in the case of a going
concern subsists even after an order for winding up is made to sustain a
similar application even at that stage".
While
considering the scope of section 391 of the Act, the Calcutta High Court in
Rajendra Prosad Agarwalla v. Official Liquidator [1978] 48 Comp Cas 476,
expressed the same view and endorsed the view of the Madras High Court referred
to hereinbefore.
This
matter again came up for consideration before the Bombay High Court in Vasant
Investment Corporation Ltd., In re [1982] 52 Comp Cas 139, where the court took
the same view and held as under (at page 142) :
"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 an 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 rules 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 section 391
in respect of a company under winding up".
Further,
the court held (at page 143):
"A
handing over of share certificates as mentioned in Form No. 141 can never
constitute such a surrender ; under section 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 section
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 denned under section 41 of
the Companies Act and they have not ceased to be such members by virtue of any
surrender of shares, because handing over 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".
In
Sonajuli Tea and Industries Ltd. (In Liquidation) [1981] Tax LR (NOC) 108 (Cal)
it has also been held by the Calcutta High Court while interpreting section 391
of the Act:
"It
is now well-settled that an application can be made by a creditor or a
contributory after the company is wound up apart from the liquidator for a
scheme but the effect of section 391 read with section 446 is that such a
scheme must cover all the creditors, both secured and unsecured, and
contributories of the company (in liquidation). Therefore, no order under
section 391(1) of the Act, can be directed for considering a proposed scheme of
the unsecured creditors only".
This
question has again been considered by the Madras High Court in N.A.P. Alagiri
Raja and Co. v. N. Guruswamy [1989] 65 Comp Cas 758 ; [1987] Tax LR 1756 and,
after having examined rules 67 and 68 framed under the Companies (Court) Rules,
1959, the court has observed (at page 765 of 65 Comp Cas) :
"On
a prima facie reading of these rules, it does appear that the rules contemplate
an application by a creditor or a member of the company even when the company
is being wound up".
In
fact, this view is based on the same reasoning as given in the aforementioned
case of the Bombay High Court.
The
consensus view of the various High Courts, therefore, that emerges is that the
liquidator is an additional person and not the exclusive person who can move an
application under section 391 of the Act.
In
addition to the above, if such an interpretation is not given to section 391,
this will lead to manifest absurdity. Section 391(2) of the Act refers to the
persons who would be bound by the compromise/arrangement if agreed to in the
meeting called for of the creditors/members and sanctioned by the court. The
persons on whom such a compromise/ arrangement would be binding are referred to
as creditors, members or company or in the case of a company which is wound up,
the liquidator and contributories of the company. In case the liquidator is
interpreted to mean not an additional person to move the application under
section 391 of the Act, on the application of the same rule of interpretation,
the compromise/arrangement arrived at by the creditors/members and sanctioned
by the court cannot bind the creditors and would exclude them from such a
compromise as, in case of a company being wound up, this will be binding on the
liquidator or contributories only which can never be the intention of the
Legislature.
Furthermore,
under section 446(2)(c) of the Act, the court which is winding up the company
notwithstanding anything contained in any other law for the time being in force
has been given jurisdiction to entertain and dispose of any application made
under section 391 of the Act by or in respect of the company. In case of
liquidation of the company, if the liquidator is interpreted exclusively to
mean to have a right to move under section 391 of the Act, and that the company
is not to have such a right, there would be direct conflict between section
391(1) and section 446(2)(c) of the Act which would not be in consonance with
the principle of harmonious interpretation of statutes. Therefore, the only
rational interpretation which can be put is that in case the company is wound
up, the liquidator is an additional person who can move the application under
section 391 of the Act apart from members, creditors and the company.
On
the question whether a member ceases to be a member and becomes a contributory
only after the liquidation of the company, we again adopt the reasoning and the
view of Justice B.N. Kirpal in Rajdhani Grains and Jaggery Exchange Ltd. [1983]
54 Comp Cas 166 (Delhi) and the view of the Bombay High Court in Vasant
Investment Corporation Ltd. [ 1982] 52 Comp Cas 139 and hold that merely
because the company has been wound up, the member does not cease to be a member
of the company so long as the requirements under section 41 read with section
150 of the Act continue to be complied with and until he ceases to be a member
in accordance with the provisions of the Act, as such, the member has every
right to move under section 391 of the Act.
The
argument that merely on winding up of the company, the member does not cease to
be a member of the company also finds support from the observations of the
Supreme Court in Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 58 Comp Cas
563. In this case, the Supreme Court, while discussing the voting rights of the
members of the company, examined and laid down as to who can be the members of
the company. The relevant discussion is reproduced below (at page 576) :
"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 section 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 section 153A of the Act in accordance with and subject
to the rest of the provisions of section 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".
It
was emphasised that so long as the name of the member continues to be on the
register of members and until he ceases to be a member in accordance with the
provisions of the Act, he continues to be a member. Even a bankrupt is held to
be a member of the company so long as his name is on the register.
No
provision has been shown to us in the Act under which after the company is
wound up, the name of the member stands erased from the register of members and
he ceases to be a member. On this ground also, a member can make the
application under section 391 of the Act even if the company is being wound up.
Counsel
for the liquidator vehemently argued that a literal construction of section 391
clearly shows that in case a company is being wound up, it is the liquidator
alone who can file an application for compromise or arrangement with the
creditors or the members. It also finds support from section 457(1)(a) of the
Act according to which the liquidator has been given a power, with the sanction
of the court, to institute or defend any suit, prosecution or other legal
proceedings on behalf of the company. In this connection, he relied on the
observations of the Supreme Court in Great Indian Motor Works Ltd. v. Their
Employees, AIR 1959 SC 1186, 1190:
"Under
the provisions of the Indian Companies Act, the affairs of the company under
liquidation are placed in charge of the official liquidator, and under section
457. it is only the liquidator who is authorized, with the sanction of the
court, to institute any suit or other legal proceedings in the name and on
behalf of the company".
There
does not seem to be much substance in this argument. As already discussed
above, the liquidator is an additional person who can make an application under
section 391 of the Act for compromise or settlement of the scheme and under
section 457 of the Act, the liquidator has been given a general power in the
company being wound up with the sanction of the court to institute or defend
any suit, prosecution, or other legal proceedings and as such, there is no
inconsistency between the two provisions. Further, this general power has been
conferred on the liquidator with the sanction of the court only. This does not
take away the special power of the member, creditor and the company to move the
court for a compromise/arrangement under section 391 of the Act without
sanction of the court, as the general power cannot take away and prevail over
the special power.
In
the light of the above discussion, the reference is answered in the following
terms :
In case the company is being wound up, the liquidator
is an additional person who can frame a scheme for compromise or arrangement in
respect of the company and move the court under section 391 of the Act. The
company, creditors and members of the company are also entitled to make the
necessary application to the court under the aforesaid section in such a
situation.
[1958] 28 COMP. CAS. 191
(PUNJ.)
V.
Minerva
Films Ltd
TEK CHAND J.
DECEMBER 26, 1957
TEK CHAND
J.-The shareholders of this
company are sharply divided into two groups and for a considerable time there
has been a bitter struggle between these two groups for obtaining control of
the company. On the application of both groups, I passed an order under section
186 of the Companies Act, 1956, on the 22nd of August, 1957, directing that a
meeting of the shareholders of the company be called for the 12th of October,
1957, at its registered office at Sonepat. There were two agendas proposed by
the two groups and I directed that both the agendas should be considered at the
meeting and, if thought fit, resolutions might be passed in accordance with
agendas with or without modifications as may be proposed at the meeting. Shri
D.N.Awasthy, advocate, was to be the chairman and Shri Satish Chandar Mital,
advocate was to be the alternate chairman. After giving notice of the meeting
as directed in my aforementioned order, a meeting of the shareholders was held.
The chairman has submitted his report and objections have been filed on behalf
of Ch. Diwan Singh to the report of the chairman, dated the 30th of October,
1957, and written reply has also been filed to the above objections by
respondents Nos. 2 to 18.
Shri Bhagirath
Dass, on behalf of Diwan Singh, has confined his arguments to three objections.
His first objection is that three shareholders, Hardawari Lal, Daryao Singh and
Dharm Singh, were in arrears on the 11th of October, 1957, and they ought not
to have been allowed to exercise the right of vote.
His second
objection is that there were certain minors who were shareholders and by reason
of their minority neither they nor any other person on their behalf could vote
at the meeting. No proxies could even be signed on their behalf. There are mine
such minors whose votes have been included and the total number of ‘A’ class
shares held by them comes to 650.
The third
objection is that the shareholders at a meeting held on the 15th of June,1952,
had authorised the directors to issue 5,000 shares of ‘A’ class, but from time
to time 13,250 ‘A’ class shares were issued. It was, therefore, contended that
8,250 ‘A’ class shares issued in excess of the authorisation given on the 15th
of June, 1952, should not be taken into consideration and all those
shareholders, who had been allotted shares in excess, could not vote at the
meeting.
The position
taken up by the chairman in the report regard to the three objections may be
stated in the same order. Regarding the first objection as to Hardawari Lal,
Daryao Singh, and Dharam Singh being in arrears, the chairman in his report
stated that according to the books of the company these persons were shown to
have paid their dues and there was no balance shown against them. The contention
of objector, Diwan Singh, was that the entries in the books had been forged but
the chairman declined to go into this question as he considered himself to be
bound by the state of affairs recorded in the books and therefore proceeded on
the assumption that these three persons were not in arrears. I think the stand
taken by the chairman was correct and during these proceedings the books of the
company are to be treated as correct. Under section 164 of the Companies Act,
1956, the register of members and certain other documents are prima facie
evidence of any matters contained therein. I, therefore, see no force in this
objection.
Regarding the
second objection, there were minor shareholders in both groups and their
relations were present at the time and voted as guardians on behalf of their
minor wards and, according to the report of the chairman, by common consent
which fact has not been denied by learned counsel for the objection. During the
course of arguments before me, Mr. Bhagirath Dass contended that the votes cast
on behalf of the minor shareholders should have been excluded Mr. Tuli
maintained that although under section 11 of the Indian Contract Act, 1872, a
contract entered into by a minor was void, but a minor was not property. He
argued that a minor in whose favour a dead of sale is executed is competent to
sue for possession of the property conveyed thereby. Muni Kunwar v. Madan Gopal
is an authority for the proposition that there is nothing in the law to prevent
a minor from becoming a transferee of immovable property. In Narain Das and
Another v. Mussammat Dhania it was held that a minor was capable of purchasing
immovable property and where such a transaction has been competed by execution
and registration of a sale deed, he could sue to recover possession of the
property purchased upon tender of the balance of the purchase money. Such a
transaction is not void because of the minority of the transferee. A large
number of authorities supporting the above view were referred to in the judgment.
In Collector of Merrut in charge, Court of Wards, Merrut, and Special Manager
of Estate of Bibi Noushaba Begum v. Lala Hardian Singh and Others, a Division
Bench of that court held that even though a minor be disqualified to enter into
contract, such disqualification did not debar him from being a transferee under
a conveyance. The above authorities are in point and there is no bar to a minor
acquiring or holding shares in a joint stock company In the case the shares of
the minors were fully paid up and they were subject to no objection. The
respective guardians of the minors had exercised the right of vote and they
were in both groups.
Regarding the
third objection as to allotment of shares in excess of 5,000 shares to which
the directors were restricted by the shareholders in the meeting dated the 15th
of June, the chairman thought that he was not competent to go into this matter
and felt that he was bound to admit the votes of all members of the company who
had paid all calls due on their respective holdings up to the 11th of October,
1957. It was also mentioned into the report of the chairman that Diwan Singh
admitted that shares of ‘A’ class in excess of 5,000 were issued in pursuance
of the resolutions which were unanimously passed at the meetings of the board
of directors of the company held under his chairmanship on the 28th of June,
1955, and 22nd of October, 1956, and there were several general meetings of the
company at which resolutions relating to further issue of shares were passed
and the shares were allotted. I do not think that on the ground of unauthorised
allotments the shareholders could be excluded from voting. Section 181 of the
Companies Act, 1956, forbids members from exercising any voting right in
respect of shares on which any called or other sums presently payable have not
been paid. Section 182 expressly provides that a public company shall not
prohibit any member from exercising his voting right on the ground that he has
not held his share or other interest in the company for a specified period
preceding the date on which the vote is taken or on any other ground not being
a ground set out in section 181. Under section 41(2) of the Act every person
who agrees to become a member and whose name is entered in the register of
members shall be deemed a member of the company. I find this objection of Shri
Bhagirath Dass also to be without force.
I am,
therefore, of the view that the meeting which was held on the 12th of October,
1957, under the chairmanship of Shri D.N. Awasthy under my order dated the 22nd
of August, 1957, was called, held and conducted in accordance with the
provisions of section 189 of the Companies Act, 1956. This meeting will be
deemed to be a meeting of the company duly called, held and conducted. The
objections of Diwan Singh being without force are dismissed. There will be no
order as to costs.
Petitioner
dismissed.
[1959] 29 COMP. CAS. 263 (P&H)
V.
Minerva
Films Ltd.
TEK
CHAND, J.
CIVIL
ORIGINAL NO. 91 OF 1957
SEPTEMBER
24, 1958
TEK CHAND, J. - This is a petition by Shri Dewan Singh,
Director, Minerva Films Limited, made under section 155 of the Companies Act,
1956 (No. 1 of 1956) for the rectification of the register of members by
omitting the names of all persons mentioned in annexure A and B to this
petition. The Minerva Films Limited is a public company and was registered on
8th of February, 1952.
The
allegations of the petitioner briefly are that he is a holder of 2501 B class
shares of the value of Rs. 5 each, that at a meeting of the company held on
15th of June, 1952, a resolution was passed requiring the board of directors to
allot 5000 A class shares which are of Rs. 10 each. On 16th of August, 1952, at
the meeting of the directors of the company, 1205 A class shares were allotted.
At the meeting of the directors held on 30th of June, 1953, 1145 A class shares
were allotted. On 10th of August, 1953, 905 A class shares where allotted, and
on 28th of June, 1955, the directors again allotted 750 A class shares. On 26th
of February, 1956, 2085 A class shares were allotted. Thus up to the coming
into force of the new Companies Act, 6090 A class shares had been allotted.
After 1956 Act became law, 4075 A class shares were allotted on 22nd October,
1956, 2485 on 24th May, 1957, and 600 on 4th July, 1957. Thus the total number
of A class shares allotted after 15th June, 1952, came to 13,250 as against
5000 A class shares which the directors were authorised to allot.
The
contention of the petitioner is, that the allotments of A class shares at the
board meetings prior to the coming into force of the Companies Act, 1956, were
in contravention of section 105C of the Indian Companies Act (No. 7 of 1913)
and the shares allotted after the coming into force of the new Act were against
the provisions of section 81 of the Companies Act, 1956. It was urged that
under the resolution passed at the shareholders' meeting held on 15th of June,
1952, the directors were authorised to allot 5000 shares of A class of Rs. 10
each, but the directors actually allotted 13,250 such shares and thus acted
beyond the scope of their authority. In annexure A to the petition, there is a
list of the holders of A class shares who, according to the petitioner, should
not have been on the register of members and to whom unauthorised allotments
had been made at the meetings of the board of directors dated 26th of February,
1956, 22nd of October, 1956, 24th of May, 1957, and 4th of July, 1957. It was
also maintained that the procedure prescribed in section 105C of the old Act
and in section 81 of the new Act had not been followed, and the shares were not
offered to the members in proportion to the existing shares held by each
member, and notice specifying the number of shares to which each members was
entitled, was not given.
The second
ground, in support of the prayer for rectification of the register, is, that
allotments were made to minors whose names were listed in annexure B to the
petition. According to the petitioner, the allotments to the minors were void,
and therefore their names should be removed from the register of the members of
the company.
In the
written statement filed on behalf of the respondents, it is alleged that the
petition is mala fide. The petitioner was present at the meetings of directors
held on 16th of August, 1952, and on 4th of July, 1957, and he presided at the
meetings held on 30th of June, 1953, 10th of August, 1953, 28th of June, 1955,
26th of February, 1956, 22nd of October, 1956, and 24th of May, 1957. The
allotments, which are being objected to, were made not only without any
objection being raised by the petitioner but he was said to be a consenting
party to all the allotments. The allottees of A class shares had paid full
consideration and their names were rightly entered on the register of members.
Neither the company nor any a class shareholder had raised any objection to the
allotments in question. The allottees of A class shares in excess of 5000 had
purchased the said shares without notice of any defect in them, and it could
not, therefore, be said that their names had been entered without any
sufficient cause. The petitioner is the only person who has now raised
objections, although his holding is confined to B class shares. It is also said
that the petitioner is actuated by malice, as at a general meeting held on 12th
of October, 1957, under orders of this court, the majority of the shareholders
had voted against him and his party. It was finally argued that this court, in
equity, ought not to grant relief sought by the petitioner despite the
irregularities having been committed as alleged by the petitioner.
On the above
pleadings, the following issues were framed :
"1. Whether the names
of the respondents are liable to be removed from the register of members ?
2. Whether the petition is mala fide ?
3. Whether the petitioners
is estopped from challenging the allotment of shares to the respondents ?"
The
petitioner produced five witnesses besides appearing himself. The same and
substance of the statements of his witnesses is, that a number of minors had
been allotted shares which fact is not denied by the respondents. The
petitioners, Dewan Singh, as P.W. 6, stated that more shares than had been
originally decided upon, had been allotted by the directors, though no objections
had been made to the allotment of such shares. He admitted in cross-examination
that at most of the meetings of the shareholders and also of directors he
occupied the chair as the chairman. Application of no shareholder who had
applied for allotment of fresh shares had been rejected. He admitted that the
shares that had been allotted to the minors were fully paid up.
I have held
in another case between the same parties decided by me on 26th of December,
1957 (Diwan Singh v. Minerva Films Limited) that there was nothing in law,
preventing minor from becoming a transferee of shares, and, that such a
transaction was not void because of the minority of the transferees. There was
no bar to a minor acquiring or holding shares in a joint stock company and the
shares of the minors were fully paid up and they were subject to no obligation.
The main
argument of the learned counsel for the petitioners is that the provisions of
law contained in section 105C of the Act of 1913 and in section 81 of the new
Act have not been complied with, and that the directors exceeded their powers
in allotting more than 5,000 shares. In reply, Mr. Tuli, counsel for the
respondents, had not denied the above allegations that the allotments were in
contravention of the provisions of law, but has contended, that the
jurisdiction of this court is discretionary and the petitioner is not entitled
to the relief on equitable grounds. He has urged, that Dewan Singh, petitioner,
has been the chairman at most of the meetings at which the shares in question
had been allotted, and he was a party to those allotments. No shareholder has
come forward to say that he wanted to purchase the shares and would have done
so if they had been offered to him. Dewan Singh's own holding entirely of B
class shares, with respect of which there is no dispute. No case has been made
out be Dewan Singh, petitioner, that he or anybody else has been prejudiced by
the irregularity in question.
Section 155
of the Companies Act (No. 1 of 1956) confers upon the court very wide powers in
the matter of the rectification of the register of members, but the exercise of
these powers is circumscribed by the judicial discretion of the court. It is
now well settled that a petitioner seeking rectification of the register of
members is not entitled to an order ex debito justitiae. The jurisdiction under
this provision and under similar provisions under the previous Acts is
unlimited, but it has always been open to the court to allow or reject the
petition, and in exercising the discretion they are guided by equitable
principles.
In Bellerby
v. Rowland & Marwood's Steamship Company, limited KEKEWICH J. at page 273
observed :
"The
power of rectifying the register given by the 35th section of the Act of 1862
is discretionary in this sense - that the court properly can only exercise it
if satisfied of the justice of the case, and on many applications the court has
declined to exercise this power on the ground that it would not be fair to do
so, or, to put it more technically, that the applicant has not established any
equity to disturb the existing state of things. And, in considering this, the
court has always had regard to the lapse of time, and to any facts and
circumstances indicating acquiescence in the existing state of things by those
on whose behalf the application is made to disturb it."
LORD
MACNAGHTEN in Trevor v. Whitworth at page 440 observed :
"After
winding up, the court has that power under sections 35 and 98 (of Companies Act
of 1862). But it is a judicial power, as it has been called, and it is to be
exercised by the court, to use the language of section 35, 'if satisfied of the
justice of the case.' Those are not mere idle words. They mean, I think, what
they say."
LORD CAIRNS
L.J. in Sichell's case said :
"In my
opinion the reference in the 98th section to a rectification of the register
cannot mean that the court in winding up a company is to rectify the register
ex mero motu suo; it must mean that the court may exercise the judicial power
conferred by the 35th section, having regard to who is the applicant, and to
all the circumstances of the case, otherwise how could the court, according to
the language of the 35th section, be 'satisfied of the justice of the case
?'".
In In re
Kimberley North Block Diamond Mining Company, COTTON, L.J., said :
"Two
points have been raised on this appeal. The first is whether the court below
had jurisdiction under section 35 to rectify the register; the second, whether,
assuming there was jurisdiction, the order of the learned Judge was right.
Section 35 of the Companies Act, 1862, imposes no limit on the jurisdiction
thereby conferred on the court, though there may be cases in which it is not
desirable that it should be exercised."
The words
"if satisfied of the justice of the case" which occur in section 35
of the Act of 1862 do not appear in section 116 of the English Companies Act,
1948, but by virtue of the word "may" the court still has the same
discretion. Vide Palmer's Company Precedents, 17th Edition, Part 1, page 1085.
Section 155
of the Companies Act, 1956, corresponds to section 116 of the English Act of
1948 and to section 38 of the Indian Companies Act, 1913. Courts in India have
also been of the view that it is entirely a matter of discretion for the court
to order rectification of the register, vide Ramesh Chandra Mitter v. Jogini
Mohan Chatterji, Luchmee Chund v. The Bengal Coal Company, and Ariff v. Suratee
Bara Bazaar Company Limited.
I do not
think that the petitioner has made out a case for the exercise of judicial
discretion in his favour. Acceptance of his contention will result in upsetting
the established state of affairs with no benefit to anybody, the company or the
members or even the petitioner; the latter, being in minority, feels
disgruntled as he no longer has a dominating voice in the affairs of the
company. The respondents had paid the entire consideration and as such are
holders of fully paid up shares. Rectification of the register would result in
the removal of their names from the register, and they would be entitled to
receive back what they paid when they purchased the shares.
The company
opposes the petition as it does not want to return the share money to the
allottees of the shares, which probably has been utilised.
The allottees
of the shares were contracting in good faith with the company, and they were
entitled to assume, that the acts of the directors in making allotments of
shares to them were within the scope of their powers conferred upon them by the
shareholders of the company. They were not bound to inquire whether the acts of
the directors which, as in this case, related to internal management, had been
properly and regularly performed. Even where the directors exceed their powers
or infringe the restrictions imposed upon them, the company may be bound; for
an outsider dealing with the company is only required to see, that the
transaction on the face of it is regular and consistent with the articles.
Strangers are justified in assuming that all matters of "indoor management"
have been done regularly. The doctrine of "indoor management" was
stated thus by LORD HATHERLEY in Mahony v. East Holyford Mining Company.
"It is a
point of very great importance, that those who are concerned in joint stock
companies, and those who deal with them, should be aware of what is essential
to the due performance of their duties, both as customers or dealers with the
company, and as persons forming the company, and dealing with the outside world
respectively. On the one hand, it is settled by a series of decisions, ....
that those who deal with joint stock companies are bound to take notice of that
which I may call the external position of the company. Every joint stock
company has its memorandum and articles of association; every joint stock
company, or nearly every one, I imagine (unless it adopts the form provided by
the statute, and that comes to the same thing) has its partnership deed under
which it acts. Those articles of association and that partnership deed are open
to all who are minded to have any dealing whatsoever with the company, and
those who so deal with them must be affected with notice of all that is
contained in those two documents.
After that,
the company entering upon its business and dealing with persons external to it,
is supposed on its part to have all those powers and authorities which, by its
articles of association and by its deed, it appears to possess; and all that
the directors do with reference to what I may call the indoor management of
their own concern, is a thing known to them and known to them only; subject to
this observation, that no person dealing with them has a right to suppose that
anything has been or can be done that is permitted by the articles of
association or by the deed ... But, after that, when there are persons
conducting the affairs of the company in a manner which appears to be perfectly
consonant with the articles of association, then those so dealing with them,
externally, are not to be affected by any irregularities which may take place
in the internal management of the company. They are entitled to presume that
that of which only they can have knowledge, namely the external acts, are
rightly done, when those external acts purport to be performed in the mode in
which they ought to be performed."
In Royal
British Bank v. Turquand, the plaintiffs had sued upon a bond under the seal of
the company. It was alleged on behalf of the defendants that the directors had
exceeded their authority in executing the bond. It was however, not shown that
the plaintiffs were aware of it. It was held by Lord CAMPBELL C.J. that a mere
excess of authority by the directors of itself would not amount to a defence.
LORD CAMPBELL said :
"If the
directors had exceeded their authority to the prejudice of the shareholders by
executing the bond, and this had been known to the obliges, illegality, we
think, would have been shown. The obligors in executing, and the obliges in
accepting, the bond might be considered as combining together to inquire the
shareholders ... But without the scienter, and without prejudice to the
shareholders or any others whatsoever, illegality is not established against
the obligees. If no illegality is shown as against the party with whom the
directors contract under the seal of the company, excess of authority is a
matter only between the directors and the shareholders ... we think that the
bond cannot be rendered illegal and void from any irregularity in the
proceedings of the company, nor even by an excess of authority, the plaintiffs
having acted with good faith, and the shareholders not being prejudiced. The
plaintiffs have bona fide advanced their money for the use of the company,
giving credit to the representations of the directors that they had authority
to execute the bond; and the money which they advanced, and which they now seek
to recover, must be taken to have been applied in the business of the company
and for the benefit of the shareholders."
The above
observations equally apply to the facts of this case.
The judgment
of the Court of Queen's Bench was affirmed by the Court of Exchequer Chamber.
JERVIS C.J. with whom the other Judges concurred, said :
"Parties
dealing with the directors of these joint-stock companies are bound to read the
deed or statute limiting the directors' authority, but they are not bound to do
more. The plaintiffs therefore, assuming them to have read this deed, would
have found, not prohibition to borrow but a permission to borrow on certain
things being done. They have, in my opinion, a right to infer that the company
which put forward their directors to issue a bond of this sort, have had such a
meeting and such a resolution passed as were requisite to authorize the
directors in so doing." (Vide Royal British Bank v. Turquand).
LORD SIMONDS
in Morris v. Kanssen, said :
"My
Lords, I think that this question admits of any easy answer. The so-called rule
in Turquand's case is, I think, correctly stated in Halsbury's Laws of England,
2nd ed., Volume V. at page 423 : 'But persons contracting with a company and
dealing in good faith may assume that acts within its constitution and powers
have been properly and duly performed and are not bound to inquire whether acts
of internal management have been regular." (See Halsbury's Laws of
England, 3rd edition, volume 6, page 430).
The doctrine
of internal management which emerges from a consideration of the above and
other authorities has been summarised thus :
"But
even where the directors exceed their powers or infringe the restrictions
imposed on them, the company may be bound; for an outsider dealing with the
company is only bound to see that the transaction is apparently regular and
consistent with the articles. He need not go into internal matters, e.g.,
ascertain that a particular resolution has been passed, that a particular
meeting has been duly held, or that particular formalities have been complied
with : he is entitled to presume omnia rite acta; but if he knows of the
irregularity the case is different." (See Palmer's Company Precedents,
16th Edition, Part I page 562).
In Damodara
Reddi v. Indian National Agencies Limited, the facts were somewhat similar. A
company consisted of six members all of whom were directors. In a directors'
meeting, where five were present, two outsiders were allotted shares on their
applications to that effect. The allotments were discovered to be in
contravention of article 5 of the articles of association which required
sanction of the general meeting. Applying the doctrine of internal management,
it was held that the applicants for shares were entitled to assume that the
directors were acting regularly and that the sanction of the company in general
had in fact been obtained and, therefore, the allotments could not be avoided.
The rule in
the case of Royal British Bank v. Turquand, is based on the principle that a
person who transacts business whit a company is not abliged to inquire whether
matters of internal management have been complied with, if apparently the acts
seem to be regular; and in such a case, he is entitled to assume that acts
within its constitution and power had been duly performed. The intention of the
rule is to protect particularly outsiders dealing with the company, who, in the
absence of knowledge, are entitled to assume that omnia rite et solemniter esse
acta.
In this case
the transaction which have been impugned, took place some years ago. The
petitioner, who was present and who was presumed to be aware of the restricted
authority of the directors, had not chosen to bring that fact to the notice of
the intending purchasers. It is not his case that they were aware that the
directors were authorised to allot not more than 5,000 A class shares. After
receiving payments to the full value of the shares, and after a passage of long
time, it is not open to the company, least of all to Dewan Singh, petitioner,
to question the legality of a transaction to which he was a party. It has
already been noticed, that the company supporting the shareholders and opposing
the petition. In this case, virtually Dewan Singh is asking this court to
overlook his ignorance and to condone his act of dereliction of duty, and to
undo an irregularity to which he was a party, and in a matter in which the
shareholders and the company stand to gain and not to lose. He wants to disturb
the established state of affairs, which if his contention is maintained, will
bring about chaos, and land the company and the shareholders in great
difficulties. This applications, has not been moved out of altruistic
considerations.
The
shareholders and the company maintain that this application has been brought
out of malevolence; it certainly is not out of any benevolence.
The petition,
to my mind, is mala fide. All the equities are against the granting of the
petition. It is a case in which judicial discretion should be exercised in
favour of status quo and the existing state of affairs ought not to be
disturbed. I find this application to be devoid of merit, and accordingly, I
dismiss it with costs.
Petition
dismissed.
[1945] 15 Comp Cas 32 (OUDH)
in the
v.
R.G. Cotton Mills Co. Ltd.
Bennett, J.
September 4,
1944
Bijay Shanker for
Applicant.
J.K. Tandon for Opposite Party 1.
This is an application under Section 38, Companies Act, by Messrs. Ganesh
Das Ram Gopal, described in the application as a "firm carrying on
business in partnership situate at Halwasiya Court Hazratganj Lucknow."
The opposite parties are Messrs. R.G. Cotton Mills, Co. Ltd., Talkotora,
It is further stated in the application that the applicant had learnt
that Mr. Ranjit Singh, Managing Director of the R.G. Cotton Mills Co., Ltd. had
previously attempted to purchase the shares from opposite party 2, threatening
that if he did not sell them to him (Mr. Ranjit Singh) he could not sell them
to anyone else. It is suggested in the application that the Directors are
attempting to acquire the shares themselves, and (or this reason arbitrarily
refused to recognise the transfer in
question. It is submitted that their refusal to recognize the transfer is not
in the interest of the company. For these reasons the applicant prays that the
Court may be pleased to order the name of the applicant to be substituted in
place of opposite party 2 as a registered share-holder of these shares. The
application was opposed by opposite party 1 who filed a written statement.
Opposite party 2 did not enter an appearance, and proceedings have been
ex-parte against him.
Two preliminary issues were framed
arising out of the written statement: 1. In view of the provisions of Art. 42
of the Articles of Association is this application under Section 38, Companies
Act, not maintainable ? 2. If it is maintainable notwithstanding those
provisions, is the application under Section 38 not maintainable because the
transfer under consideration was made in the firm name of a partnership concern
and not in the name of any person ? A third issue was framed to be considered
only if the first two issues were decided in the applicant's favour. This read:
3. If the application is maintainable was the refusal to register made
arbitrarily or wantonly and should registration be ordered by the Court under
Section 38 of the Act ? Article 42 of the Articles of Association referred to
in issue 1 reads :
"The Directors, without assigning any reason for
such refusal, may decline to register any transfer of shares whether it be in
the name of a member or non-member."
I have heard arguments on the
first two issues. As regards the first, it does not appear to me that the
provisions of Art. 42 are relevant for this purpose. It might be necessary to
consider the effect of these provisions on issue 3, but that would only arise
on the finding that the application is maintainable. Issue 1 was not strongly
pressed. Learned counsel cited In re Gresham Life Assurance Society ; Ex parte
Penney,
in which it was held that the directors of the company concerned were not bound
to disclose their reasons for rejecting a transferee, provided that they had
fairly considered the question at a meeting of the board; and that, in the
absence of evidence to the contrary the Court would take for granted that they
acted reasonably and bona fide. But if there is evidence to show that the
Directors who have such a power have exercised it capriciously or unfairly, the
court has jurisdiction to interfere. It seems to me that this case may be
relevant on issue 3, but has no application to the first. It is in no way
suggested by it that an application for registration is not maintainable : in
fact just the contrary. I find against opposite party 1 on issue 1 therefore
and come to issue 2 which raises the question whether the application must fail
because the transfer under consideration was made in the firm name of a
partnership concern and not in the name of any person.
The transfer deed shows that
Sheikh Mohammad Habibullah sold the shares to Messrs. Ganesh Das Ramgopal for
the sum of Rs. 510, and the application is made by Ganesh Das Ramgopal without
any reference to the partners of this firm. There is nothing to show whether
the partners are persons so named or who they are. Section 38 refers to the
entry of the names of persons in the Register of members of a company and it is
essential therefore to hold that the firm is a person for this purpose before
an application under Section 38 can be further considered. Learned counsel for
opposite party 1 referred on this point to Various authorities, both English
and Indian. An English case on which he telied is In re Vagliano Anthracite
Collieries, Ltd. In this
ease the application was to enter the names of two persons, Thomas Blair and
William Blair Girling, Who were solicitors in partnership under the name of
"Blair and W.B. Girling.”
The transfer in question was in favour of "Messrs. Blair and W.B.
Girling." The company (i.e., Vagliano Anthracite Collieries, Ltd.) refused
to register the transfer in this form. It was held that the application must
fail, because a firm is not a person in law, distinct from the partners who
compose the firm. Reference was made in this case to another English case,
Sadler v. Whiteman at p. 889.
The quotation given from this case reads:
"The fallacy is to say that a partner in a firm does not, but the
firm does, carry on business. In English law a firm as such has no existence,
partners carry on business both as principals and as agents for each other
within the scope of the partnership business; the firm name is a mere
expression, not a legal entity, although for convenience under Order 48 A it
may be used for the sake of suing and being sued."
It was pointed out by the learned counsel for the opposite party that in
that case the Act under consideration was the Money Lenders Act, 1900. This is
so, but the observations quoted are of a general nature of Indian cases,
reference was first made to Sheodoyal Khemka v. Joharmull Manmul, in which
it was held that a partnership firm is not a person but is merely a collective
name of the individuals who are members of the partnership and as such cannot
be a partner in another firm. A similar view was taken by the Allahabad High Court
in Brij Kishore Ram Sarup v. Sheo Charan Lal, the
headnote to which commences as follows:
"A firm being only an association of persons
which has no corporate capacity, a firm as such cannot enter into a partnership
with other individuals."
Learned counsel for the applicant also referred to certain provisions of
the Partnership and Companies Act. He pointed out that under Section 4,
Partnership Act "partnership" is the relation between persons who
have agreed to share the profits of a business carried on by all or any of them
acting for all. Persons who have entered into partnership with one another are
called individually "partners" and collectively "a firm,"
and the name under which their business is carried on is called the "firm
name." Section 31, Companies Act, provides for the keeping of a register
of members. This must show inter alia the names and addresses and the
occupation, if any, of the members.
Reference was also made to Art. 13 of the Articles of Association which
provides that save as otherwise provided the company shall be entitled to treat
the registered holder of any shares as the absolute owner and shall not, except
as ordered by a Court of competent jurisdiction, or as by statute required, be
bound to recognize any equitable or other claim to or interest in such share on
the part of any other person. It was contended that the scheme of the Companies
Act implies that only persons shall be recognized as members of a company.
Section 5 provides the mode of forming an incorporated company by seven or more
persons subscribing their names to a memorandum of association and otherwise
complying with the requirements of the Act in respect of registration. Section
28 refers to the shares or other interest of any member in a company as being
movable property, and Section 30 defines members as persons whose names are
entered in the register of members.
For the applicant reliance was placed on the provisions of Section 3(39) General
Clauses Act, which defines "person" as including any company or
association or body of individuals whether incorporated or not. But the
definition in Section 3 is subject to the proviso "unless there is
anything repugnant in the subject or context," and repugnancy, it was
argued may be inferred from the provisions of the Companies Act referred to.
Reference was made to the case in CIT, Madras v. M. Chidambaram Nadan. In this case
under the Income-tax Act it was held that the definition in the General Clauses
Act, 1897, was applicable and that as provided therein the word
"person" clearly includes a firm. The answer given to this was that
there is nothing repugnant in the Income-tax Act to the application of the
definition given in the General Clauses Act, while in the Companies Act there
is.
An English case on which reliance was placed for the applicant is In re
Land Credit Company of Ireland generally
referred to as Weikersheim's case. It is indeed stated in the headnote to this
case (which is of the year 1873) that it was held that shares can be
sufficiently registered in the name of a firm, but this seems to me to be
misleading. The question for consideration in this case was whether the firm to
whom shares in a company had been transferred could be held liable as
contributories on the winding up of the company. The transferring firm had not
itself been registered at the time of transfer, but subsequently the register
of members was brought up to date, registration in favour of the transferring
firm being dated before the registration of the firm to whom the shares had
been transferred. In the arguments, reference was made to the fact that in no
previous case had a firm been made liable as contributories. It had been
decided that a corporation can be a shareholder, but not a firm. There was no
express consideration in the judgment of this general question, attention being
concentrated chiefly on the effect of the irregularities which attended the
registration. The transferees were held liable as contributories. One learned
Judge (Sir G. Mellish, L.J.) confessed that he had some doubt whether, if the
company had inserted the names of the transferees on the register as
shareholders on the date of transfer that would have made them shareholders. He
was of opinion that it would only make them shareholders by way of estoppel. It
would also appear that the registration was in the names of the partners of the
firm. The same learned Judge observed:
"I am of opinion that if money has been lent by
a banking firm to a shareholder in a company, one partner in that firm has
authority to take a transfer of shares in the company as security for that
loan; and by the laws of this country if a transfer is under those
circumstances made and registered, the members of that firm do, to all intents
and purposes, become shareholders in the company."
The other learned Judge (Sir W.M. James, L.J ), in considering an
objection to the description of the new members in the register expressed the
opinion that it was a sufficient description of the individuals who then
constituted the firm. The objection on this ground was as immaterial "as
if any individual shareholder in this company were entered by his name of
office or by his title as a peer, instead of being entered by his Christian
name and surname." It would appear from this that registration was made in
favour of the actual partners in the firm, however they may have been
described. I cannot therefore consider this case as an authority for the
general proposition that shares in a company may be registered in the name of a
firm. Lastly learned counsel relied on the provisions of Order 30, Rule 1,
Civil Procedure Code, which allows two or more persons claiming or being liable
as partners and carrying on business in British India to sue or to be sued in
the name of the firm. The rule also, it may be noted, provides that any party
to a suit may in such case apply to the Court for a statement of the names and
addresses of the persons who were, at the time of the accruing of the cause of
action, partners in such firm, to be furnished and verified in such manner as
the Court may direct. Reference was made to this provision in Brojo Lal Saha v.
Budh Nath Pyarilal & Co. As shown in
the English case in Sadler v. Whiteman the rule is
one of convenience. The learned Judge in the Calcutta case cited various
authorities and the following observations are relevant:
"Our attention has been drawn by the learned advocate for the
respondent to the observations made by Lindley, L.J., in Western National Bank
of the City of New York v. Perez Triana & Co., which
runs thus: 'When a firm's name is used, it is only a convenient method for
denoting those persons who compose the firm at the time when that name is used,
and a plaintiff who sues partners in the name of their firm in truth sues them
individually, just as much as if he had set out all their names." Similar
observations were made by Farwell, L.J., in Sadler v. Whiteman where the
Lord Justice observes that when a firm is sued, all the members of the firm are
to be considered as parties. Similar observations were also made in Heinemann
& Co. v. S.B. Hale & Co. It is
contended on behalf of the app3llant that the observations, which were made in
those cases, were with reference to different enactments and should not be
applied to the present case. It is no doubt true that those observations were
made with reference to different Acts, but the sole question is whether the
firm is a separate personality as such, and in my judgment the observations of
the learned Judges familiar with the law of partnership are of great assistance
in arriving at a conclusion on the question. Those observations were followed
in this Court by my learned brother, Page, J., in Sheodoyal Khemka v. Joharmull
Manmull.
At p. 558 the learned Judge observes: 'A partnership under Section 239,
Contract Act, is a relationship which subsists between persons; but a firm is
not a person: it is not an entity: it is merely a collective name of the
individuals who are members of the partnership. It is neither a legal entity,
nor is it a person.' With this observation I entirely agree."
Upon these authorities there appears to me to be no doubt that the
Companies Act does not contemplate the registration of the name of a firm as
the holder of its shares, but only individuals or other legal entities. I hold,
therefore, on issue 2 that the application is not maintainable because the
transfer under consideration was made in the firm name of a partnership concern
and not in the name of any person. The application is accordingly dismissed
with costs.
[1958] 28 COMP. CAS. 13 (KER.)
V.
West
Coast Planters Agencies Ltd.
SANKARAN AND RAMAN NAIR JJ.
SEPTEMBER 2, 1957
RAMAN NAIR
J. - These appeals by the
State against acquittal of the same accused persons in two different cases
raise the question whether there can be a general meeting under section 76(1)
of the Indian Companies Act, 1913, of a company consisting only of one member.
The first accused in both the cases is the company itself, a private company as
it happens to be, and the second accused is the managing director of the
company who, at the relevant time, was its sole member. In one case the
prosecution was for an offence under section 76(2) of the Companies Act for
failure to hold a general meeting in the year 1953 as required by section 76(1)
; in the other, it was for an offence under section 133(3) read with section
131 for failure to lay before the company in general meeting a balance-sheet
and profit and loss account in the same year ; and in both the liability
depends upon whether section 76(1) enjoins such a meeting in the case of a one
man company or, perhaps, to put it more correctly, whether section 76(1)
applies to such a company. The learned Magistrate who tried the case took what
seems to us the common sense view that for a meeting there must be at least two
persons, that a man cannot meet himself, and that the general meeting required
by section 76(1) being an impossibility, no liability attached under section
76(2) or section 133(3) to either of the accused. In this view he acquitted the
accused in both the cases, and hence these appeals.
2. We are inclined to think
that the common sense view taken by the learned Magistrate is also the true
view in law. The word “meeting’ is thus defined in the Shorter Oxford
Dictionary, “an assembly of a number of people for entertainment, discussion,
or the like,” and in Black’s Law Dictionary, as, “a coming together of persons
; and assembly. Particularly in law, an assembling of a number of persons for
the purpose of discussing and acting upon some matter or matters in which they
have a common interest.” It would follow that for a meeting, there must be at
least tow persons, and that this is the ordinary and natural meaning of the
word is recognised in the only two reported cases that have been brought to our
notice. In the first of these, Sharp v. Dawes the validity of a call made at a
meeting of a company purporting to have been held by one shareholder was in
question. The statute, viz., section 10 of the Stannaries Act, 1869, required
that the call should be made at a meeting of the company with special notice,
and, in pronouncing against the validity of the call on the ground that one man
could not hold a meeting within the meaning of the Act, LORD COLERIDGE C. J.
said : “the word `meeting’ prima facie means a coming together is nothing here
to show this to be the case.” MELLISH L. J. was more forthright and it would
appear that he refused to contemplate a meeting of one person. “It is clear”,
he observed, “that, according to the ordinary use of the English language, a
meeting could no more be constituted by one person than a meeting could have
been constituted if no shareholder at all had attended.”
3. In the second case, East v.
Bennett Brothers Limited WARRINGTON J. following Sharp v. Dawes, and also the
decision of JESSEL M. R. in Sanitary Carbon Co., In re, observed that in an
ordinary case it was quite clear that a meeting must consist of more than one
person. The learned judge however we on to hold that the word “meeting’ was
used in the memorandum of association he was construing in a special sense, and
that having regard to the purpose of the particular clause, namely, that the
formal consent of the preference shareholders should be obtained before
anything was done affecting their rights, the framers of the document, who must
have contemplated the possibility of all the preference shares being held by
one person, must have used the word “meeting” in a sense different from the
ordinary sense and as including the record, in a formal manner, of the assent
of a single person when he happens to be the sole preference shareholder. He
thought that that was one of the cases referred to by LORD COLERIDGE C. J. as
one in which it may be possible to show that the word “meeting” had a meaning
different from the ordinary meaning. The learned Judge also seems to have
thought that the circumstance that in the two cases referred to by him there
were several shareholders whose proxies were held by the single shareholder who
held the meeting, whereas in the case he was deciding there was only one
preference shareholder, made a difference. We agree ; but with due respect we
think the difference makes the case of a one-man company an a fortiori case.
4. It is to be observed that
both LORD COLERIDGE C. J. and WARRINGTON J. were dealing only with civil
obligations and that neither was construing a panel statute. WARRINGTON J. in
particular was construing only a memorandum of association of a company, and
the degree of latitude he allowed himself is apparent from the question he
posed himself, namely. “whether what the company did was in effect, although
not perhaps in terms, within the provisions of the memorandum and articles of
association, and if it was in effect though not in terms, whether there was a
sufficient compliance with the memorandum and articles to render the
proceedings valid,” although he straightaway put it in a different form,
namely, whether, upon the true construction of the memorandum and articles the
proceedings were not really and in terms a compliance with them.
5. One thing is clear from both
these decisions as also on the high authority of JESSEL M. R. in Sanitary
Carbon C., In re (the report of which has however not been placed before us),
and that is that, according to the ordinary use of the English language, a
meeting can no more be held by one person than it can be by none.
6. It is hardly necessary to
repeat what has been so often said that the golden rule of construction is that
the grammatical and ordinary sense of the words used in a statute should be
adhered to unless that would lead to some absurdity or repugnancy or
inconsistency with the rest of the statute. Words have to be given their plain,
fair and natural meaning where it is not apparent from the scope and intendment
of the statute that such a meaning would be inconsistent or would lead to
manifold injustice. It is no more necessary to say that the provisions of a
penal statute must be strictly construed, that a man cannot be punished for
breach of an obligation of which the words imposing that obligation do not give
him clear notice, or to put it somewhat differently, that a man cannot be
punished for failing to do, not what the statute on the face of it requires him
to do according to the ordinary and natural meaning of the words employed, but
according to some meaning that can be read into them by an involved process of
reasoning. No doubt as Maxwell observes (Chapter X, 9th edition) the rule of
strict construction in the case of penal statutes was more rigorously applied
in former times, and the tendency of modern decisions, upon the whole, is to
narrow materially the difference between what is called a strict and a
beneficial construction. The rule of strict construction must yield to the
paramount rule that every statute is to be expounded according to its express
or manifest intention. Nevertheless the intention to use words in a sense
different from their natural and ordinary sense must first be established, and
this more strictly in a criminal case.
7. We are told that section 76
of the Companies Act, in fact the Act as a whole, uses the word “meeting” in a
very special sense as including resolutions. The argument advanced in support
of this view is that, in law, there can be a company with only one member -
although under section 5 of the Companies Act at least tow persons are
necessary for forming a private company and seven for a public company ;
sections 147 and 162 (iv) contemplate the reduction of the membership to below
two. Therefore, since there can be a company with only one member, all the
provisions of the Act, including section 76, must apply to such a company. The
legislature could not have intended otherwise. There are so many provisions in
the Companies Act as, for example, sections 32 and 131 that depend on the
holding of the annual general meetings and many more, that depend on statutory
or extraordinary general meetings, and having regard to the scope and
intendment of the statute, it cannot be that these provisions, with the
obligations that they carry, were not intended to apply to the case of a one man
company.
8. So runs the argument, and our
attention has also been drawn to regulations 51 and 52 of the Regulations in
Table A of the first schedule to the Act (now embodied in section 174 of the
Companies Act, 1956) which read together imply that a meeting can be held with
less than two members. For regulation 51 lays down that two members personally
present shall be a quorum in the case of a private company and regulation 52
says that if at an adjourned meeting a quorum is not present, the members present
(which covers the case of one member, the plural including the singular, and
which, in the case of a private company can be only one) shall be a quorum.
9. The first answer that occurs
to us to this argument is that if sections 147 and 162 (iv) of the Act
contemplate the case of a one-man company they contemplate also a no man
company, for the reduction of membership below two or seven as the case may be,
can as well be to zero as to one. Similarly in the case of the regulations, the
absence of a quorum of two includes a case where none is present. That this is
in accord with strict legal theory, and that a company does not cease to exist
merely because it has ceased to have any members would appear from the
following observation in Salmond on Jurisprudence (page 339, 10th edition) :
“There is no
reason why a corporation should not continue to live, although the last of its
members is dead.”
By a parity of
reasoning a company should be obliged to hold an annual general meeting of its
members although it has no members.
10. We do not profess to read the
mind of the Legislature apart from what appears from the words it has used, but
it might well be that the Legislature thought it unnecessary that the
obligations under section 76 of the Act and under the other sections depending
on it, should be imposed on a one-man company. All these provisions, it will be
noticed, are primarily designed for the protection of the members of a company
against those in actual management of its affairs. They do not appear to be
designed so much for the protection of the general public, and that is why a
private company, all the members whereof would ordinarily have a hand in the
actual management, is exempt from some of the provisions : see for example
section 77(11) which exempts a private company from the provisions of that
section. Where a company consists of only one member he would naturally be in
conduct of its affairs, and the Legislature might well have thought it
unnecessary to protect him against himself. For the general public dealing with
such a company, it was probably thought that provisions like section 47 and
section 162(iv) would afford sufficient protection.
11. It is also possible that, in
framing section 76, the Legislature lost sight of the fact that there could be
a one-man company and proceeded on the basis that there would always be two or
more members. In any case, the notion of one man calling a meeting of himself,
going to that meeting to meet himself, electing himself to the chair, presiding
over himself, laying before himself the matter to be considered, and, after
having discussed these matters with himself, passing resolutions with regard to
them, and, perhaps, as was the case in Sharp v. Dawes , proposing a vote of
thanks to himself, sounds so Gilbertain that we should think that, unless the
words used expressly, or by necessary implication, point to it, the Legislature
could not have contemplated such a thing.
12. Such words are, in fact, to
be found in the explanation to section 186(1) (as also in the explanation to
section 167(1) of Companies Act, 1956) which states that the directions given
by the court under that sub-section may include a direction that one member of
the company shall be deemed to constitute a meeting. This, we are told, is only
declaratory of the law under section 79(3) of the Act of 1913 as that
provisions was judicially interpreted. That might well be so ; but even so it
clearly implies that in the sense in which the word “meeting” used in the Act
of 1956 (Which cannot be less comprehensive than the sense in which it is used
in the Act of 1913, the provisions of the later Act being more far-reaching)
there cannot be a meeting of one member of a company. It requires a direction
of the court (or of the Central Government as the case may be) before one
member can even be deemed to constitute a meeting. This, we should imagine is
conclusive against the argument advanced on behalf of the State.
13. We have been referred to the
decision of a Bench of this court in Peermade Tea Co. Ltd. v. Executive
Authority, as authority for the proposition, with which we have no quarrel,
that, if the context requires it, a word must be given a meaning wider than its
ordinary or primary meaning. But that decision which concerns itself with the interpretation
of the word “house” as used in a local administration statute, an ambiguous
word which has long outgrown its primary meaning of a building for human
habitation and has, especially in the context of rates and taxes, come to
include all manner of buildings, has no direct bearing on the present case. Our
attention is however invited to the following aphorism of Judge learned hand
which is quoted in that case, “it is one of the surest indexes of a mature and
developed jurisprudence not to make a fortress out of the dictionary.” We can
only observe that it is certainly not the index of such a jurisprudence to make
a flood-gate of the dictionary through which can enter any extravagance of the
mind.
14. It is said that it was the
duty of the company and of the sole surviving member to bring on the register
the legal representatives of the deceased members, and that the accused cannot
be allowed to take advantage of their own remissness. But we have not been
shown any provision of the Act which imposes such a duty ; nor are we aware
that a legal representative can be compelled to come on the register.
15. The
appeals fail and are dismissed.
Appeals
dismissed.
[1989] 66 COMP. CAS. 358 (ALL.)
HIGH COURT OF
H.N. SETH J. Ram Govind Misra
v.
Allahabad Theaters (P.) Ltd.
COMPANY PETITION NO. 17 OF 1983
APRIL 4, 1985
Janardan Sahai for the Petitioner.
R.K. Agarwal for the Respondent.
H.N. Seth J.—Sri Ram Govind Misra, claiming himself to be a
contributory of the compay, known as Allahabad Theatres Pvt. Ltd., has filed
this petition praying for the winding up of the company. The petitioner claims
that the company has suspended its business and has become commercially
insolvent. Neither has the company held its annual general meetings, nor has it
filed its annual returns with the Registrar of Companies. Consequently, it is
expedient and in the interest of justice that it should be wound up.
The petition was admitted on
September 30, 1983. The court directed that the notice should be issued to the
company and other persons arrayed as respondents in the case. On January 9,
1984, one Shri Bhagwan Das Jaiswal, claiming to be a director of the company,
filed a counter-affidavit questioning the right of the petitioner to file the
winding up petition and asserting that the petition is mala fide and has been
filed for ulterior reasons. He also controverted the other allegations made in
the petition. Subsequently on November 10,
1984, an application (Paper No. A-12) was filed on behalf of the company
wherein it was prayed that the order admitting the petition be revoked and that
the petition be not advertised as the same is not maintainable and has been
filed for ulterior reasons.
I have heard learned
counsel for the parties on the question regarding the right of Sri Ram Govind
Misra to maintain the present petition.
Briefly stated, the facts
bearing on this controversy are that the authorised share capital of the
company is Rs. 1,20,000 divided into 160 equal shares of Rs. 750 each. The
issued share capital of the company is Rs. 45,000 divided into 60 equity shares
of Rs. 750 each fully paid-up. Two of such fully paid-up equity shares were
held jointly by Sri Mahadeo Prasad, father of the petitioner and Sri
Purushottam Dat. Sri Mahadeo Prasad died and the petitioner claims that he,
having succeeded to the right of his father, has become a contributory and is
entitled to file the present petition for the winding up of the company. This
claim made by the petitioner is resisted on behalf of the company and it is
urged that the petitioner, whose name does not yet find place in the register
of members of the company, cannot be considered to be a contributory entitled
to maintain the winding-up petition.
The principal question,
therefore, that arises for consideration in this case is as to whether the
petitioner has become a "contributory" within the meaning of section
428 of the Indian Companies Act (hereinafer referred to as the Companies Act).
The expression
"contributory" has been defined in section 428 of the Companies Act
as under :
"The term
'contributory' means every person liable to con tribute to the assets of a
company in the event of its being wound up, and includes the holder of any
shares which are fully paid up………."
It is the not the case of the petitioner that he is a
person who is liable to contribute to the assets of a company. He claims that
after the death of his father, Sri Mahadeo Prasad, who jointly held two fully
paid-up shares of the company along with Sri Purushottam Dat, the interest of
his father has devolved upon him and that he has become entitled to the shares
held by his father. Inasmuch as he holds certain fully paid up shares of his
father and he is a "contributory" within the meaning of the
expression used in section 428 of the Companies Act he is, as laid down in
section 439(1)(c) of the Act, entitled to maintain the petition.
Section 28(2) of the
Companies Act lays down that, in the case of any company limited by shares
which is registered after the commencement of this Act, and in so far the
articles do not exclude or modify the Regulations contained in Table
"A" of Schedule-1 of the Companies Act, those regulations shall, so
far as, applicable be the regulations of the company in the same manner and to
the same extent as if they were contained in a duly registered articles.
Similar provisions existed in the corresponding sections 17 and 18 of the
Companies Act, 1913 as well. Regulation 25 of Table “A" to Schedule I to
the Companies Act, 1956 and corresponding regulation 21 of Table "A"
to Schedule I to the Companies Act, 1913 lay down that on the death of a
member, the survivor or survivors where the member was a joint holder and his
legal representative where he was a sole holder, shall be the only persons
recognised by the company as having any title to his interest in the share.
There is nothing on the record of this case to show that there was anything in
the articles of the company which excluded or modified the applicability of
regulation 25 of Table "A", Schedule I to the Companies Act, 1956 or
of regulation 21 of Table “A" Schedule I of the old Companies Act.
According to the aforementioned regulation, where shares are held jointly and
one of such joint shareholders dies, it is the survivor who alone is to be
recognised as having title to the said shares. The question of a legal
representative of a shareholder becoming entitled to the shares arises only in
a case of a sole shareholder.
In the instant case,
admittedly, the shares were held jointly by Shri Mahadeo Prasad, the father of
the petitioner and Sri Puru-shottam Dat. Accordingly, after the death of Sri
Mahadeo Prasad, it was Sri Purushottam Dat, who alone became entitled to those
shares and no title in respect of those shares passed to the heir and the legal
representative of Sri Mahadeo Prasad. In this view of the matter, it cannot be
said that after the death of Sri Mahadeo Prasad, any interest or title to the
shares held jointly by Sri Mahadeo Prasad and Sri Purushottam Dat devolved upon
the petitioner. As the petitioner has failed to establish that, in law, he was
entitled to hold the shares jointly held by Sri Mahadeo Prasad and Shri
Purushottam Dat, he cannot be said to be a holder of those shares or a
"contributory" as defined in section 428 of the Companies Act.
During
hearing of the case, learned counsel for the company also submitted that even
if it be assumed that the interest of Sri Mahadeo Prasad in the shares held
jointly by him and Sri Purushottam Dat did, after the death of Sri Mahadeo
Prasad, devolve upon the petitioner as his heir and legal representative, the
petitioner was, as laid down in sub-section 4(b) of section 439 of the
Companies Act, not entitled to maintain this petition inasmuch as those shares
did not stand registered in his name for a period of six months. For this
purpose, he placed strong reliance on a decision of the Madras High Court in
the case Nagalakshmi B. v. Mannargudi Transports (P.) Ltd. [1968] 38 Comp Cas 147
(Mad) wherein it was held that under section 439(4)(b), it was necessary that
the shares which a person claims to have devolved upon him must also stand
registered for a period of six months before he can maintain a petition for the
winding up of the company.
Learned
counsel appearing for the petitioner seriously disputed this proposition and
urged that the decision in the aforementioned Madras High Court's case is
wrong. In support of his contention, he relied upon the decision in the case Re
Bayswater Trading Co. Ltd., [1970] 1 All ER 608, where Buckley J. while
interpreting similar provisions contained in section 224 of the English
Companies Act ruled that there is nothing therein to indicate that a person on
whom the shares devolve on the death of any holder must have been registered as
a holder of those shares before he becomes entitled to maintain the winding up
petition. Although I feel that there is force in the submission made by learned
counsel for the petitioner that the decision in the case of the Madras High
Court, in Nagalakshmi (B.) v. Mannargudi Transports (P.) Ltd. [1968] 38 Comp
Cas 147 is of doubtful validity, it is in view of my finding that in a case
where shares are held jointly, the interest of the deceased shareholder passes
to the survivor and not to the heir of the deceased and that the said heir
neither becomes a holder of a share nor a contributory within the meaning of
section 428 of the Companies Act, it is not necessary for me to go into this
question.
Inasmuch as the petitioner
has failed to satisfy me that after the death of his father, Sri Mahadeo
Prasad, he (the petitioner) became a contributory, the present petition filed
by him in such capacity for the winding up of the company should be dismissed
as not maintainable. The petitioner does not claim to maintain this petition in
any other capacity.
In the result, the
application (paper No. A-12) filed on behalf of the company is allowed and the
Company Petition No. 17 of 1983 is dismissed as not maintainable.
The parties shall bear
their own costs.
[1953] 23 COMP CAS 335 (BOM)
HIGH COURT OF
v.
Indian
Manufacturing Co. Ltd.
CHAGLA C. J. AND SHAH J.
FEBRUARY 17, 1953
M.V. Desai, S.A. Desai and K.H.
Kaji, for the Appellants.
Sir Jamshedji Kanga, Purshottam
Tricumdas and P.N. Bhagwati, for the Respondents.
Chagla C. J.—This is an appeal against the
judgment of Mr. Justice Desai, and the appeal involves a very short question as
to the construction of Section 30(2) of the Indian Companies Act, and the
construction becomes necessary under circumstances which we will presently
relate. Plaintiff No. 1 is the father of plaintiffs Nos. 2 and 3 and they filed
a suit for a declaration that certain shares which they held in the first
defendant company were not subject to the lien of the company and that the
company was not entitled to enforce a lien against these shares. The shares
with which we are concerned are five shares registered jointly in the names of
plaintiffs Nos. 1 and 2, 44 shares registered jointly in the names of the three
plaintiffs, and three half shares also registered jointly in the names of the
three plaintiffs. The plaintiffs also had one share jointly with Bai
Harkuverbai, the wife of plaintiff No. 1, and with regard to this share the
question arises because of the counterclaim to which a reference will be
presently made. The first defendant company filed its written statement and
also a counterclaim, and in the counterclaim they made Harkuverbai also a
defendant and they claimed by the counterclaim a lien on all the shares to
which reference has just been made, also a right to enforce its lien, and the
counterclaim stated that the lien was being exercised by reason of a debt due by
plaintiff No. 2 to the company. When the matter came for hearing before Mr.
Justice Desai, the plaintiffs admitted that a sum of over Rs. 6,00,000 was due
by plaintiff No. 2 to the defendants and all issues of fact which arose on the
pleadings were admitted by the plaintiffs. The plaintiffs contented themselves
with arguing before the learned Judge below a short and narrow point of law,
and the point that they put forward was that as the debt was due solely by
plaintiff No. 2 and as the shares did not belong to plaintiff No. 2 alone but
were the joint shares of plaintiff No. 2 along with plaintiff No. 1 or
plaintiff No. 3 or Harkuverbai, the company had no right to enforce the lien in
respect of these shares. The learned Judge decided this point of law against
the plaintiffs and passed a decree in favour of defendant No. 1. It is from
that decision that this appeal is preferred.
Now the article on which the
company relies is article 29 and that article, to the extent that it is
material, provides:
"The company shall have a
first and paramount lien upon all the shares registered in the name of each
member (whether solely or jointly with others) and upon the proceeds of sale
thereof for his debts, liabilities and engagements solely or jointly with any
other person to or with the company."
The contention of Mr. Desai on
behalf of the plaintiffs is that it is only in respect of the debts of a member
that the company has a first and paramount lien and according to Mr. Desai the
member in this case is not plaintiff No. 2 but is plaintiffs Nos. 1, 2 and 3
collectively, and in respect of some shares plaintiffs Nos. 1, 2, 3 and
Harkuverbai collectively. Further, it is Mr. Desai's contention that unless the
shares belong solely to plaintiff No. 2 he could not become a member of the
company and it is only when the shares belong solely to him that in respect of
those shares the company could have a first and paramount lien when debts were
contracted by him. In order to under stand and appreciate this argument one
must turn to the provisions of the Companies Act in order to determine who is a
member of a company. The relevant provision is to be found in Section 30 which
defines a " member". We are not concerned with sub-section (1), and
turning to sub-section (2) it provides:
"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."
Therefore, you must have for the
purposes of this sub-section a person and you must have an agreement between
that person and the company, and when that agreement is entered into to become
a member of the company that person becomes a member and it is also necessary
that his name should be entered in the register of members as a member.
Mr. Desai contends that in this
case the agreement was entered into not only by plaintiff No. 2 but by
plaintiff No. 2 jointly with others, and Mr. Desai says this is a case of joint
contractors who have entered into a contract with the company and therefore the
person who becomes member is not one of the joint contractors but all the joint
contractors. We find it difficult to understand how, if more than one person
agree to become members of the company, the resulting agreement creates a
situation whereby there is only one member of the company and not as many
members as persons who agreed to become members. It is clear that, the persons
who agreed to become members of a company do not constitute a legal entity. If
there are joint contractors, whatever their rights, obligations and liabilities
may be inter se, they do not in the eye of the law become a legal person or a
legal entity, and therefore if they are not a legal entity, they are
individuals who enter into an agreement with the company in order to obtain
certain rights and certain status. If the joint contractors are not a legal
entity, it is difficult to understand how they can become a member of the
company, thereby assuming a legal entity, which they did not possess when they
entered into the contract. By his contention Mr. Desai wants to confer upon
individuals, who apply to become members of a company and who enter into a
contract for that purpose, the rights and status of a legal entity which can
only be conferred by the Legislature. There is nothing to suggest in Section
30(2) that a member of a company is a legal entity which can comprise more than
one individual. Looking at the plain and ordinary language used by the
Legislature, it is clear that if one person agrees to become a member of a
company he becomes a member of that company, and if more than one person agree
to become members of the company then they become as many members as there are
persons, who have agreed so to become. Mr. Desai is oppressed by the fact that
the agreement by which the plaintiffs applied for shares and obtained shares
was the agreement by persons jointly and therefore the result of that agreement
could not be to make them separate members of the company. But in sub-section
(2) the person who agrees corresponds to the member of the company which he
becomes by reason of the agreement. The person and the member are both
individuals, neither is a legal entity, and this sub-section has maintained
correspondence between the person who enters into the agreement and the person
who becomes the member of the company. We find it extremely difficult to
visualise the legal concept of more than one individual becoming "a
member" of a company. Even a firm, if it were to apply to become a member
of a company, would become a member of the company not as a firm but as the
members which constitute the firm because in law there is no such entity as a
firm. It would be different if a company or a corporation were to agree to
become a member of a company because a company or a corporation is an entity
recognized by law and if it applies as an entity to become a member it can
become a member as the same entity. Therefore, on a simple construction of
sub-section (2) of Section 30 we are of the opinion that if plaintiff No. 2
along with plaintiff No. 1 and/ or plaintiff No. 3 and/or Harkuverbai applied
for shares and were allotted shares, each one of the applicants became a member
of the company.
It is rather surprising that
there should be no direct authority on the construction of Section 30(2). There
is a corresponding section in the English Companies Act, Section 26(2), but
there is also an equally surprising dearth of authorities in
Reliance has also been placed on
two decisions of the English cour.ts, but in our opinion neither of these two
decisions is very helpful. The first is a decision reported in Cory v. Reindeer
Steamship Ltd. In that case the company's articles provided that at general
meetings resolutions were to be decided by a numerical majority of votes, unless
a poll was demanded by three members, and that when two or more persons were
entitled to a share the one whose name stood first on the register should be
the only one entitled to vote. The plaintiffs in that case, who numbered more
than three, held a majority of shares and they opposed certain resolutions,
which were however carried on a show of hands. Owing to the fact that some of
the plaintiffs' shares were being jointly held they only counted as two persons
and so did not amount to the three persons necessary for the demand of a poll.
The plaintiffs then brought an action to restrain the carrying out of the
resolutions and asked for an injunction until the trial, and the court granted
the injunction. When we turn to the judgment, the judgment is mainly concerned
with the question as to whether injunction should be granted or not. But what
Mr. Desai relies on is the fact that although the plaintiffs were more than
three and they held shares jointly, they were counted as two persons and not as
many members as there were plaintiffs. It has got to be borne in mind, as the
report of the case clearly points out, that there was an article in the
articles of association which entitled only that person to vote who stood first
on the register when they were joint shareholders, and therefore if the right
to demand a poll turned upon the right to vote, then by the articles of
association all the joint holders were not entitled to vote, but only the one
who stood first among them.
The other decision which has been
relied upon by the other side is a decision reported in
In our opinion, the real key to the construction of Section
30(2) is to be found in the Indian Companies Act itself. Section 2(13) defines
a "private company" and a private company means a company which among
other things limits the number of its members to fifty not including persons
who are in the employment of the company. Then there is a very important and
significant proviso and it is to the effect that where two or more persons hold
one or more shares in a company jointly they shall, for the purposes of this
definition, be treated as a single member. If Mr. Desai's contention were
sound, it was absolutely unnecessary to enact this proviso. But the proviso
became necessary because but for it every joint shareholder would be a member
and if every joint shareholder was to be counted as a member the number might
go beyond fifty to which the private company was restricted, and therefore the
proviso specifically states that where two or more persons hold one or more shares
in a company jointly, they are not a single member but they shall be treated as
a single member for the purpose of the definition. Therefore, only in the case
of a private company by a legal fiction joint shareholders are not to be
considered as members but to be treated as a single member. There fore, it is
clear that where we are dealing with a public company every joint shareholder
is a member, and Mr. Desai's contention is not correct that when three or four
persons agree to accept shares in a company they constitute a single member and
not as many members as there are applicants.
Turning to some of the other sections of the Act, perhaps
one might usefully look at Section 31. That deals with register of members and
some of the particulars that have got to be entered in that register are the
names and addresses and the occupations, if any, of the members. It seems rather
difficult to understand how, if several joint shareholders were to be entered
in the register as a single member it would be possible to give the names and
addresses and occupations as common to all these three which must be looked
upon as a single entity. This section again makes it clear that more than one
joint shareholder do not constitute an entity and they cannot be entered in the
register as a single entity. Section 32(2) is also to the same effect and it
deals with annual list of members and summary and in the list also the names,
addresses and occupations of all the past and present members are to be stated.
There are other sections to which reference was made, but they are consistent
with either view of the matter and it is unnecessary to consider them.
Turning to the articles, relience
is placed on articles 9 and 12 by Mr. Desai. Article 9 provides that the
company shall be entitled to treat the registered holder of any share as the
absolute owner thereof, and article 12 provides that every member shall be
entitled to one certificate for all the shares registered in his name. Mr.
Desai says that it would not be possible to comply with this article if joint
share holders were looked upon as members. But the answer to this criticism is
to be found in article 14 which expressly provides that the certificate of
shares registered in the names of two or more persons shall, unless otherwise
directed by them, be delivered to the person first named on the register. Then
attention is drawn to article 15 which deals with calls and provides that the
directors may, from time to time, make such calls as they think fit upon the
members in respect of all moneys unpaid on the shares held by them, and Mr.
Desai says that if all the joint shareholders were members, under this article
a call could be made on each ore of them and each one would be liable to pay
the call. Again, the answer to that is to be found in article 8 which provides
that joint holders of a share shall be severally as well as jointly liable for
the payment of all instalments and calls due in respect of such share. Then
attention might be drawn to article 42 which provides for the shares of
deceased persons, and it provides that in the case of a deceased member the
executor or the administrator shall be the only person entitled to be
recognised by the company as having any title to his share, but in the case of
joint holders the surviving holder or holders or the executor or administrator
of the last surviving holder shall be entitled to be recognised. Then we have
the provision with regard to voting at general meetings, and article 63
provides that five members personally present shall be a quorum for a general
meeting for the purposes mentioned in that article. Article 68 provides that at
any general meeting, unless a poll is demanded, in the case of a special or
extraordinary resolution by at least five persons entitled to vote, or in any
other case by the chairman or by at least five members, or by a member or
members holding or representing by proxy or entitled to vote in respect of at
least one-tenth part of the capital represented at the meeting, a declaration
by the chairman that a resolution has been carried shall be conclusive evidence
of the fact. Therefore, this article provides for a poll by at least five
persons entitled to vote. When we turn to article 76 we find that in the case
of joint holders, if there is one of them present, he is entitled to vote
either personally or by proxy, and if more than one is present, then the person
who stands first in the register is entitled to vote. Therefore, by giving the
construction we are proposing to do on the expression "member", no difficulty
or inconvenience can be caused looking to the scheme of the articles.
Turning back to the article in
question, we have so far dealt with that article as if the words in parenthesis
"whether solely or jointly with others" were not incorporated in that
article, and Mr. Desai concedes that if we take the view that each joint
shareholder is a member, then no further question can arise with regard to the
interpretation of that article. But the parenthesis does throw some light on
the interpretation of the expression "member". The words in brackets
"whether solely or jointly with others" clearly imply that a member
may be registered alone or he may be registered jointly with others, and
therefore the article clearly contemplates the possibility of there being joint
holders who are all registered as members, one member being jointly registered
with the others. Strictly it was not necessary at all to have these words in
brackets, but they are inserted for greater caution and in order to repel any
such argument as has been advanced by Mr. Desai that in the case of a member
who has been jointly enrolled as a member with others, his debts would not be
liable to a lien on the part of the company. The whole of Mr. Desai's argument
really resolves itself into this that in respect of one share there cannot be
more than one member. No authority whatever has been adduced by Mr. Desai for
this proposition. It is difficult to understand on principle why, if in respect
of one share more than one person is interested, they cannot all be registered
as members if they have all applied to the company and the share has been
allotted to all of them.
In our opinion, therefore, the
learned Judge below was right when he held that in respect of the debt of plaintiff
No. 2 the company was entitled to claim a lien under its articles in respect of
the shares which plaintiff No. 2 held jointly with plaintiff No. 1 and/or
plaintiff No. 3 and/or Harkuverbai who is
defendant No. 4 to the counterclaim.
The result is that the appeal fails and must be dismissed
with costs in favour of respondent No. 1.
[1960]
30 COMP. CAS. 192 (P&H)
V.
KHOSLA,
C.J.
AND
TEK CHAND, J.
LETTERS
PATENT APPEAL NO. 132A OF 1958
DECEMBER
24, 1959
TEK CHAND,
J. - This is a Letters Patent
appeal from the judgment of GROVED J. dismissing regular second appeal
preferred by two defendants- appellants, Jarnail Singh and Behari Lal In this
case the trial court whose judgment was affirmed by the learned single judge
had passed a decree in plaintiff's favour for a declaration that transfers of
shares made in favour of Jarnail Singh and Behari Lal defendants Nos.11 and12
were illegal and ultra vires of the articles of association of the Moga
Transport Company (Private)Limited. Jarnail Singh and Behari Lal had
unsuccessfully appealed to the Senior Subordinate Judge Ferozepur and their
appeal to the High Court was also dismissed by the learned single judge this is
an appeal on their behalf under the Letters Patent of this court.
On 26th of
May 1954 the company had sanctioned the transfer of ten shares held by
Bachittar Singh in favour of Jarnail Singh defendant No. 11. and had also
sanctioned transfer of five shares held by Milkhi Ram in favour of Behari Lal
defendant No. 12 These transfers----besides some other transfers which are no
longer the subject -matter of any dispute were challenged by the plaintiff and
a relief by way of the declaratory decree was prayed and has been granted. On
the parties leadings the following four issues were framed but at this stage we
are concerned with the first issue in so far as it affects the case of the
contesting defendants Nos. 11 and 12-------
1.
1. Whether the transfer of shares in favour of
defendants No. 2 to 12 is illegal and ultra vires for the reasons given in
paragraphs 5 to 7 of the plaint if so its effect ?
2.
2. Is the suit within time?
3.
3. Whether the plaintiff is stopped by his
conduct from suing?
4.
4. Relief?
On the register
of members of this company there are two sets of joint shareholders (I) Karnail
Singh and Jarnail Singh, (2) Girdhari Lal and Behari Lal. The two transfers
sanctioned by the company on 26th of May 1954 were in favour of Jarnail Singh
and Behari Lal respective each in their individual capacity. The contention
raised on behalf of the plaintiff and which found favour with the learned
single Judge and the two courts below was that although Jarnail Singh and
Karnail Singh as two joint holders and similarly Behari Lal and Girdhari Lal as
two joint holders were members of the company a single joint holder cannot be
deemed to be a shareholder and a member of the company within the meaning of
article 8(a) of the articles of association of the company. For ready reference
the relevant articles of the articles of association of the company are
reproduced below;
"2. The company is a
`private company' within the meaning of section 2(1) (13) of the Indian
Companies Act 1913 and accordingly(I) no invitation shall be issued to the
public to subscribe for any share debentures or debenture stock of the company
(20 the number of the members of the company (exclusive of person in the
employment of the company) shall be limited to fifty provided that for the
purposes of this provision where two or more persons hold one or more shares in
the company jointly they shall be treated as single member and (3) the right to
transfer the shares of the company is restricted in manner and to the extent
hereinafter appearing.
8.(a) No shareholder will be entitled to
transfer his shares except to other shareholders of this company.
11. Each shareholder and director
will have only one vote irrespective of the number of shares he holds.
12. The qualification of a
director shall be holding in his own right and not jointly with any other
person one or more shares of the company."
The only
question that has to be examined is whether having regard to the constitution
of the company which is a "private company" within the meaning of
section 2(I)(13) of the Indian Companies Act 1913 sanction to transfer of
shares by a shareholder in favour of one out of several joint holders in in
contravention of article 8(a) of the articles of association In order words
whether Jarnail Singh a transfer in one case and Behari Lal a transfer in the
other case can be considered a shareholder of the company.
It was
contended on behalf of the plaintiff that one of the joint holders cannot be
deemed to be a shareholders for purposes of transfer of shares. the plaintiff
has stressed that joint holders together are to be treated as one shareholder
for purposes of private companies.
Mr. Tuli
learned counsel for the appellants has drawn our attention to regulations 6,
13, 21, 61 and 100 of Table A of the First Schedule to the Indian Companies Act
1913 which are applicable to this company.
According to
regulation 6 delivery of one certificate specifying the shares held by joint
holders to one of several joint holders shall be sufficient delivery to all.
Under
regulation 13 the joint holders of a share are jointly and severally liable to
pay all calls in respect thereof.
Under
regulation 21 in the case of a share registered in the name of two or more
holders the survivors or survivor or the executors or administrators of the
deceased survivor shall be the only persons recognised by the company as having
any title to the share.
Regulation 61
provides that in the case of joint holders the vote of the senior who tenders a
vote whether in person or by proxy shall be accepted to the exclusion of the
votes of the other joint holders and for this purpose seniority shall be
determined in the order in which the names stand in the register of members.
Lastly
regulation 100 lays down that if several person are registered as joint holders
of any share any one of them may give effectual receipts for any dividend
payable on the share.
On the
strength of the above regulations it was argued that everyone of the joint
holders is a shareholder in the company.
In Grundy v.
Briggs under article 61 of the defendant company's articles of association it
was provided that"each of the directors shall be the registered holder of
not less than twenty shares." the plaintiff held five shares in his own
name. He and some others were executors of a shareholder in that company. The
executors executed a transfer of fifteen of the testator's 112 shares to the
plaintiff for a nominal consideration in order that he might hold the required
number of shares and thus qualify himself for being a director of the company.
The point that arose for consideration before the court was whether the
plaintiff was a registered holder of not less than twenty shares when he and
others were jointly registered as holders of 112 shares. The company was in the
words of Eve J., "more or less in the nature of a private company". A
contention was raised in that case that a person was not qualified as a
directors by the holding of share jointly with other persons. This contention
was repelled by EVE J. and he held that the plaintiff was qualified to be a
director of the company by virtue of his registration as a joint holder of the
testator's shares. Mr. Tuli has with reason submitted that under analogous
circumstances a joint holder could also be a transfer in his individual
capacity just as he can be a director.
In Burns V.
Siemens Brothers Dynamo Works Ltd Two persons Burns and Hambro were the
registered joint holders of a large number of shares in the company. Under the
articles Burns alone as the first named holder was entitled to vote and the
second named holder Hambro could neither vote not could be appointed proxy for
a poll so that if Burns was ill or absent the voting power was lost It was held
that in order to enable Burns and Hambro effectual to exercise their voting
power in all circumstances they were entitled to have their holding split into
two joint holdings with their names in different orders and it was ordered that
the register be altered accordingly.
In the above
case the observations of WARRINGTON J. in In re Saunders & Co, Limited were
cited with approval He said:
"It
seems to me that the joint holders of shares are entitled to arrange among
themselves which of them shall stand first on the register of members and
exercise on behalf of all the right of voting which belongs to them
collectively."
Our attention
has also been drawn to an Australian case Transcontinental Hotel Ltd., In re
referred to in Volume I of Palmer's Company Precedents Seventeenth Edition at
page 488 in the footnote In that case the articles of association of a limited
company required that a quorum of two members should be personally present at a
meeting of the company to pass a special resolution. It was held that the
presence of two persons who were registered as joint holders was a sufficient
compliance with the articles of association. In other words for purposes of
quorum two joint holders were treated as two members of the company.
In Narandas
Munmohandas Ramji v. indian Manufacturing Co. Ltd., which was a case of a
public company it was held that every joint shareholder was a member and it was
not correct to say that when three or four persons agreed to accept shares in a
company they constituted a single member. CHAGLA C.J. while distinguishing the
case of a public company from that of a private company said:
"In our
opinion the real key to the construction of section 30(2) is to be found in the
Indian Companies Act itself. Section 2(I)(13) defines a `Private company' and a
private company means a company which among other things limits the number of
its members to fifty not including persons who are in the employment of
company. Then there is a very important and significant proviso and it is to
the effect that where two or more persons hold one or more shares in a company
jointly they shall for the purposes of this definition be treated as a single
member If Mr. Desai's contention were sound it was absolutely unnecessary to
enact this proviso. But the proviso became necessary because but for it every
joint shareholder would be a member and if every joint shareholder was to be
counted as a member the number might go beyond fifty to which the private
company was restricted and therefore the proviso specifically states that where
two more more persons hold one or more shares in a company jointly they are not
a single member but they shall be treated as a single member for the purposes
of the definition. Therefore only in the case of a private company by a legal
fiction joint shareholders are not to be considered as members but to be
treated as a single member. Therefore it is clear that where we are dealing
with a public company every joint shareholder is a member and Mr. Desai's
contention is not correct that when three or four persons agree to accept
shares in a company they constitute a single member and not as many members as
there are applicants."
Under article
8(a) no shareholder is entitled to transfer his shares except to other
shareholders of the company. This article as it stands makes no distinction
between one kind of shareholder and another . Joint holders are members of the
company to the same extent as an individual member of course there being
certain necessary limitations and for certain purposes the joint holders together
are treated as one shareholder. There is no gainsaying the fact however that
for purposes of membership of the company no one out of the several joint
holders can be excluded from exercising rights and discharging duties attaching
to a member with the exception of those specifically mentioned in the Act and
in the articles of association. Under the Indian Companies Act 1913 the
expression"shareholder" or"holder of a share" in so far as
that Act is concerned denotes no other person than "a member"' vide
Howrah Trading Co. Ltd. v. Commissioner of Income-tax.
Section
2(I)(13) of the Indian Companies Act 1913 defines "private company"
as under:
"Private
company' means a company which by its articles-------
(a) restricts the right to transfer the shares if
any; and
(b) limits the number of its members to fifty not including persons who are
in the employment of the company and
(c) prohibits any invitation to the public to subscribe for the shares if
any or debentures of the company:
Provided that
where two or more persons hold one or more shares in a company jointly they
shall for the purposes of this definition be treated as a single member."
The learned
counsel for the respondent places emphasis on the proviso and contends that two
or more persons who hold shares jointly have to be treated as a single member
and from this he argues that neither Jarnail Singh nor Behari Lal in their
individual capacity could be treated as a member of the company.
Under section
30(2) of the Indian Companies Act 1913 a person who agrees to become a member
of the company and whose name is entered in its register of members shall be a
member of the company. These two requirements are satisfied by Jarnail Singh
and also by Behari Lal. Being members though jointly with others shares can be
transferred to them provided however the requirements of section 2(I)(13) are
not contravened. At present the number of members of the company does not
exceed 24 and after the number reaches the limit of 50 the directors will refuse
to sanction the transfers but till then I see no bar to the directors
sanctioning the transfers.
In the
proviso the words"for the purposes of this definition" are
significant. All that they convey is that two or more persons holding one or
more shares jointly in a private company shall be treated as a single member
not for all purposes but "for the purposes of the definition" only.
There are three features of a private company indicated in the definition
section. Firstly the right to transfer is restricted and lastly an invitation
to the public to subscribe for the shares is prohibited. These two provisions
have no bearing so far as the proviso is concerned. The proviso relates to the
second of the three requirements which restricts the membership to fifty. In
other words according to this requirement there can be fifty sets of joint
holders and joint holders of each set shall be treated as a singled member and
the total number of members will thus be considered to be fifty. But the
proviso makes it clear that two or more persons holding shares in a company
jointly are not to be considered as a single member for all purposes. If joint
holders are entitled to be entered on the register in any order they choose or
to have part entered in one order and part in another or that their joint
holdings may be split up into two or more joint holding or that two joint
holders can form a quorum at a meeting there seems to be absolutely no reason
why a joint holder whose name appears on the register of members of company and
who fulfills the qualifications of "a members" under the Indian
Companies Act 1913 should not be treated as a shareholder.
Article 8(a)
of the articles of association forbids transfer of shares to persons who are
not already shareholders of the company. Such a provision is usually contained
in the articles of association of private companies and the underlying object
of incorporating restrictions on the right of transfer of shares is that the
ownership should be confind to a close circle of members connected with one
another by ties of kinship or friendship or closer relationship of a similar
character and with a view to avoid the intrusion of a stranger unless his
admission is acceptable to the existing members. The restrictions which a
private company is obliged to require by its articles have been left under
fined as they may be of wide and varied character. The articles of association
also confer a right on the directors to refuse to register transfers of shares
in the capital of the company without the previous sanction of the directors
and who may withhold their sanction without assigning any reason The directors
of this company have such an absolute discretion under article 9 of the
articles of association of this company Pre-emption clauses of various types
are usually found in the articles of private companies the object being in
consonance with the character of a private company or a "close
corporation" as it is called in America. But it is one thing not to permit
acquisition of shares of a private company freely by members of the public
which characterizes the constitution of a private company from that of a public
company it is however a different thing to place stringent condition's the
result of which might be to prevent transfers of shares between members and
thereby virtually depriving them from exercising a fundamental and most useful
right which is incidental to the exercise of proprietary right.
In the case
of Burns v. Siemens Brothers Dynamo Works Limited ASTBURY J. observed:
"The Dynamo
Company and its directors are I think under an obligation in law not to prevent
a fair and reasonable exercise by the members of their rights of dominion in
their own property consistent with the constitution of the company . . . . . .
. ."
I cannot
construe article 8(a) so as to exclude the transfer from being a shareholder of
the company when his name along with that of another is borne on the register
of members of the company. Placing a narrow construction on this article as is
contended for by the respondent will be putting and unreasonable restraint upon
the alienation of property. The courts should hesitate to place and
interpretation on the articles which may have the effect of imposing
restrictions on transferability which may be in restraint of trade and
therefore opposed to public policy. The courts should lean in favour of an
owner's right to deal with his property at pleasure unless such a right has
been abridged in a particular manner and in that case too only to the extent of
the abridgment. In my judgment to treat one out of several joint holders not to
be a shareholder for purposes of transfer within the meaning of article 8(a) of
the articles of the company would be tantamount to placing a construction which
is neither justified by the language not by the real object underlying the
formation of a private company Such a construction will be tantamount to an
impingement on the owner's right to dispose of his shares beyond permissive
inhibition.
I find
nothing in the articled of association or in the Indian Companies Act
prohibiting a transfer of shares to a joint holder in his individual capacity
Joint holders as such are not a distinct legal entity apart from the individual
owners who jointly own one or more shares. A transfer of shares whether made to
an individual shareholder or to joint holders collectively is not within any
statutory ban or within the prohibition of the articles of association of the
company so long as the total number of members of the private company not
including persons who are in the employment of the company does not exceed
fifty as required by section 2(I)(13)(b) of the Indian Companies Act 1913 which
with slight modifications corresponds to section 3(1) (iii) (b) of the
Companies Act 1956.
For the above
reasons the impugned transfers are not tainted with any illegality and suffer
from no flaw or lacuna.
In the result
this Letters Patent appeal is allowed and the plaintiff's suit is dismissed
with costs of this appeal.
KHOSLA, C. J.
- I agree.
Appeal
allowed.
[1938] 8 COMP. CAS. 161 (
HIGH COURT OF
v.
Carew
& Co. Ltd.
PANCKRIDGE, J.
JANUARY 20, 1938
Page and Kamala Bose, for Plaintiff.
S. Mitra and Clough,
for Defendant.
JUDGMENT
Panckridge, J.—The plaintiff in this
case is the son of one David Ezekiel, who on 2nd September, 1936, was the
registered holder of 16,800 ordinary shares in the defendant company. The
defendant company's registered office is at
Admittedly David has a strong motive for not returning. In March 1936, proceedings were instituted against him and various other persons in the Criminal Courts at Alipore, wherein he was charged with offences punishable under the Penal Code and Excise Act. In the course of the criminal proceedings, David has been proclaimed an absconder under Section 87, Criminal Procedure Code, and under Section 88 his property, including the 16,800 shares in the defendant company, has been attached. The Official Receiver of this Court is now in possession of the share certificates, as receiver appointed by the Criminal Court under Section 88 (3) (b) by an order dated 17th June, 1936. When the share certificates were seized they were in the custody of Messrs. Lyall Marshall & Co. the Managing Agents of the defendants, in the following circumstances. Solomon had purported to transfer the shares under the power of attorney, the transferee being the plaintiff. As to 6,800 shares the consideration is said to have been shares in Davidsons Ltd., belonging to the plaintiff, and as to the balance, a sum of Rs. 2,10,000 borrowed on over-draft account from the Eastern Bank Ltd. The plaintiff had arranged with the Bank that all the 16,800 shares should be held by them as security against his overdraft, and that the transfers should be made out in the names of two of the Bank's officers. Solomon as attorney executed the transfers in that form and handed the certificates to the Bank. The Bank forwarded them to the Managing Agents for registration, but this had not been effected when the scrip was seized under the order of the Criminal Court. In my opinion these facts are not relevant to this suit, although the defendants sought to make them the basis of an issue which I ruled did not arise on the pleadings.
To resume the main story. About this time the defendants thought it desirable to increase their capital. Their powers to do so are limited and prescribed by Arts. 37 to 40 of the Articles of Association. These Articles are as follows:
"37. The company may, from time to time, by extraordinary resolution, increase the capital by the creation of new shares of such amount as may be deemed expedient.
38. The new shares shall be issued upon such terms and conditions and with such rights and privileges annexed thereto as shall be directed in such Resolution, or in default of such direction as the Directors may determine, and in particular such shares may be issued with a preferential or qualified right to dividends, and in the distribution of assets of the company, and with a special or restricted or without any right of voting.
39.Subject in all respects to any direction to the contrary that may be given by the company in general meeting at which the resolution for the issue of any new shares is passed, such shares shall be offered in the first instance either at par or at a premium as the Directors may decide to all the then members in proportion to the amount of the capital held by them, and such offer shall be made by notice specifying the number of shares to which the member is entitled and limiting the time within which the offer, if not accepted, will be deemed to be declined, and after the expiration of such time or as to the shares of any particular member on the receipt of an intimation from such member that he declines to accept the shares offered, the Directors may dispose of the same in such manner as they think proper but in default of any such determination or so far as the same shall not extend the new shares may be dealt with as if they formed part of the shares in the original ordinary capital.
40. Except so far as otherwise provided by the conditions of issue or by these presents any capital raised by the creation of new shares shall be considered part of the original ordinary capital and shall be subject to the provisions herein contained with reference to the payment of the calls and instalments, transfer and transmission, forfeiture, lien, surrender and otherwise."
On 17th August, 1936, the Managing Agents convened an extraordinary general meeting of the Company by a notice in the following form:
P. D. 4.
Carew & Company Ltd.
Notice convening Extraordinary General Meeting.
Notice is hereby given that an Extraordinary general meeting of Carew & Co. Ltd. will be held at the registered office of the company at 4, Fairlie Place, in the town of Calcutta on 2nd September 1936 at noon when the subjoined resolutions will be proposed as extraordinary resolutions, namely:
(1) That pursuant to the provisions of the Companies Act, 1913, and of Art. 37 of the Company's Articles of Association, the capital of the company be increased to Rs. 30,00,000 by the creation of 1,40,000 additional ordinary shares of Rs. 10 each ranking for dividend and in all other respects in pari passu with the existing ordinary shares in the company, save only that the same shall not rank for dividend in respect of dividends declared for the year ending 30th June, 1936.
(2) That 40,000 of the said 1,40,000 shares be forthwith issued and the Directors be instructed to offer the said 40,000 shares in the first instance at a premium of Rs. 4 per share to members of the company whose names appear on the register of members as on the 2nd day of September 1936 holding four or more ordinary shares in the proportion of one new share for every four shares held by them respectively, fractions being disregarded or to the nominee or nominees of any such member and upon the noting that the full amount of each share taken up plus the premium making together Rs. 14 per share shall be paid to the company on acceptance of the offer and that such offer be made by notice specifying the number to which the member is entitled and limiting the time within which the offer if not accepted by payment will be deemed to be declined and that the Directors be empowered to dispose of the shares not taken up in response to such offer by offering them at the same premium to any one or more of the share-holders of the company including the Directors or otherwise as they consider expedient in the interest of the company.
The notice was accompanied by a circular letter addressed to the shareholders, in which the Managing Agents explained the reasons which caused the Directors to recommend the increase of capital, and the purposes to which the new capital when raised would be put. On 9th September, 1936, the extraordinary general meeting was held and the resolutions in the form set out in the notice of 17th August were passed unanimously. Immediately after the extraordinary general meeting, a Directors' meeting was held and a form of circular letter purporting to contain the offer that the Directors were instructed to make by the second resolution was approved. Accordingly letters in the approved form were despatched to the members of the company, the letter to David being dated 15th September, 1936. It is not necessary to set out the letter in extenso, but the following paragraphs are of importance:
'Should you desire to renounce your rights to all or any of the shares to which you are entitled in favour of a nominee, will you be good enough to fill up the enclosed form "B" provided for that purpose instead of or in addition to the form already referred to. The letter of renunciation should be counter-signed by the nominee. The Directors reserve the right to reject any nominee. Should the said shares not be applied for by yourself or by the nominee within the time named the Directors of the company will assume that you are not prepared to take them up and will dispose of them elsewhere.'
The time referred to expired on 9th November, 1936. This letter was opened by Solomon as the attorney of David and shown to the plaintiff. The plaintiff's position was that though he considered himself the legal owner of the 16,800 shares, he realized that as he had not been able to effect registration either of his own name or the names of the Bank's nominees, he would not be in a position to enforce his right as a member of the company to participate in the new issue. On 1st October, 1936, his solicitors accordingly wrote to Solomon requesting him to complete the form of nomination in the plaintiff's favour and to make it over to the plaintiff. On 6th November he delivered to the Managing Agents a form of renunciation signed on 6th October 1936 by Solomon as attorney for David and a form of acceptance signed by himself. He remitted with these documents his cheque for Rs. 58,800 being the amount due on the basis of Rs. 14 for each share of the 4,200 new shares to which David was entitled, as the holder of 16,800 of the original shares in the company. The forms of renunciation and of acceptances had been prepared in the office of the company and were as follows. The form of renunciation addressed to the Directors of Carew & Co., Ltd. ran:
'Gentlemen,
I hereby renounce in favour of the undersigned Mr. Herbert Ezekiel the whole of 4,200 ordinary shares to which I am entitled in the above issue as stated in your notice of 17th August, 1936.'
The notice of acceptance ran:
'I hereby accept the above mentioned shares upon the terms of the said notice and authorize my name to be put on the Register in respect of them.'
On 10th November 1936, the Managing Agents called upon the plaintiff to produce David's power of attorney for inspection and at the same time they returned his cheque for Rs. 58,800. On 27th November the Managing Agents wrote again to the plaintiff, the letter being admittedly drafted by the defendants' solicitors. In that letter the Managing Agents state that the company has been advised: (1) that the validity of the power of attorney dated 16th April 1929 is open to challenge ; (2) that doubt exists as to its scope; (3) that it is not known whether the donor is absent from India or whether he may even be dead ; (4) that a discretion was reserved to refuse to accept a nominee; (5) that in the particular circumstances of this matter, the discretion may be properly exercised by a refusal to accept the plaintiff as the nominee of David; (6) that the fact that the power may have been acted upon in the past is immaterial. The letter goes on "in the circumstances we have to inform you that shares will not be allotted to you as the nominee of Mr. David Ezekiel". On 9th December, 1936, the present suit was instituted. It was in form a suit for specific performance of a contract to allot and issue 4,200 shares, or alternatively, for damages. An application to restrain the company from disposing of the shares elsewhere was unsuccessful, and thereafter the company sold the shares in the market. An amendment was thereupon made which converted the suit into one for damages for breach of contract, the damages claimed being the difference between the market price on the date of breach and Rs. 58,800, or in the alternative the difference between Rs. 58,800 and the highest market price since the date of breach. It is not now contested that if the plaintiff is entitled to damages, such damages should be assessed as on 27th November, 1936, or that on that date the market rate for the shares was Rs. 19-8-0. On this basis if the plaintiff obtains a decree it will be for Rs. 23,100.
The defences with which I now propose to deal were raised by issues which for all practical purposes were agreed upon with one exception. Mr. Clough, as I have already indicated, pressed me to permit a defence to be raised based on the contention that that ownership of the 16,800 shares has passed to the plaintiff, and accordingly David on 2nd September, 1936, had no right to an offer of new shares and as a consequence was not in a position to nominate the plaintiff in his place. I ruled that the title of David to the 16,800 shares on 2nd September, 1936, as pleaded in para, 2 of the plaint, had not been denied in the written statement, and that without amendment of the written statement the issue was not admissible. Mr. Clough did not apply for leave to amend and that defence accordingly dropped out.
The first line of defence is a challenge of the validity of the power of attorney. It is said that for the plaintiff to succeed he must show that Solomon, when he on signed the renunciation form on David's behalf, was acting under a subsisting power. It is now admitted that the power has never been expressly revoked by David, but it is said that the agency of Solomon may have been terminated by David's death, and that the plaintiff and Solomon are the most likely persons to be able to produce the best evidence as to the continued existence of David, and that they have failed to do so. In my opinion in the circumstances there is no obligation on the plaintiff to call evidence to show that David was alive in October, 1936. The question of the burden of proving death is dealt with by Section 107, Evidence Act; that section forms part of Ch. 7 which deals with the burden of proof generally. The section runs:
'When the question is whether a man is alive or dead, and it is shown that he was alive within 30 years, the burden of proving that he is dead is on the person who affirms it,'
It is admitted that David was alive as late as March 1935. The evidence is that he is now 65 years of age and in these circumstances there in nothing, in my judgment, which renders Section 107 inapplicable to the circumstances of the case. Accordingly it is unnecessary for the plaintiff to produce evidence to show that David was alive and the burden of proof is on the defendants to show that he was dead in October 1936, if they seek to challenge the validity of the exercise of the power on that ground. Indeed it appears that the plaintiff, if David is dead, has no motive for concealing the fact; because on his death David would obviously cease to be an accused person in the criminal proceedings, and it follows that the order under which the 16,800 shares claimed by the plaintiff are attached would have to be vacated.
It is next suggested that on David's return to India in the cold whether of 1929-1930 the agency was automatically terminated. This defence is founded upon a recital in the power of attorney that the donor is about to proceed to England, and is therefore desirous of appointing the donee as his constituted attorney for purposes thereinafter expressed. The submission is that this recital indicates an intention to limit the duration of the power, a matter as to which the rest of the document is silent to the period of David's absence from India. Mr. Clough relies on Danby v. Coutts & Co. In that case the relevant recital was as follows:
'And whereas I am about to return to South Australia and am desirous of appointing an attorney or attorneys to act for me during my absence from England, etc'
It was held that the recital controlled the generality of the operative part of the instrument and limited the exercise of the powers of the attorneys to the period of the donor's absence from England. I have been referred to a passage in Halsbury's Law of England, Edn. 2, Vol. 1, p. 314, where it is stated on the authority in Danby v. Coutts & Co., that when a power of attorney recited the fact that the donor was about to go abroad, it was held to be impliedly revoked on his return home. In my opinion, however, Danby v. Coutts & Co., dose not justify the proposition that the return to England of the donee revoked the power, or more properly speaking, terminated the agency. At p. 514, Kay, J., says:
'The operative part of this instrument does not refer in any way to the duration of the power. Therefore a statement in the recital or any part of it that it was only intended to have effect during the donor's absence from England would not be repugnant to anything in the operative part. It is only a conclusion of law that if such power is silent as to its duration it must last during the donor's life or until he revokes it.'
Moreover the contention of the plaintiff in that case is summarized in the following terms:
'I take next in order the second question, whether or not the power of attorney of 16th August, 1880, ceased to be operative during the plaintiff's residents in England from 18th June, 1882 to 30th November in the same year.
Although the language in the power with which I am dealing is by no means as emphatic as the language in Danby v. Coutts & Co., I am willing to concede that the authority of the attorney could not have been exercised during the periods that David was in Calcutta or possibly in India, but I see nothing in the document to support the contention that the authority of the attorney terminated absolutely upon the return of the donor, and that from that date the document was as ineffective as if it had been expressly revoked. If it is permissible to look to the conduct of the parties, it is not without significance that the donor did not think it necessary to execute a new power when he left India again: on the contrary, the power has been continuously acted upon since its execution during the periods of David's absence from Calcutta. I therefore hold that if David was absent from Calcutta, or even from India, on 6th October, 1936, Solomon had authority to sign the letter of renunciation if such an act is within the scope of the power.
Mr. Clough on this basis contends that it has not been shown that the donor was in fact absent from India on that date. In my opinion, in the circumstances, no reasonable man can doubt that since the institution of the criminal proceedings, David has been deliberately absconding, and that the last place which he is likely to visit is India. When Mr. Nicolson, Chairman of the defendant company, was in the witness-box he gave the following answers. (Question 147).
Ques.—You are content to let that statement pass, that to the best of your knowledge he was not in India?
Ans.—Yes.
At Question 85:
Ques.—You had very little doubt in your mind, I imagine, that Mr. David Ezekiel was not in India?
Ans.—We had very little doubt.
In these circumstances I hold as a fact that David Ezekiel was absent from India on 6th October, 1937.
The next question to be considered concerns the scope of the power, that is to say "did the power give the attorney authority to sign the letter of renunciation, and thereby relinquish David's claim to the new shares, and nominate the plaintiff in his place"? There is no serious divergence as to the principles which are to be applied to the construction of powers of attorney. It is admitted that they must be construed strictly, and that general words must be interpreted in the light of the special powers, although they include incidental powers necessary for carrying out the authority. The crucial clause in the power is clause (4):
"To accept, draw, make, sign, endorse, realize or negotiate any bills of exchange, drafts, hundies, orders, cheque's, promissory notes, bills of lading and all other mercantile documents receipts for fixed deposits with Banks shares, policies of Insurance, Government or other securities for money, shares in public Companies, Debentures, War Bonds, War Loan and dues for payment of money and to execute, sign, enter into, acknowledge, perfect and do all such contracts, hypothecations, leases, reconveyances, transfers of mortgages and other transfers, surrender of leases and shares and all other assurances, deeds, agreements, instruments, acts and things as shall be required or as the said attorney may deem necessary or proper in relation to my said business and affairs."
Does the claim cover the acts which the donee has purported to do on the donor's behalf in this case ? I have come to the conclusion it does not, although the question is one of considerable difficulty. I have no hesitation in holding that the transaction in question was not "a surrender of shares" within the meaning of the clause. The phrase "surrender of shares" has a well-ascertained and definite signification, and it means the surrender to the company on the part of the registered holder of shares already issued. Many companies, of which the defendant company is an example (see Arts. 27 and 28), have articles expressly providing for surrender in certain circumstances. The phrase is not, in my opinion, applicable to the refusal of a registered share-holder to take up newly issued shares to which he is entitled. I do not think any businessman would describe what Solomon purported to do when he signed the combined form of renunciation and nomination as a surrender of shares.
Mr. Page states that as under the power of attorney the donee can both accept shares and transfer them, there can be no justification for holding that the donee has not the power to achieve the same result by renunciation and nomination. This argument is not without its force, but I have come to the conclusion that the transaction which the donee sought to perfect on the donor's behalf was a special and peculiar one which the power does not contemplate and for which it does not provide nor can it be held to be an act incidental to the power to transfer. Indeed it is not surprising if those are contingencies not covered by the power. The power was not executed in 1929 to meet a situation where the agent was not in a position to communicate with the principal; indeed I take leave to doubt whether such a situation has even now arisen. The power appears to me to have been designed primarily to enable the agent to act for the principal in routine matters. Anything exceptional could be passed on to the principal, who could then either deal with the matter direct or give the agent special authority. In these circumstances, it seems improper to strain the language of the power for the purpose of giving it as comprehensive a scope as possible. I hold accordingly that the renunciation and the nomination of the plaintiff were unauthorized, and inasmuch as they have never been ratified the defendants are not bound by them.
It remains to consider two questions relating to the letter of 15th September 1936. The defendants argue that inasmuch as the letter was addressed to David, there was no offer to the plaintiff and that it follows that the plaintiff's purported acceptance on 6th November did not conclude a contract between the parties. This submission is one which will not survive the most cursory examination. By the resolution of 9th September, the Directors were instructed to offer the new shares to members of the company or "to the nominee or nominees of any such members." The letter of 15th September was intended to be a compliance with these instructions and enclosed a form whereby the nominee was enabled to accept the shares offered to the member. The letter clearly contains an offer made first to the registered shareholder, and then in the event of his renouncing to his nominee or nominees. If there is renunciation by the former, acceptance by the tatter concludes a contract. The second question is concerned with the purported reservation by the Directors of the right to reject a nominee. Unquestionably the resolution gave them no authority to qualify the offer in this manner, not can the defendants justify the qualification by any provisions in the articles. In re Pool Shipping Co. Ltd., is of assistance here. In that case it was held that the letter of renunciation of bonus shares in favour of a nominee did not amount to a "transfer" of shares so as to fall within and be subject to articles dealing with the transfer of these share-holders already registered.
Mr. Page makes two points. First he argues that the qualification of the offer being without authority the acceptor is not bound by it and can regard it as a nullity, I cannot agree with this view. It must be remembered that the nominee has no rights against the company until acceptance. It may be conceded for the purpose of argument that a share-holder could have insisted that the offer made by the Directors to him should conform to the terms of the resolutions of 9th September, but the nominee can only accept, or decline to accept, the offer actually made to him. Acceptance of an offer made by an agent, the terms of which are beyond the agent's authority, cannot give the acceptor a right to call upon the principal to perform a contract based on a hypothetical offer which the agent would have had authority to make. There is more force in Mr. Page's second argument founded on the form of acceptance. He points out that the phraseology of the form by renunciation and acceptance is in terms for which the defendants are responsible, a fact which distinguishes this case from cases where the acceptance purports to qualify the terms of the offer. The renunciation refers to "your (i.e.., the Directors') notice of 17th August, 1936" and the acceptance is in the form:
"I hereby accept the above-mentioned shares upon the terms of the said notice and authorize my nominee to be put on the register in respect of them."
This point now raised is the basis of the amendment of the concluding portion of para. 3 of the plaint. This originally ran:
"By such letter (i.e., the letter of 15th September 1936) the defendant company offered upon the terms of such letter to issue to the said David Ezekiel or to his nominee the said 4,200 shares."
This was subsequently amended to read:
"By such letter the defendant company offered upon the terms of the said notice dated 17th August, 1936, and in accordance with the said resolution (2) set out in para. 1 of the plaint to issue, etc."
Paragraph 5 states that the plaintiff accepted the shares in terms of the notice. It is in evidence that the letter of 15th September as also the accompanying's forms were settled by the company's solicitors and approved without more than a formal examination by the Directors.
It is not suggested that the reservation was inserted in the letter in anticipation of any nomination on the part of David. The Directors only applied their minds to the matter when they found that David through his constituted attorney had purported to nominate the plaintiff. They had no objection to the plaintiff personally as a member of the company, but the fact that shares in which the plaintiff claimed a beneficial interest had been attached by the Magistrate's Court made them apprehensive that difficulties might be expected with regard to any shares that were issued to the plaintiff. There is no evidence what was in the mind of the draftsman when he referred to the notice of 17th August, 1936, and there seems to be no reason why the letters of acceptance and renunciation could not have been drafted in simple and nontechnical language as was done in In re Pool Shipping Co., Ltd. But whatever be the effect of the reference to the notice, it cannot alter the fact that the offer was made by the letter of 15th September, which clearly stated that the Directors reserved the right to reject any nominee. That was the only offer made to the plaintiff and consequently the only offer he could accept. It follows that it was part of the contract between the defendants and the plaintiff that the acceptance of the shares on the plaintiff's part should be subject to the Directors' veto. It is not denied that the Directors did in fact reject the plaintiff as David's nominee. I hold therefore that the suit must be dismissed with costs on two grounds, firstly, because the purported renunciation and nomination of the plaintiff by David through Solomon were invalid as being beyond the scope of the authority vested in Solomon under the power : secondly, because it was a term of the contract between the defendant and the plaintiff that the Directors should have the power to reject the plaintiff as David's nominee and the Directors did in fact reject him.
[1988] 64 Comp. Cas.
492 (AP)
High
Court of Andhra Pradesh
v.
V. L. N. Sastry
February 11, 1987
S. Parvatha Rao for
the Petitioners.
Y. Surya Narayana for S.
Venkat Reddy, B. Narayana Reddy for the Respondents.
G. Ramanujulu Naidu, J.—The above company application, i.e., Company Application
No. 37 of 1985, is filed by the petitioners in C. P. No. 1 of 1985 for an
injunction, among other reliefs, restraining respondents Nos. 1 to 4 from
managing and interfering with the affairs and business of the sixth
respondent-company in any manner, pending disposal of the company petition.
Respondents Nos. 1 to 4
filed a counter-affidavit on August 12,1985. Later, the first respondent filed
an additional counter-affidavit on October 30, 1986, objecting to the
maintainability of the company petition itself at the instance of the
petitioners, the objection being that the petitioners are not
"members" as defined under section 41 of the Companies Act, 1956.
The authorised capital of
the sixth respondent-company (hereinafter referred to as "the
company") is Rs. 5 lakhs comprising Rs. 3 lakhs, being the equity share
capital divided into 3,000 equity shares of Rs. 100 each, and Rs. 2 lakhs,
being the preferential share capital divided into 2,000 cumulative redeemable
preferential shares of Rs. 100 each. All the 3,000 equity shares of the company
have been issued and subscribed. No preferential shares of the company have
been so far issued.
It is asserted in paragraph
6 of the company petition that the present shareholders of the sixth respondent-company
are 12 in number, that the first petitioner holds 75 shares of the company with
distinctive numbers 2551 to 2625 under share certificate No. 10, that the
second petitioner has acquired 300 shares of the company with distinctive
numbers 391 to 500 and 801 to 990 under share certificate No. 15, that the
third petitioner holds 375 shares of the company with distinctive numbers 2,626
to 3,000 under share certificate No. 11 and that all the three petitioners
together hold 750 shares of the company.
In paragraph 13 of the
company petition, it is amplified that the first and the third petitioners and
four others were allotted shares on June 19, 1981, that the first respondent
submitted a return of allotment dated July 4, 1981, in the prescribed form to
the Registrar of Companies, that acquisition of 300 shares of the company by
the second petitioner was approved by the board of directors of the company and
that share certificate No. 15 dated August 17, 1981, was issued and signed by
the first and the fifth respondents certifying that the second petitioner was
the registered holder of the said 300 shares. It is also asserted in paragraph
15 of the company petition that petitioners Nos. 1 and 2 and the second
respondent were appointed as the directors of the company at an extraordinary
meeting of the general body held on June 12, 1983, and that a return dated
February 4, 1983, in the prescribed form was also filed by the first respondent
before the Registrar of Companies furnishing the particulars of the said
appointment.
In the counter-affidavit
filed on behalf of respondents Nos. 1 to 4 in the company petition, it is
stated that it is unnecessary to canvass the version set out in paragraph 4 of
the company petition. What is more, in paragraph 10 of the counter-affidavit,
the averments in paragraph 13 of the company petition are admitted to be
correct. Also in paragraph 12 of the counter-affidavit, the appointment of
petitioners Nos. 1 and 2 and the second respondent as directors of the company
at an extraordinary meeting of the general body held on January 12, 1983, is
admitted, though it is added that the second petitioner and the second
respondent were removed from the board of directors later.
It may be thus noted that
the holding of the petitioners in the company as claimed by them is not only
not denied but also admitted. It may be recalled that the company petition was
filed under sections 397 and 398 of the Companies Act, 1956 (hereinafter
referred to as "the Act"). Inasmuch as the petitioners hold not less
than l/10th of the issued share capital, they are entitled to seek redress
under sections 397 and 398 of the Act.
Sri Y. Suryanarayana,
however, submits that a petition for relief either under section 397 or section
398 of the Act is available only to members of the company and the petitioners
not having been noted as members of the company in the register maintained for
that purpose, the company petition is not maintainable.
It is, therefore, necessary
to notice the relevant provisions of the Act. Section 41 of the Act defines
"member" of a company and it runs thus:
"41(1).
The subscribers to 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 andwhose name isentered in its register of members, shall be a member
of the company".
Section 2(27) of the Act also
defines a member in relation to a company as not including a bearer of a share
warrant of the company issued in pursuance of section 114. Section 113 deals
with issue of share certificates after allotment. Rule 4(1) of the Rules called
the Companies (Issue of Share Certificates) Rules, 1960, hereinafter referred
to as "the Rules", lays down that when a company issues any capital,
no certificates of any share or shares in the company shall be issued except in
pursuance of a resolution passed by the board. Rule 5 deals with the form and
contents of a share certificate. Rule 6 requires the share certificate to be
issued under the seal of the company, which shall be affixed in the presence of
(i) two directors or persons acting on behalf of the directors under a duly
registered power of attorney; and (ii) the secretary or some other person
appointed by the board for that purpose. Rule 7 requires particulars of every
share certificate issued in accordance with rule 4(1) to be entered in the
register of members maintained in the form set out in the appendix to the
Rules. Sections 114 and 115 of the Act deal with the issue and effect of share
warrants to bearer. In particular, it is enacted therein that on the issue of
share warrant, the company shall strike out of its register of members the name
of the member then entered therein as holding the shares specified in the
warrant as if he had ceased to be a member. Section 150(1) of the Act enjoins
an obligation on every company (registered) to maintain a register of its
members and enter therein the particulars more fully set out in clauses (a) to
(d). Sub-section (2) of section 150 renders the company and every officer of
the company who commits default punishable with fine.
It may be thus seen that
the subscribers to the memorandum of a company become members of the company
automatically and on its registration, they shall be entered as members in its
register of members. 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. Once a person's name is entered as a member
of the company in its register of members, it is not open to question his
membership. The converse does not necessarily flow. Even if the prescribed
register of the company does not incorporate the names of all its shareholders
as members of the company, the particulars so entered in the register are not
conclusive. The shareholders of the company, in whose favour share certificates
are issued, can exercise rights as members of the company notwithstanding the
omission of their membership as found in the prescribed register. In fact,
section 150(1) of the Act casts a duty upon every company to maintain a
register of its members and enter the relevant particulars more fully set out
in clauses (a) to (d) thereof. Failure to comply with the mandatory duty
enacted under section 150(1) is made punishable under sub-section (2) of
section 150.
As already stated, it is
not denied that the first petitioner holds 75 shares while the third petitioner
holds 375 shares in the company. It is also not denied that the second
petitioner has acquired 300 shares of the company. The distinctive numbers of
the shares of the three petitioners as also the share certificate numbers given
to them are furnished in the company petition. The first respondent also
submitted the required returns to the Registrar of Companies certifying the
holding of the three petitioners. In fact, petitioners Nos. 1 and 2, as also
the second respondent, were appointed as directors of the company at an
extraordinary meeting of the general body of the company held on January 12,
1983. It is, therefore, futile to contend that the petitioners have no right to
maintain the company petition, they not having been shown as members of the
company in the prescribed register. It is alleged in the company petition that
the first respondent is guilty of not maintaining the various registers
properly and not convening the annual meetings of the company.
There is also considerable
force in the submission of Sri S. Parvatha Rao, learned counsel appearing for
the petitioners, that the petitioners' names were duly entered in the
prescribed register, that the same was, however, suppressed and not produced
before the Commissioner appointed by this court and that in its place another
register with defective particulars is brought into existence. In any event,
the first respondent cannot take advantage of his failure to maintain the
prescribed register properly to non-suit the petitioners.
Sri Y. Suryanarayana,
learned counsel appearing for the respondents, however, submits that it is open
to the petitioners to move this court for rectification of the defective
entries in the prescribed register under section 155 of the Act. Section 155 of
the Act is only an enabling provision and cannot be invoked in aid to defeat
the rights of the petitioners to move this court for appropriate relief under
sections 397 and 398 of the Act.
Lastly, it is urged by
learned counsel for the respondents, that no resolution of the board of
directors was passed for allotment of any shares to petitioners Nos. 1 and 3
and for purchase of the shares by the second petitioner, as required under rule
4 of the Rules. The submission does not deserve to be countenanced as in the
counter-affidavit filed on behalf of the respondents in the main company
petition, it is admitted that share certificates to petitioners Nos. 1 and 3
were validly issued.
The preliminary objection
as to the maintainability of the company petition is, therefore, overruled.
Post the company
application for further orders on February 20, 1987.
Bombay High Court
COMPANIES ACT
[1996] 8 SCL 77 (BOM.)
HIGH COURT OF
v.
Omega Agro Ltd.
D.R. DHANUKA, J.
NOVEMBER 3, 1995
Section 41 of the Companies Act,
1956 - Member/shareholder - Respondent-company contended that inter-corporate
loan advanced to it by petitioner-company was repaid by cheque encashed by petitioner
through its current account at a bank at Bombay - Petitioner denied receiving
such cheque or having such account at aforesaid bank - There was in fact an
account in petitioner's name in said bank, opened and authorised by one 'P' -
Petitioner denied having authorised 'P' to open account on its behalf and
alleged that he was neither shareholder nor director of petitioner - Whether,
matter being serious, both companies were to be directed to file copies of
their respective accounts for period in question for verification of facts -
Held, yes - Whether 'P' was to be produced before Court - Held, yes - Whether
balance sheet, annual return and minutes of board resolutions of petitioner
were to be examined to ascertain whether 'P' was in fact shareholder/director
of petitioner or had been authorised to operate/open said bank account - Held,
yes
A
sum of Rs. 1.5 crores had been advanced by the petitioner-company to the
respondent-company as an inter-corporate loan. The respondent contended that it
had already repaid the amount by a cheque dated 22-3-1991 which had been
encashed by the petitioner through its current account No. 660/7 with a certain
bank at
HELD
In
view of the seriousness of the matter, the respondent was directed to file
copies of the entries in its books of account, if any, having bearing on the
aforesaid transaction and particularly the entries concerning the alleged
repayment of Rs. 1.5 crores by the cheque dated 22-3-1991. The petitioner was
also directed to file copies of the relevant entries for the period 22-3-1991
to 31-3-1991, the minutes book of the meetings of the board of directors of the
petitioner containing resolutions, if any, dated 17-4-1990 and 4-10-1990. The
petitioner was also directed to produce copies of its annual returns for the
year 1990-91 from which it could be verified whether P was a shareholder of the
company during the years in question. A copy of the balance sheet of the
petitioner for the year 1990-91 was also directed to be produced, from which it
would he possible to verify as to who were the directors during that period.
The presence of Pin the Court was also required.
Kumar
Desai and Shekhar
Shetye for the Petitioner. S.H. Doctor and D.V. Merchant for the
Respondent.
JUDGMENT
1. It is alleged in para 3 of the
affidavit in reply dated 28-1 -1995 that a sum of Rs. 1,50,00,000 which was
advanced to the company as inter-corporate loan is already repaid by the
company. It is alleged that on 22-3-1991, the respondent-company paid the said
amount to the petitioners by cheque bearing No. 106512 dated 22-3-1991, drawn
on the State Bank of
2. It is the case of the
petitioners that the petitioners never had any current account bearing No.
660/7 with the Jammu & Kashmir Bank Ltd.,
3. It is found that a bank account exists in the name of Express
Leasing Ltd. with the Jammu & Kashmir Bank Ltd. and the said account was
opened by one Mr. Mayur Parekh. It is alleged that the petitioner- company had
never authorised Shri Mayur Parekh to open the said bank account in the name of
the petitioner and operate the same. It is the case of the petitioner that no
Board Resolution was ever passed by the petitioner in this behalf and Shri
Mayur Parekh was never the shareholder or the Director of the
petitioner-company.
4. The
matter is far too serious.
5. The company is directed to file
an affidavit annexing thereto copies of the entries in their books of account, if
any, having bearing on the above-referred
transaction and particularly the entries concerning alleged repayment of Rs. 1
crore 50 lakhs by cheque dated 22-3-1991. The petitioner is also directed to
file an affidavit annexing thereto copies of the relevant entries for the
period commencing from 22-3-1991 till 31-3-1991. Perhaps it may be possible to
verify as to whether the petitioners had received any such cheque from the
company with the assistance of the relevant entries. The petitioner is directed
to produce minute book of the meetings of the Board of Directors of the
petitioner-company containing the Resolutions, if any, dated 17-4-1990 and
4-10-1990. The petitioner is also directed to produce copy of its annual return
for the year 1990-91 from which it can be verified as to whether Shri Mayur
Parekh was a shareholder of the petitioner-company during the relevant years. A
copy of the balance sheet of the petitioner for the year 1990-91 may also be
produced before the Court. It shall be possible for the Court to verify from
the balance sheet as to who were the Directors of the petitioners during these
years.
6. The
Court would like to ask a few questions to Shri Mayur Parekh, who had opened
the account. Shri S.H. Doctor, the learned counsel for the company makes a
statement that his clients will keep Shri Mayur Parekh present before the
Court.
7. Copy of the
necessary affidavit shall be furnished to the other side on or before
9-11-1995. To be placed first on board on 17-11-1995, as far as possible.
8. The
learned counsel for the petitioners Shri Kumar Desai, has made a statement in
open Court that Shri Mayur Parekh was never a shareholder of the petitioners
company. This fact may also be set out in the affidavit to be filed.